Anthony Kirkham, Head of Investment Management and Portfolio Manager for the Legg Mason Western Asset Australian Bond Fund, talks with Legg Mason’s Peter Cook about the new Australian fixed income landscape, the RBA’s inflation stance and how Western Asset is positioning the Australian Bond Fund.
Peter Cook: Australia has, for many years, been seemingly immune to having to approach the zero bound in interest rates. Today, that's changed. Could you talk a little bit about what's driving that change and how that's affecting your role as portfolio manager?
Anthony Kirkham: Yes, there's two components to that. The RBA has been forced to continue to ease policy to try and generate some activity in the economy, with the idea of actually creating further employment and building some pressure on the inflation side, where it's been moving below their target band.
At the same time, they're also up against it in some ways because other central banks, as you noted, have already taken their cash rates down to zero, in some cases, even negative. And therefore, if the RBA doesn't move, then we end up having rates that stand out relative to others, bringing capital flows and ultimately driving the currency higher. Having a higher currency clearly is a problem because that will push our competitiveness lower.
So, they're fighting two battles, in many ways, and so, therefore, they're forced to continue to play the game, if you want, to ease monetary policy to generate some activity.
Peter Cook: What was the genesis of the Legg Mason Western Asset Australian Bond Fund?
Anthony Kirkham: The Legg Mason Western Asset Australian Bond Fund was designed to be a diversified fund that would provide a nice stable income and capital protection for investors, particularly in a broad portfolio perspective, where you want to protect yourself against volatile risky assets, like equities.
Peter Cook: There's a lot of chatter about the next recession. With that in mind, could you talk a little bit about how you think about controlling risk in the fund, and how that might differ from other alternative Aussie bond investment strategies?
Anthony Kirkham: Sure. There's always a discussion in markets about the next recession, particularly when pessimism rises, which we saw back in October. At Western Asset, we believe that the central banks are going to do enough to avert that, particularly in the short to medium term, and even more so in Australia. And so, you've got central banks, easing monetary policy to generate that activity, and I think they will ultimately, certainly prevent a recession over that time frame. Still, growth is going to remain relatively low, and I think that's probably the key message.
In Australia, we've got some more firepower on the fiscal side because the government isn't running debt levels that other countries are. And so, they certainly can use that to generate that activity required to create jobs and create a sustainable economic activity level.
For us at Western, we have a number of tools to take advantage of this pessimism. Being an active portfolio manager, we can try and position ourselves around this volatility, particularly as people talk about recession and then get back on the growth train, and so we can add value that way. And, because central banks continue to ease monetary policy, that will certainly assist corporates, in terms of their debt load. Therefore, we think that credit will continue to provide extra yield in a portfolio and generate greater alpha for the portfolio.
Peter Cook: Western Asset recently published a paper talking about the change in the federal reserve's reaction function to inflation. Do you see any indication that the RBA may be changing its view on its mandate towards inflation as well?
Anthony Kirkham: The RBA has a mandate that expects them to keep inflation between two and three per cent, so they’re an inflation-targeting central bank, and so, that mandate hasn't actually changed.
Inflation is sitting below the target at this point in time, which is why the RBA is taking the measures they are, to generate some activity through easier monetary policy. The RBA is being more patient about that hitting that target due to the recognised lags in Monetary Policy at these levels and at this point in time. But the overall function for the RBA hasn't changed, and certainly, the government that directs that is making no further changes to that mandate either.
Peter Cook: Anthony, you spent almost thirty years in the industry and twenty years at Western Asset. Could you talk a little bit about how the Australian fixed income landscape has changed over that time?
It's certainly changed a lot, even if you just look at the outright yield levels. So that's a change. But more broadly, there's been a big structural change in the market as well, particularly over the last ten years. Part of that, ironically, has been driven by the fact that the government has issued so many bonds, and that makes it more investible, in fact, for investors globally. And therefore, you're seeing a lot more participants come to the market.
So, you've got central banks from other countries coming and using our market. You also had a lot of insurers, as an example, particularly from Japan, where yield's been starved, to chase that yield. And then you've also had, more recently, private banks out of Asia.
Having greater participants in the market has meant that you've had, certainly, different objectives from those investors and therefore, markets are moving a little bit more than what we were used to when it was just purely fund managers like ourselves.
That provides a lot of opportunity, I think, for Western, particularly in credit where we're seeing, once again, some big changes because you've got a lot of foreign issuers coming to the market, using the marketplace as a place to fund, and that provides really great diversity for investors in a portfolio like ours.
The good thing at Western, is that by having such a large global analyst team to look into these credits, we're able to use that to position the portfolio appropriately, taking the right amount of risk and getting the right rewards for that risk in the portfolio and providing great diversity for investors. So, that certainly has been a big change in the marketplace more recently.
Anthony Kirkham is a Portfolio Manager for the Legg Mason Western Asset Australia Bond Fund, also available as an Active ETF (BNDS). Learn more:
All investments involve risk, including possible loss of principal. There is no guarantee that investment objectives will be achieved. Investors should consider their objectives, risk tolerance and time horizon before investing. Diversification does not ensure a profit or protect against market loss.
This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827). The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.