Legg Mason's McIntyre seeks high yield in Mexican bonds

Legg Mason's global bond portfolio manager, Jack McIntyre, has exited his Canadian and Chinese positions and upped exposure to Mexico as part of a move to higher yielding countries.

McIntyre has redistributed his 5% Canadian exposure into Mexico in his $33m (£20m) Brandywine Global Opportunistic Fixed Income fund. He also holds 5% Mexico exposure in his $591m Brandywine Global Opportunistic Fixed Income fund, increasing his overall holdings in the region to 9.5%.

"Mexico, a high yielding country combined with the peso, which is extremely under-owned, will do much better in a risk-on environment. Generally we are shifting our exposure from lower yielding countries to higher yielding, growth orientated countries," he said.

The move is backed by improvement in the global economy, a more "risk friendly" environment and seemingly smaller negative "fat tail" events emanating out of Europe.

"The Canadian dollar has appreciated significantly over the years and is now having a negative effect on the Canadian economy as it is more expensive to do business there. Companies are in the process of moving their production facilities south into the US. In addition, its housing market is now showing signs of forming a bubble, and we know how bubbles end," he said.

"Given its trading dynamics, Mexico is much better positioned to benefit from the growth in the US and better positioned to compete with China in terms of both labour and particularly, when you also incorporate transportation costs," he added.

The manager has also increased exposure to the Chilean peso to 3.5% in both his funds reflecting his bullish outlook for not only Mexico, but other South American economies (excluding the Brazilian real).

He is maintaining his exposure to the US dollar as a defensive position in the fund, expecting the asset class to benefit from a flight to safety in a volatile environment, which he sees as inevitable.

"We do not extrapolate short-term positives in the first and second quarter of 2012 as being the theme for the entire year. In addition, the US dollar will garner support through the recent improvement in US economic data. When the markets perceive QE3 may be a non event, or pushed back into late 2012, the dollar should continue to strengthen versus both the euro and the yen," he said.

McIntyre added he sees high quality duration as not as "compelling to own".

"High quality duration is the type of duration that will do very well in a 'risk off' type of environment. Having a large exposure to US treasuries and long maturity gilts were a big driver of the funds' outpeformance last year. We still have exposure to US treasuries as a way of balancing out some of our higher yield bond positions, as well as having overweights in more undervalued, growth oriented currencies," he said.

"In this environment of uncertainty, we think it is prudent to have defensive oriented positions as well as some positions what will attract capital in stable and risk seeking environments," he added.

The Brandywine manager has also adjusted the portfolios' currency exposure to reflect the more uncertain outlook for China.

He has completely sold out of his exposure to the renminbi this year across the Brandywine fixed income portfolios, in the view the Chinese government will continue to artificially control its currency due to fears over the impact of the eurozone crisis.

"The decline in inflation in China gives them the flexibility to hold the renminbi stable and not let it appreciate," he said.

"Even though it is not our base case, you cannot rule out China experiencing a hard landing as it is still at risk of the impacts of a recession in Europe and to more subpar growth in the US economy," he said.

McIntyre is a fund manager on the investment team that manages the Legg Mason Brandywine Global Fixed Income fund and the Legg Mason Brandywine Global Opportunistic Fixed Income fund.