September, 2023
The Fund fell 4.18% over the September quarter. Within the Fund, developed market sovereign duration was the primary detractor for the quarter, led by U.S. Treasuries, while German bunds detracted to a lesser extent. Interest rates were broadly higher as the market priced out rate cuts in 2024 and anticipated a potential higher-for -longer interest-rate scenario. Select emerging market local currency sovereign bonds and their respective currencies also detracted, specifically Brazil, Mexico, Colombia and Peru. Despite performing well year to date, the emerging market asset class sold off as the U.S. dollar moved higher. Currency exposure to the Japanese yen also detracted as did short European high yield. U.S. high-yield corporate credit was the primary contributor for the quarter, with energy and communications names performing well specifically. U.S. corporate investment-grade exposure was flat in the portfolio despite the asset class performing poorly. Prime U.S. MBS exposure was also flat in the portfolio despite the asset class underperforming. Finally, short exposure to Japanese government bonds contributed. Yields moved higher as the market expects the Bank of Japan could change its negative interest-rate policy.
From a positioning perspective, the Fund continued to roll down the U.S. Treasury curve and initiated a position on the five-year part of the curve while also increasing its allocation to the 10-year part of the curve. While we still believe that a soft-landing scenario is possible, hard-landing risks have increased. Therefore, we prefer the intermediate section of the curve for a soft-landing scenario and bull steepener trade. We also continue to hold long-end (30-year) U.S. Treasury duration for a hardlanding scenario. The strategy trimmed allocation to emerging market local currency sovereign bonds and their respective currencies, specifically to Mexico and Brazil. These allocations had performed well year to date and spreads had narrowed versus U.S. Treasuries, which led us to take some profits in the positions. Tactical allocations to Spanish government bonds and German bunds were also removed during the quarter. Finally, the portfolio also reduced its Japanese government bond short. The strategy added to short-dated U.S. corporate credit exposure during the quarter, primarily to shorter-dated, higher quality high-yield securities given their favourable yield profile. The portfolio remains invested in both investment-grade and higher-quality high-yield U.S. corporate credits. Given higher yields, we believe there is a large amount of cushion for spread widening to occur and still achieve a favourable total return. Finally, the portfolio removed its short exposure to European high yield.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-bw-global-income-optimiser-au-7.pdfJune, 2023
The Fund gained 1.28% (net) over the month of June. Emerging market local currency sovereign bonds and their respective currencies was the largest contributor over the quarter, specifically to Colombia, Brazil and Mexico as each of these countries are showing signs of peak inflation. U.S. corporate high-yield bond exposure also generated a positive return as credit spreads narrowed, with industrials and financials in particular outperforming. U.S. corporate investment-grade exposure was flat for the quarter. U.S. prime MBS exposure also generated a positive return given the resiliency in the U.S. residential housing market.
The Fund’s primary detractor was U.S. Treasury duration, as yields moved higher later in the quarter given comments from Powell on the likelihood of additional rate hikes. Short Japanese duration exposure also detracted, as the Bank of Japan maintained its accommodative stance despite rising inflation. Finally, the Japanese yen detracted given the widening monetary policy divergence between Japan and the U.S.
From a positioning perspective, duration stayed relatively consistent over the quarter. However, the Fund rolled down the curve with a portion of its U.S. Treasury duration exposure. The position is now split between the 10-year part of the curve and the 30-year part of the curve. U.S. dollar exposure was trimmed, as we believe the dollar will weaken given that U.S. relative monetary policy tightening is set to peak. The Fund slightly increased its emerging market sovereign local currency exposure, including to Brazil, Colombia and Mexico, as many emerging markets are experiencing disinflation. A position to the Japanese yen was also initiated, as it reached new year-to-date lows. The Japanese economy also continued to perform well. The Fund also took profits on its prime MBS exposure late in the quarter. Within U.S. corporate credit, the Fund took select exposure from the intermediate part of the curve in favour of shorter-duration credits. Given the inversion of the U.S. treasury yield curve, shorter-duration credits and their yields offered a favourable risk-return profile. Within U.S investment-grade credit, the Fund trimmed technology names in favour of financials.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-bw-global-income-optimiser-au-6.pdfMarch, 2023
The Fund gained 1.85% (net) over the month of March. Developed market bond duration, specifically U.S. Treasuries and German bunds, were positive for performance. The Fund’s emerging market government bonds were beneficial, driven by allocations to Brazil, Colombia and Mexico. From a currency positioning perspective, exposures to the Brazilian real, Columbian peso and Mexican peso were additive for returns, as they all strengthened versus the U.S. dollar. Finally, the Fund’s allocation to U.S. corporate investment-grade bonds was rewarded. On the downside, a short duration position to Japan detracted from returns, as the Bank of Japan maintained its accommodative monetary policy and yields declined.
