PASADENA, Calif., Jan. 28, 2015 /PRNewswire/ -- After leading the Western Asset Management Core and Core Plus team to a top honor from Morningstar, Inc., Chief Investment Officer Ken Leech and Portfolio Manager Carl Eichstaedt believe that while rates may be at or near historic lows, global markets continue to offer significant opportunities for fixed-income investors.
With respect to areas of specific portfolio risk, Mr. Leech emphasized that, "if we do our homework correctly, that's where the opportunity is." Of the recent market turmoil he said, "You don't get to buy bonds at good prices when the news is good."
In an interview recognizing them for being jointly named (along with Portfolio Manager Mark Lindbloom) Morningstar's 2014 U.S. Fixed-Income Fund Manager of the Year for the Western Asset Core Plus and Western Asset Core Bond funds, Mr. Leech and Mr. Eichstaedt called out several areas they are targeting for 2015. A big focus is mortgage-backed securities, particularly non-agency.
"We see great opportunities there still," Mr. Eichstaedt said. "In the legacy non-agency market, we see single-digit after-loss yields. The commercial mortgage market is one that we've really been focusing on more recently. You've got a much more robust commercial mortgage market in the U.S. You have much more conservative underwriting standards and much higher subordination levels. Put all of that together and we see big opportunities."
Macroeconomic factors have been key to Western Asset's approach to the yield curve.
As Mr. Leech explained, "We have brought our duration back to neutral. When we look at the U.S. government bond market, it's quite a conundrum. When you look at it from a U.S. perspective, with 10-year notes under 2 percent we see no real meaningful value there. We are a value investment firm. That's how we make our decisions. We don't see the value in the 10-year Treasury – and certainly from a U.S. perspective, you can argue that it's even overvalued."
"When you look at it against the rest of the world, though, our interest rates are much higher than Germany, Japan, most of Europe and most of the developed countries. And the dollar is strengthening. So there is a case to be made for Treasuries. We have taken a neutral stance on the Treasury market. In fact, we are actually a little underweight Treasury duration."
This is leading many investors, including Western Asset, to look further afield for higher yields.
"In the emerging-markets space, one of the things we've liked is dollar-denominated sovereign issues," Mr. Leech said. "It's not really a solvency crisis. Emerging markets issuing their own currencies are in much better shape, have much better reserves. When you look at the spreads of the sovereign emerging markets governments – especially countries like Mexico and Brazil – we think they are very well positioned relative to the tighter spreads we've seen in investment-grade corporate bonds."
That does not mean that credit markets will be bereft of opportunity, however.
"From an investment-grade standpoint, we think corporate America is in very good shape," Mr. Eichstaedt said. "Balance sheets are clean; earnings are good. Within the corporate space, we see better value in what we call the finance sector – bank and finance. Historically, like-rated finance companies trade at a tighter spread than industrials. Today, that's the opposite. So, we have an overweight to bank and finance. Industrials may concern us a little bit more from bondholder-unfriendly activity – releveraging the balance sheet, for example. Utilities are a little bit underweight because we think they have to go through a big [capital-expenditures] program."
Certain segments of the credit markets should bring greater returns, in specific sectors.
"High-yield, we think there are some tremendous opportunities," Mr. Eichstaedt said. "Particularly since June, spreads have widened substantially. The high-yield index yields over 7 percent. The spread over Treasuries is over 500 basis points off, and there is definitely 'a tale of two worlds' within the high-yield market. The biggest subsector is energy. We all know what's happened with the price of oil. The energy component has really underperformed. I think there are some big opportunities there. There are some survivors, and some companies that may not; but if you identify those that will survive, I think there is tremendous opportunity in energy high-yield."
Mr. Leech foresees significant impacts on the global economy from the oil sector.
"From a macro perspective, it may take time for the decline in oil to actually level out, then be arrested before it increases," he said. "That would be our modest house view, but we think it contributes meaningfully to a very subdued inflation backdrop. That allows central banks to stay lower for longer. Even if in the short run there is some pain to be felt by those countries and companies that are dependent upon oil, it will be a tailwind for global economic growth."
