Each of Legg Mason's affiliates operates with investment autonomy, which is reflected in how our three fixed income managers approach unconstrained investing.
Unconstrained fixed income strategies are those that invest in all sectors of the bond market, including those not represented in popular benchmark indexes. Such strategies tend to invest without reference to a benchmark and can take concentrated positions as well as long-short approaches to investing.
This is how each of Legg Mason's fixed income managers approach investing to such a wider opportunity set.
Brandywine Global follows a macro-driven top down investment approach to fixed income.
It favours identifying markets where real yields are high relative to historical levels and the rest of the investment universe. It then employs country analysis to gauge the structural strength and weakness of an economy.
Mean reversion plays a very important part in this process. For example, currencies and interest rates will often continue to trend until they change people’s economic behaviour. This can signal that valuations have run far enough to start mean reversion. Brandywine aims to exploit such over and under-valuations.
As an unconstrained manager it can short bond markets with very low or negative real yields where it believes the potential exists for a price decline. It will also actively manage currency exposure to seek to protect capital and enhance returns. It can also fully hedge the currency risk in a market, where it views the bonds to be attractive but the currency unattractive.
Brandywine uses a macro-focused top down investment approach to find credit investment opportunities. It uses macro-economic valuation metrics for several thousand securities in global bond markets to identify securities it believes have the most attractive risk return profile. It believes this process removes behavioural bias from security selection that arises when a manager has dedicated country and industry analyst teams.
Over several decades of experience, EnTrust Permal (ETP) has built up experience on how fund of hedge fund portfolios can be managed over a market cycle to achieve consistent, risk-adjusted returns.
Experience in this sector is important as a lack of transparency and manager risk are particular challenges. Manager selection, asset allocation and risk management are also key in delivering an alternative fixed income strategy that leverages the investment talent of hedge funds.
ETP's investment process starts with determining asset allocation based on top-down macroeconomic and strategic views. Then it selects from its broad range of active hedge fund manager relationships to create customised portfolios.
Such managers use strategies that include long-short, relative value, event driven, global macro and short-term pricing of anomalies between related instruments. ETP’s existing relationships with hedge fund managers help it assess the systematic risk factors that explain their returns, cut through a prospective manager’s “spin” on its process and to target a specific part of a manager’s skill set.
ETP carries out extensive due diligence of managers and oversees the risk management of its entire portfolios. It checks that each of the allocated managers adhere to investment and risk guidelines. It can target the size of allocations to the various managers and adjust their volatility targets.
Western Asset is a long term, value-driven manager in global fixed income. It combines a firm-wide top-down view with bottom-up sector and issuer research. It seeks a wide analysis of markets and sectors to identify opportunities based on relative value. As an active investor, Western Asset believes that returns can be enhanced by rotating between fixed income sectors.
To support these goals, it has portfolio managers and research analysts based in North and South America, Europe, Asia, Australia and New Zealand and teams responsible for investment grade and high-yield corporate bonds, emerging markets and structured debt. These teams identify opportunities that arise from out-of-favour securities, trading inefficiencies or securities it believes are due an upgrade. The resulting variety of ideas across markets aids diversification so that its performance is not overly reliant on any one sector or idea. This can also aid the scope to reduce market volatility over a market cycle.
Western Asset chief investment officer Ken Leech takes input from the specialist teams at various weekly and monthly meetings. The Global Investment Strategy Committee sets the firm’s top down global macro outlook, including views on economic growth, inflation, monetary and fiscal policy around the globe and helps to determine broad asset allocation strategies for funds, duration and yield curve strategies. Industry and sub-sector selection is further developed by the Global Credit Committee, which is comprised of the heads of the various credit asset classes.
The best ideas or themes that come out of these various meetings are implemented by the portfolio managers depending on their given investment objectives and risk tolerances.