Gary Herbert, manager of the Legg Mason IF Brandywine Global Income Optimiser Fund, explains the fund's investment process and why a margin of safety is as important in fixed income as it is in equity markets
When did you launch the fund and what is it designed to do?
We launched the fund in 2011 and it's designed to generate attractive income with modest capital appreciation through the economic cycle. To achieve this, capital preservation is an important objective. We don't focus on any one particular sector or region. Instead we evaluate countries, currencies and credit globally to determine the most attractive fixed income markets. This global remit allows us to find the best risk-adjusted income as well as compelling total return opportunities.
What is your investment process and approach?
We start with an investment process that's grounded in a margin of safety. So when we look at the global markets - investment grade, high yield, structured credit, local currencies, sovereign - we are looking for a margin of safety or a degree of cheapness, as well as a favourable macroeconomic and fundamental thesis. This allows us to generate income and hopefully modest capital appreciation, while preserving capital.
There will be periods of market volatility where we aim to prevent large drawdowns by de-risking the portfolio, using high quality fixed income sectors or derivatives. We think about the portfolio risk from a permanent loss of capital perspective, while factoring in drawdowns as well as volatility.
In our pursuit of attractive income, we would ideally have 50% to 60% of the volatility in high yield-oriented strategies. And we've done that over time. Year to year there may be pockets of volatility, but when we buy markets at the right time, globally, we can generate income with lower downside volatility because we bought at the right price.
People think about margin of safety in the equity markets but perhaps not enough in fixed income. So we're very grounded on capital structure, covenant quality and ultimately recovery rate for many of our credit investments.
Click here to read more about the Legg Mason IF Brandywine Global Income Optimiser fund and how the manager assembles a diversified portfolio with a global multi-sector approach.