From a positioning perspective, the investment team’s view, safe haven duration and remaining liquid are appropriate in the current environment. The team believes increasing risks of recession justify some ballast in the Fund, including approximately 3.4 years of U.S. Treasury duration and 0.4 year of German bund duration. The Fund remains invested in liquid parts of the bond market should further volatility occur. The team also feels that U.S. corporate bonds provide a yield cushion for the portfolio. Given higher yields, there is a large amount of cushion for further spread widening to occur and still achieve a positive return. The team continues to favour lower-quality investment-grade securities as well as higher quality high-yield issuers. The Fund owns credits that the team feels comfortable holding for a longer time period, even with spread volatility. Finally, the Fund maintains select foreign currency positions, including a modest allocation to emerging market currencies. In the team’s view, the U.S. dollar will likely weaken in 2023 given U.S. relative monetary policy tightening set to peak and decelerating U.S. growth.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-bw-global-income-optimiser-au-5.pdfDecember, 2022
The Fund fell 0.32% (net of fees) over the month of December. U.S. high-yield corporate credit was the largest contributor over the quarter. All sectors performed well broadly as spreads narrowed; however, metals and mining, as well as leisure names, outperformed. U.S. investment-grade corporates were also accretive, with financials in particular performing well. Currency exposures also contributed over the quarter, specifically the New Zealand dollar, the Japanese yen, the Thai baht and the Euro. After reaching a 21-year high in late September, the U.S. dollar subsequently gave back around half of its gain in the fourth quarter. The reversal was partially driven by concerns the economy could fall into a recession. Peruvian local-currency government bond exposure was also accretive. Developed market duration, specifically U.S. Treasuries and German bunds, was the largest detractor. Developed market bond duration rallied in November on the back of the expectation that the Fed had become less hawkish. However, rates rose in December and reversed any gains as central banks reiterated their commitment to tightening monetary policy to combat inflation.
From a positioning perspective, the Fund added select foreign currency positions, using the U.S. dollar as the funding currency. Most notably the Japanese yen, euro, Australian dollar, Colombian peso and Thai baht were added. The Fund also initiated and subsequently sold a tactical position to the New Zealand dollar over the quarter, which was accretive. We believe the dollar will likely weaken in 2023 given that U.S. relative monetary policy tightening is set to peak and due to decelerating U.S. growth outperformance. The Fund remains invested in developed market bond exposure, primarily via U.S. Treasuries and German bunds. Increasing recession risks justify some safe-haven duration on the long end of the curve (30 years), which we believe is increasingly anchored. The Fund tactically took profits in its corporate bond exposure after spreads narrowed. The team also increased exposure to select emerging market government bonds, including Brazil and Colombia. Finally, the Fund added to its mortgage-backed securities exposure, primarily via U.S. agency pass-through securities.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-bw-global-income-optimiser-au-4.pdfSeptember, 2022
The Fund fell 4.76% (net of fees) over the month of September. The short-dated US Treasuries within the Fund shielded the Fund during a volatile quarter. While on the other side, developed market duration detracted, specifically U.S. Treasuries, as rates moved higher on the back of hawkish comments by developed market central banks and further rate hikes U.S. high-yield and investment-grade detracted; credit spreads widened as risk aversion remained elevated and rates moved sharply higher.
From a positioning perspective, we see increasing risks of recession which justify some ballast within the Fund, including approximately 4.5 yrs. of long-dated (30-year) US Treasury duration. We are tactically looking for opportunities to add duration. The strategy also holds short-dated U.S. Treasury floaters and remains invested in liquid parts of the bond market should further volatility occur. We are selective in our credits, and our corporate credit within the Fund remains allocated to those companies with strong fundamentals and pricing power. We have added some credits we feel comfortable holding for a longer time period, even with spread volatility. Index level spreads are now somewhat compelling, though we may not have seen the peak in credit spreads. With that said, given higher yields, there is a large amount of cushion for further spread widening to occur and still achieve a positive return. We continue to favour lower-quality investment grade securities as well as higher-quality high-yield issuers.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-bw-global-income-optimiser-au-3.pdfJune, 2022
The Fund fell 2.75% (net of fees) over the month of June. The high yield allocation was the largest detractor for the quarter. Price action was initially driven by front-end rates moving higher; however, spread widening became the larger catalyst of returns toward the end of the quarter.
