Investors need to stay flexible

22 June 2020

Investors searching for regular income sources in today’s low rate environment will need to remain flexible and creative, according to managing director of Legg Mason Australia Andy Sowerby.

Additionally, given the current market uncertainty, it was crucial for investors to be able to continue to diversify their strategies while strongly focusing on capital protection.

The Legg Mason Brandywine Global Income Optimiser fund, which was launched in May 2017 in Australia and invested in a broad mix of global securities including (but not limited to): sovereign, investment grade, high yield, structured credit and emerging market debt, benefited from its significant exposure to US investment-grade credit with positions in banks and technology companies producing strong relative and absolute returns during the month.

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“In general, US financial institutions have been well capitalised since the Global Financial Crisis, and we remain constructive on the sector,” Brian Kloss, portfolio manager, Brandywine Global, said.

“This flexibility allows Income Optimiser to source income from areas where it is attractive and available while avoiding where it is not. As different asset class, sectors, industries, and parts of the capital structure come in, and out of favour, Income Optimiser seeks income from the market-sub-sectors with the most favourable income and risk/return profiles.”

In late March, the fund significantly increased its exposure to long-duration US investment-grade corporate bonds.

According to Kloss, at the same time, it would continue to minimise exposure to lower-quality corporate credit as the best opportunities could be found in the financial, consumer non-cyclical and technology sectors.

As far as the emerging markets debt was concerned, the value could be still found there but investors should be cautiously positioned in this space due to the increasingly uncertain macro backdrop.

The fund also continued to have exposure to US housing securities, which offer solid fundamentals with minimal direct interest rate sensitivity.

“Looking forward, we continue to closely monitor for value opportunities across the corporate credit spectrum. For instance, while the G3 central banks have each provided a backstop for investment-grade corporate issuers, the high-yield credit has not received the same level of intervention to date,” Kloss said.

“Therefore, high-yield corporate credit has not seen the same demand or spread compression as the investment-grade market and may offer compelling value as the economic backdrop improves. However, any additional exposure there will be taken carefully and with a keen eye on the progress of reopening across the relevant sectors.”

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