Gary Herbert, manager of the Legg Mason IF Brandywine Global Income Optimiser Fund, explains how he identifies risk in fixed income markets and why US high yield is in favour.
What risk parameters do you identify in the fixed income markets and how are you mitigating them?
The risk that we think about in this portfolio is principally spread duration or spread sensitivity; that's our credit risk. We also think of interest rate sensitivity which is our duration risk. And then accordingly we think about emerging market risk. Today we have a larger weighting in emerging markets because that's where we see opportunities - but we do think about that risk which is in a sense predicated upon global growth and real yield.
So we look at a host of risks. I'd say the predominant risk, if you disaggregated our returns over time in this portfolio, is credit risk. The second most important risk is interest rate sensitivity and the third is global economic growth, which is sometimes best seen through the lens of emerging markets.
Which instruments are displaying the best opportunities at the moment?
We view US high yield as offering relative value. It's a sector with lower interest rate sensitivity but still has relatively attractive yield, particularly given the benign default environment. So there are opportunities in US high yield and commodity-oriented markets like oil, gas and chemicals. Technology is another sector we're watching.
Also, we've found opportunities in select emerging markets like Brazil, Argentina and Poland. We see high yields in those jurisdictions and an opportunity due to their weakened currencies to generate significant returns in the credit and sovereign spaces.
And then thirdly, we've identified an opportunity more associated with the financial sector in investment grade corporates. We've seen significant recovery in financial sector equity prices, and we think there's still some modest spread tightening to be achieved there. So we're more allocated towards the financial sector, particularly in the US.
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.