As of quarter end, spreads had returned to levels last seen in the summer of 2020. The selloff in high yield was broad in nature, although the strategy was particularly hurt by bonds within the lowest quality segments (i.e., single B and below). Developed market duration returned mixed results over the quarter. While yields were generally higher during the quarter, the market saw a sizable reversal in rate hike expectations in mid-June after the Fed raised its policy rate by 75 basis points.
The small relief rally provided some offset to the negative return contributions from the first two and a half months. The strategy’s exposure to short-dated U.S. Treasury floating rate notes provided protection during heightened volatility. Overall, there were limited opportunities to achieve positive returns during the quarter, with all segments including investment-grade corporates and securitized assets achieving negative returns.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-bw-global-income-optimiser-au-2.pdfDecember, 2021
The Fund returned 0.69% (net of fees) for the month of December 2021. The key contributor to performance for the month was the exposure to corporate high yield. From a lower quality credit perspective, the overall U.S. high-yield market rallied in December, boosting its strong 2021 return. Losses booked from the sector in the previous two months were more than recouped as better than expected news flow on the Omicron variant was digested by markets.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-bw-global-income-optimiser-au-1.pdfSeptember, 2021
The Fund fell –0.70% during September, and was down –0.07% over the quarter. Within the high-yield credit market, cyclicals, especially energy-related securities, contributed to the Fund’s performance, as both oil and natural gas prices increased over the quarter. Exposure to the U.S. mortgage-backed market was also additive for returns as it continues to be supported by higher home prices and a muted foreclosure environment. On the downside, tactical exposure to high-quality government bonds across the U.S. and Europe was a significant detractor from results late in the third quarter. Finally, the Fund’s exposure to Mexican sovereign bonds was a headwind for performance, as they were negatively impacted by central bank rate hikes as a result of rising inflation, coupled with Fed’s perceived hawkishness.
From a credit perspective, the Fund continues to favor issuers within sectors that maintain pricing power. The Fund also has minimal exposure to select emerging market hard currencies. The Fund increased its duration throughout the quarter and ended the period at 5.4 years. This was primarily executed through investments in high-quality government bonds in the U.S. and France, as well as higheryielding European periphery securities. Policy uncertainty has heightened volatility across the bond market, and increasing duration felt like the prudent move. The Fund has been positioned for higher rates going forward, but increased macro risks have called into question the reflationary narrative in the near term. Finally, the Fund continues to favor lower-quality investment-grade securities and relatively higher-quality highyield issuers. The Fund’s corporate credit portfolio remains allocated to cyclical companies, and the manager remains selective in its credit exposure, as valuations are not overly compelling
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-bw-global-income-optimiser-au.pdfAugust, 2021
The Fund posted a positive absolute return in August, up 0.12%. The Fund’s U.S. high-yield allocation was the largest contributor to performance as the sector benefited from strong corporate earnings and spread tightening. European high-yield positioning was also additive for returns. Elsewhere, an exposure to structured credit, primarily U.S. residential mortgage-backed securities, continued to produce results. On the downside, the Fund’s government sovereign exposure was the largest detractor in August, driven mainly by South Korea and France During the month, the Fund continued to modestly increase its duration. Monetary policy uncertainty has heightened volatility across the bond market, and the manager felt increasing duration was a prudent strategy. The Fund has been positioned for higher rates going forward, but increased macro risks have called into question the reflationary narrative in the near term. The Fund continues to favor lower-quality investment-grade securities as well as higherquality high yield issuers. The Fund’s corporate credit allocation favors pro-cyclical companies and the manager is highly selective in its credit positioning, as valuations are not overly compelling. The manager also continues to focus on companies that have pricing power I the current environment
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-lm-bw-global-income-optimiser-4.pdfJuly, 2021
The Fund posted a positive absolute return in June. Duration positioning, led by the Fund’s exposure in investment-grade credit, contributed to performance. Cyclicals, especially within the energy sector, added the most value as oil prices continued to rally, allowing companies to significantly increase future earnings. The second largest contributor was the Fund’s position in credit default swaps, primarily in the European Union. An allocation to structured product was also beneficial. Delinquencies continue to trend lower within residential real estate, and strong housing fundamentals remain a positive backdrop for further spread compression.
