Many investors in the fixed income space are facing losses over the next two to five years but opportunities can be found in local currency from emerging markets, according to Legg Mason.
Legg Mason’s Brandywine head of global credit, Gary Herbert, said at a media briefing on Monday that the current challenge for many individual investors and some institutions was around trying to generate income with capital preservation.
“You have the realistic outcome that many investors in the fixed income space are facing loses over the next two to five years, you simply cannot mathematically make money as interest rates normalise,” Herbert said.
“We see a scenario where one should consider high yielding opportunities. If one is willing to expand the opportunity set in corporates that are members of the multiverse, or global high yield opportunities, one can find local currency yields and hedge back to the AUD which can really enhance yield. Given our top down perspective this will not take significantly more risk.”
Herbert said Legg Mason’s view globally across portfolios was that reflation was taking hold and there had been concerns over how global growth would transition in light of Brexit and the Trump administration.
“Although we’re at the end of an abnormal expansionary phase we believe the baton has been passed from monetary policy to fiscal policy. So what that will allow for is further reflation taking hold,” he said.
“A key point is that reflation is happening; it’s happening slowly and not as quickly as we would all like. But it still permits or allows us to capitalise on significant valuation anomalies that are apparent in emerging market corporates and more specifically in local currency emerging market sovereign.”
He said there were many opportunities in local currency emerging markets like Brazil, Argentina, Indonesia, and Mexico.
Herbert also announced the launch of the Legg Mason Brandywine Global Income Optimiser Fund.
The fund aimed to deliver high, consistent returns in all market conditions, over a full market cycle with capital preservation.
The fund will invest across countries and across debt sectors including sovereign, investment grade corporates, high yield corporates, structured credit, swaps, currency futures, and cash.
“The fund should have strong appeal for self-directed and advised individual investors including the self-managed superannuation fund market, as it offers predictable returns in all conditions and diversification away from the local staples of the ASX [Australian Securities Exchange] listed equities and term deposits,” Herbert said.
