Q2, 2020 Performance Update – Legg Mason Western Asset Australian Bond Fund

Anthony Kirkham, Portfolio Manager gives a quarterly update on the Legg Mason Western Asset Australian Bond Fund.


Peter Cook: Hello and thank you for joining us. I'm Peter Cook, Senior Investment Writer at Legg Mason. Today, we will be speaking with Anthony Kirkham, Head of Investments for Western Asset Australia and Lead Portfolio Manager for the Legg Mason Western Asset Australian Bond Fund for a review the Fund's recent performance and outlook. Over the second quarter of 2020 the Fund posted a return of 0.81% net of fees. Please note that all performance figures discussed are as of June 30th, 2020, unless otherwise noted. Anthony, thanks for joining us.

Anthony Kirkham: My pleasure.

Peter Cook: How did the fund perform over the last quarter and what drove that performance?

Anthony Kirkham: The fund performed solidly from an outright position over the quarter. This wasn't due to the movement in government yields because despite the volatility in the 10 year, which was actually around 50 basis points, point to point, the change was only marginal. Markets obviously were buoyed by large central bank and government stimulus across all developed markets and the positive outcomes in quelling the virus infection rate. This started to unravel a little at the end of the quarter. But markets were more focused on medical progress than the spiking numbers, particularly in the US, although domestically the state of Victoria spike due to the bungling of quarantine hotels was also a concern. So as a result, the main driver returns was actually spread contraction across all spread sectors, and that included semi-governments, super nationals, covered bonds. And the main contributor, which was investment grade corporates. Corporate paper contributed the most because it had taken the brunt of the shock in markets in Q1. Therefore, not only did we say spreads contracting sharply, but yield carry was also strong versus government bonds and the Fund was positioned with an overweight to all these sectors. So it benefited strongly from the contraction. The only small detractor was a yield curve flattening position. And as you know, we like to build portfolios with negatively correlated positions because clearly we're not always going to be right. So this was a small detractor in the portfolio due the 10 basis point increase or so, in the back end of the yield curve.

Peter Cook: You mentioned the macro and economic implications for the portfolio over the last quarter. Could you talk a little bit about what your outlook is for the second half of 2020?

Anthony Kirkham: Yeah, at Western Asset, we still believe in a 'U' Shaped recovery due to the huge fiscal and monetary policy response that we've seen. We do categorise it, though, as a two steps forward, one step back type recovery. So uncertainty will be ever present. Therefore, we're not surprised about the setbacks we have seen recently in the US or in my home state of Victoria. I think what it does highlight is that we can't be complacent with the virus and therefore it is going to crimp the speed of our recovery for some time. The fact is that until a proper vaccine is distributed to everyone, the risks are real and growth will not be able to return to pre COVID-19 levels for some time. So in reality, this will not be possible, I guess, for a few years. So many businesses and jobs obviously have already been lost as a result of the shutdown. And therefore that will, as I said, be a crimping factor to growth. Therefore, interest rates will be super low, for at least the next couple of years and that's certainly the highlight from the central banks, not only here, but globally. With limited inflationary pressure as unemployment remain certainly on the high side of the central bank's objectives. So, however, the huge support mechanisms will be with us for some time, which gives us comfort that spread sectors will remain very well supported. Also, the lack of credit growth will mean that there'll be limited bank debt issued as well as corporate debt. So the technicals will also support spread markets. Bank issued securities, as an example, have already returned to pre COVID-19 levels on these drivers and therefore the relativities to other credit will therefore support them as well. So we think longer end yields will track a volatile range, as we've just seen in the last quarter, as obviously markets oscillate between concerns around spiking infections, economic green shoots and, of course, lifesaving vaccines.

Peter Cook: Thanks for that perspective. Given that outlook, how is the fund positioned to capitalise on this? What sector of the market do you find most appealing or interesting right now?

Anthony Kirkham: So the Bond Fund continues to be positioned to benefit from the incredible support that has been provided by central banks, governments and even regulators. It won't all be one way, as already noted and as we've seen recently. But the broad exposure of the Fund to investment grade credit will mean that the Fund will benefit from not only federal government securities (it obviously provides that defensive nature), but also our active positioning within corporates, super national's and semi-government securities. Overall, we believe that through judicious positioning we will be able to add further value and we are pleased that the Fund has already recovered so quickly from the unprecedented challenges in markets during March and April.

Our main risk position will continue to be that investment grade position, as it clearly offers the most spread, particularly in sectors most affected by the crisis and the sectors being given the most support by policy. So as an example, in REITs and airports, they certainly were a standout in terms of widening, so our credit analytical work is key at this point in time to extract these opportunities. We will remain short dated in focus with that credit positioning as we have for some time. But we have seen a steepening of the credit curve so, we will continue to selectively capture some of these opportunities as well. And I think picking through the credits discarded in the hype like what we did over last quarter in names such as AbnBev or even Volkswagen or short dated REITs like Mirvac and Stockland have already assisted  and we think there's still opportunity there as well. At the same time, duration and curve positioning has added value recently, and continue to be used to provide ballast as required to diversify our strategic positioning with that overweight to other credit sectors.

Peter Cook: Thank you so much for taking the time. We appreciate it and look forward to speaking with you next quarter, Anthony.

Anthony Kirkham: Absolutely. Take care. Thank you.



The podcast is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 849 AFSL 240827), which is part of the Global Legg Mason Inc. group. Any reference to Legg Mason Australia or Western Asset Management is a reference to Legg Mason Asset Management Australia Limited. Legg Mason Australia is the responsible entity of the Legg Mason Western Asset Australian Bond Fund (ARSN 088 670 286) (Fund). Western Asset Management is the investment manager of the Fund. Before making an investment decision you should read the Product Disclosure Statement (PDS) carefully and you need to consider, with or without the assistance of a financial advisor, whether such an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. The PDS is available and can be obtained by contacting Legg Mason Australia on 1800 679 541 or at www.leggmason.com.au. This product has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Neither Legg Mason Australia, nor any of its related parties, guarantees the performance or the return of capital invested. Past performance is not indicative of future performance. Investments are subject to risks, including, but not limited to, possible delays in payments and loss of income or capital invested. These opinions are subject to change without notice and do not constitute investment advice or recommendation.