During the month, the Fund increased its allocation to mortgage-backed securities. Most of the allocation remains in residential mortgage-backed securities. However, the manager is also finding opportunities within the collateralized mortgage obligation (CLO) and commercial mortgagebacked security (CMBS) sectors. Meanwhile, the Fund reduced its overall duration by roughly 1.5 years. Policy uncertainty continues to add heightened volatility across the bond market. The Fund continues to be positioned for higher rates going forward, but strong technical moves during the second quarter continue to provide headwinds for yields to move upward.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-lm-bw-global-income-optimiser-3.pdfJune, 2021
The Fund posted a positive absolute return in June. Duration positioning, led by the Fund’s exposure in investment-grade credit, contributed to performance. Cyclicals, especially within the energy sector, added the most value as oil prices continued to rally, allowing companies to significantly increase future earnings. The second largest contributor was the Fund’s position in credit default swaps, primarily in the European Union. An allocation to structured product was also beneficial. Delinquencies continue to trend lower within residential real estate, and strong housing fundamentals remain a positive backdrop for further spread compression.
During the month, the Fund increased its allocation to mortgage-backed securities. Most of the allocation remains in residential mortgage-backed securities. However, the manager is also finding opportunities within the collateralized mortgage obligation (CLO) and commercial mortgagebacked security (CMBS) sectors. Meanwhile, the Fund reduced its overall duration by roughly 1.5 years. Policy uncertainty continues to add heightened volatility across the bond market. The Fund continues to be positioned for higher rates going forward, but strong technical moves during the second quarter continue to provide headwinds for yields to move upward.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-lm-bw-global-income-optimiser-2.pdfMay, 2021
The Fund posted a positive absolute return in May. The Fund’s allocation to investment-grade corporate bonds continued to be the largest contributor to returns. In particular, its cyclical and commodity-related issues performed well, as they benefited from the opening of the economy. These positions align well with the manager’s theme over the past year to allocate to corporate bonds that could experience narrowing spreads.
During the month the Fund increased its allocation to BBB-rated securitized credit in a defensive move, as the manager believes they will stand up better than high-yield securities if risk aversion increases. The manager is emphasizing very strong companies that can withstand volatile environments. Elsewhere, the Fund reduced its overall duration by roughly half a year to reduce its interest rate risk.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-lm-bw-global-income-optimiser-1.pdfDecember, 2020
The Fund was up 1.04% in December, and gained a sold 5.1% for the December quarter rounding out a solid calendar year return of 15.1%. Given the Fund’s tilt to spread assets, the Fund’s sizeable allocation within corporate credit generated a substantial portion of its return. Led by high-yield’s continued rally, positions within commodity-driven sectors delivered strong returns. The Fund’s investment-grade allocation was also beneficial.
The Fund’s positioning within the more cyclical BBB-rated segment of the market provided outsized returns versus the broad index. Emerging markets continued to play a greater role this month, primarily through hard dollar corporate credit positions. While the Fund continues to be underweight developed market duration, the positions it did hold had a modest negative impact on returns. Two notable changes occurred in the Fund in December. First, the manager reduced the Fund’s overall duration by almost two years. As developed market duration may not provide its historical ballast to risk positions during times of minimal stress, the Treasury yield curve should continue to steepen without much interference from central banks. Second, the manager reduced the Fund’s U.S. dollar position, mostly against emerging market currencies. Inflation concerns continue to be modest overall, while commodity price recovery should support currency appreciation.
While the securitised portion of the portfolio remained consistent at roughly 9%, the structure of the underlying holdings has changed. With lower delinquencies and higher home prices, the manager became more comfortable investing in lower-quality tranches. Overall, while valuations are not as compelling as they were during most of 2020, the top-down support by governments and central banks provides the framework where asset prices continue to be supported until the underlying economy recovers.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/fund-commentary-lm-bw-global-income-optimiser.pdfasset_class: Fixed Income
asset_category: Multi-Strategy Income
peer_benchmark: Fixed Income - Multi-Strat Income Index
broad_market_index: Global Aggregate Hdg Index
manager_contact_details: Array
ticker: SSB0515AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.franklintempleton.com.au/our-products/fund-documents/index?filter=SHARE_CLASS:A,W;
Fund Commentary
PDF: “What Happened in the Fund”
fund_features:
Legg Mason Brandywine Global Income Optimiser A aims to earn a return before fees and taxes of 2% p.a. in excess of the Citigroup World Government Bond Index hedged into Australian dollars (‘Benchmark’) over complete market cycles of three to five years. The Trust generally aims to invest countries that are included in the Benchmark, however up to 40% of the Trust can be invested in countries outside the Benchmark. The Fund’s investment objective is to seek to generate a high and consistent level of income in all market conditions over a full market cycle with a secondary objective of capital preservation.
structure: Managed Fund