Western Asset does not believe the U.S. Federal Reserve will be quick to raise rates, as some do.
"With respect to the Fed, going forward this year, we think they are very desirous to end the zero-interest-rate policy," Mr. Leech said. "We think they want to move rates above zero, and we think their goal is to do that in June; but we've actually changed our firm's forecast. We now think the inflation outlook in the U.S. will actually be declining by the middle of the year. Subsequently, we think they may have to wait until the end of the year."
Mr. Leech attributed the Western Asset team's success in 2014 to accurate forecasting.
"We felt the inflation outlook in the United States was pretty subdued," he explained. "More importantly, inflation around the world was actually very subdued, perhaps in a declining trend. Our forecast for the U.S. economy was a little less robust than the Fed's. That, in conjunction with the low inflation outlook, led us to believe that the number of rate hikes the market was expecting was unlikely to occur. And that allowed us to take a little longer duration position."
"When you look at the shape of the curve, we felt it was the short-intermediate sector of the curve that had been the biggest beneficiary of [quantitative easing] and would be the biggest loser when QE was finished. That in fact meant that the curve would flatten. So, the flattening curve plus the longer interest-rate exposure proved very beneficial."
Western Asset offers a video (5:51) "The Global Economy 2015: Dramatic Differences," with Mr. Leech. If you would like to view it, please use this link:
About Kenneth Leech
As Chief Investment Officer, Ken Leech oversees the firm's interest rate strategy and leads the long duration effort. He joined Western Asset Management in 1990. In 1998, he was named CIO and spearheaded the performance and product development efforts that helped underpin Western Asset's global growth and success. After taking medical leave for much of 2008, Mr. Leech resumed investment duties in early 2009 and was named chairman of the global strategy committee. In this position, he directed global portfolio management and the macro-strategy alternative efforts. In 2013 he became Co-CIO as part of the transition process, before fully resuming the CIO role in April 2014.
From 2002 to 2004, Mr. Leech served as a member of the U.S. Department of Treasury's Borrowing Committee. Prior to joining Western Asset, he spent much of his career focusing on proprietary trading, including with Greenwich Capital (1988-1990) and the First Boston Corporation (1980-1988). In his four years at the University of Pennsylvania's Wharton School, Mr. Leech obtained three degrees while graduating summa cum laude.
Along with Carl Eichstaedt and Mark Lindbloom, Mr. Leech was jointly named Morningstar's 2014 U.S. Fixed-Income Fund Manager of the Year for the Western Asset Core Plus and Western Asset Core Bond funds. Mr. Leech and Western Asset were named U.S. Fixed-Income Core and Core Plus Managers of the Year by Institutional Investor in 2014*. In 2007, Mr. Leech was named to the Fixed-Income Analysts Society's (FIASI) Hall of Fame.
About Carl L. Eichstaedt CFA
Portfolio Manager Carl Eichstaedt joined Western Asset in 1994. Formerly, he worked as Portfolio Manager at Harris Investment Management and Pacific Investment Management Company. He has also served as Director of Fixed-Income at Security Pacific Investment Managers. Mr. Eichstaedt received an MBA from the Kellogg Graduate School of Management at Northwestern University and a Bachelor of Science from the University of Illinois. Mr. Eichstaedt, who has 29 years of experience, holds the Chartered Financial Analyst® designation.
About Western Asset Management
Western Asset Management is one of the world's leading fixed-income managers with $466 billion in assets under management as of December 31, 2014. The firm is a wholly owned, independently operated subsidiary of Legg Mason, Inc. (NYSE: LM) From offices in Pasadena, Hong Kong, London, Melbourne, New York, São Paulo, Singapore, Tokyo and Dubai, the company provides investment services for a wide variety of global clients, across an equally wide variety of mandates.
About Legg Mason
Legg Mason is a global asset management firm, with $709 billion in AUM as of December 31, 2014. 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).
