Flexible Approach to Investing Matters as Bond Market Transitions

Western Asset, one of the world's leading global fixed income managers, created one such strategy in 2012.  Macro Ops was designed to provide concentrated risk and opportunistic exposure to Western Asset's key themes, with an emphasis on active management of macro risk factors.  It is one of several unconstrained strategies that Western manages with varying degrees of risk, and is one with a higher risk profile. 

"At a minimum, we define each unconstrained fund on three parameters," explained Joe Filicetti, Product Specialist at Western Asset Management Company. "What volatility should our client expect? Where is the risk budget going to be allocated? And what types of strategies align with that goal?"

Western Asset is often asked to explain what exactly is "unconstrained" investing. Unconstrained bond strategies can target an expanded universe of securities where heightened volatility could increase potential opportunities for fluctuation in value.

"Western has been managing unconstrained strategies since 1996 and the first question we get from clients is, 'What are the constraints?'" noted Ken Leech, Chief Investment Officer of Western Asset Management Company. "There isn't one definition for unconstrained strategies – all are not tied to a benchmark, but the similarities can end there."

Leech continued, "I think the key to managing risk, particularly in unconstrained, is having a very strong sense of humility. While you have to have strong views, you also have to be reactive. Things change. You need to be cognizant of how you need to adapt and change your positions with the changing landscape."

While unconstrained strategies are not tied to a benchmark, traditional index-driven bond strategies are. Often, the indices, can exclude parts of the investable fixed-income universe.

"Bond strategies tied to an index, like the Bloomberg Barclays Aggregate, have been experiencing significantly lower yield and a higher average duration now than before the 2008 crisis," said Mr. Filicetti. "Western believes it's important to look beyond the benchmarks – unconstrained strategies may offer investors greater flexibility to manager concerns on yield, duration, diversification or correlations to U.S. Treasuries."

Asthe U.S. nears a potential rate hike in December, traditional index-driven strategies might have less income to offset the future impact of rising interest rates on bond prices. This might not be the case for unconstrained strategies.  Even with greater potential stimulus coming from a Trump Administration, Western is adopting a wait-and-see approach with regard to global growth. 

"In the case of slowly increasing global rates, Western's house view, investors are facing an allocation challenge, requiring strategies that are defensive, yet opportunistic, and that offer diversified, risk-adjusted returns in line with the opportunity set. We believe Macro Ops is one such strategy," Mr. Filicetti concluded.

About Kenneth Leech
Ken Leech is Chief Investment Officer of Western Asset Management Company. He joined the firm in 1990. From 1991 to 2014, assets under management grew from just over $5 billion to $466 billion. Mr. Leech leads the Global Portfolio, US Broad Portfolio, and Macro Opportunity teams. From 2002 to 2004, he served as a member of the Treasury Borrowing Advisory Committee. In 2014, Mr. Leech and the Western Asset team were named Morningstar's US Fixed-Income Fund Manager of the Year for the Western Asset Core and Western Asset Core Plus Funds. He was inducted into the Fixed-Income Analyst Society Hall of Fame in 2007. Mr. Leech is a graduate of the University of Pennsylvania's Wharton School, where in four years he received three degrees, graduating summa cum laude.

About Joseph Filicetti
Joseph joined Western Asset in 2010 as a Product Manager. Previously, he served for eight years as President and CEO at Scalae Management, LLC, and for two years as President and Co-CEO at Prudential Securities Futures Management, Inc. Before that, Joseph was Director of Client Services at CDC Ixis Asset Management, as well as at Rotella Capital Management. And prior to that, he was a Proprietary Trader and Sales Trader for Merrill Lynch Government Securities, Inc. and Lehman Brothers, respectively. Joseph earned his MBA from Columbia University and is a graduate of Niagara University.

About Western Asset Management
Founded in 1971, Western Asset Management is one of the world's leading fixed-income managers with $444.5 billion in assets under management as of Sept. 30, 2016. From offices in Pasadena, Hong Kong, London, Melbourne, New York, São Paulo, Singapore, Tokyo and Dubai, the company provides long-term, value-oriented investment services for a wide variety of global clients, across an equally wide variety of mandates. The firm is a wholly owned, independently operated subsidiary of Legg Mason, Inc. To learn more about Western Asset Management, please visit www.westernasset.com.

About Legg Mason
Legg Mason is a global asset management firm with $716 billion in assets under management as of October 31, 2016. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).

DISCLOSURES
Fixed-income securities involve interest rate, credit, inflation, and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed-income securities falls. High yield bonds are subject to greater price volatility, illiquidity, and possibility of default. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks. Tapering of the Federal Reserve Board's quantitative easing program and a general rise in interest rates may lead to increased portfolio volatility.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The views expressed are those of the portfolio managers as of the date indicated, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice.

©2016 Legg Mason Investor Services, LLC, (LMIS) member FINRA, SIPC. Western Asset Management Company and LMIS are subsidiaries of Legg Mason, Inc.

INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

SOURCE Legg Mason Inc.

Related Links

http://www.westernasset.com