All investing involves risk. Past performance is no guarantee of future results.
Western Asset Core Plus Fund:
Investments in fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. An increase in interest rates will reduce the value of fixed income securities.
The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. Leverage may increase volatility and possibility of loss. International investments are subject to special risks including currency fluctuations, 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. Risks of high-yield securities include greater price volatility, illiquidity and possibility of default. Potential active and frequent trading may result in higher transaction costs and increased investor liability. Diversification does not assure a profit or protect against market loss.
Western Asset Core Fund:
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. Derivatives, such as options and futures, can be illiquid, may disproportionately increase losses, and have a potentially large impact on fund performance. Investing in asset-backed, mortgage-backed or mortgage-related securities subjects the Fund to additional risks such as prepayment and extension risks. The Fund may engage in active and frequent trading, resulting in higher transaction costs and increased investor liability. Diversification does not assure a profit or protect against market loss. Please see the prospectus for a more complete discussion of the Fund's risks.
Western Asset Core Plus Fund Sector Allocation % as of December 31, 2014
Mortgage-Backed Securities 39.0
Investment Grade Corporate Bonds 25.1
Emerging Market (IG) 8.1
High Yield Corporate Bonds 4.6
Asset-Backed Securities 2.4
Bank Loans 2.3
Cash & Other Securities 1.1
Effective Duration (Years): 5.84
Western Asset Core Fund Sector Allocation % as of December 31. 2014
Mortgage-Backed Securities 44.1
Investment Grade Corporate Bonds 27.4
Emerging Market (IG) 7.1
Asset-Backed Securities 3.8
Cash & Other Securities 1.9
High Yield Corporate Bonds 0.7
Effective Duration (Years): 5.91
The Morningstar awards acknowledge managers who not only delivered impressive performance in 2014, but who have also shown excellent long-term risk-adjusted returns, and have been good stewards of fund shareholders' capital, as noted on the Morningstar website.
Morningstar Awards 2014(c). Morningstar, Inc. All Rights Reserved. Awarded to: Ken Leech, Carl
Eichstaedt, and Mark Lindbloom, Western Asset Core Bond (WACSX) and Western Asset Core Plus
Bond (WAPSX) for U.S. Fixed-Income Fund Manager of the Year.
* Western Asset Management 2014 winner of Institutional Investor's 5th Annual U.S. Investment Management Awards for Core and Core Plus Fixed Income in the Fixed Income Strategies area. The awards recognize U.S. money managers across asset classes, strategies and product types that stood out in the eyes of the investor community for their exceptional performance, risk management and customer service. In selecting the winners, Institutional Investor began by analyzing data; looking at 2013 returns, asset size and other valuation criteria. From that review, the magazine surveyed 1,000 institutions; and used the results of that survey to tabulate the winners. The award was not issued for any particular strategy or fund.
U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity.
Duration is a measurement that signals how much the price of a bond is likely to fluctuate when there is a change in interest rates. The higher the duration number, the more sensitive a bond will be to interest rate changes.
Effective Duration is a duration calculation for bonds with embedded options. Effective duration takes into account that expected cash flows will fluctuate as interest rates change.
Shows the relationship between yields and maturity dates for a similar class of bonds.
Are those rated Aaa, Aa, A and Baa by Moody's Investors Service and AAA, AA, A and BBB by Standard & Poor's Ratings Service, or that have an equivalent rating by a nationally recognized statistical rating organization or are determined by the manager to be of equivalent quality.
A basis point is one one-hundredth of one percent (1/100% or 0.01%).Before investing, carefully consider a fund's investment objectives, risks, charges and expenses. You can find this and other information in the Fund's prospectus available at www.leggmason.com/individualinvestors
© 2015 Legg Mason Investor Services, LLC, member FINRA, SIPC. Western Asset Management, and Legg Mason Investor Services, LLC, are subsidiaries of Legg Mason, Inc.
INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
SOURCE Legg Mason, Inc.