The Legg Mason Western Asset Macro Opportunities Bond fund has built up a large stake in emerging market debt on the view an attractive entry point exists in the asset class.
Mike Zelouf, head of Europe, Middle East and Africa at Legg Mason firm Western Asset Management, said while there were still “question marks” hanging over emerging markets, he felt their bonds had now priced in known risks.
“Valuations are compensating us a fair bit for short-term risks and we feel comfortable to own markets such as Brazil and Mexico,” he said.
Mr Zelouf said the Western Asset team had been adding selectively to emerging market bonds recently, and had now built up a position of 30 per cent within the fund.
He pointed to long-term fundamentals in emerging markets, such as superior growth dynamics and a lack of indebtedness compared with the developed world, as evidence of a long-term opportunity to invest in the debt at low valuations.
Most of the exposure has been taken through local currency debt, which is denominated in emerging market currencies, rather than hard currency debt, which is denominated in dollars.
Local currency debt is seen as riskier because the investor is exposed to the often volatile movements in emerging currencies, but Mr Zelouf said the downside risk on some currencies was already priced in.
He said: “If you take into account what is priced in, you see short-term interest rates in Brazil are already pricing in a 10 per cent devaluation in the currency. Unless you expect that to come through then you are being really compensated for your exposure.”
In addition to Brazil, Mr Zelouf said the team was positive about Mexico, where he thinks the benefits of reforms taking place in the country have yet to be realised in the currency or bond markets.
The emerging markets position represents the long-term strategic side of the Macro Opportunities fund, but Mr Zelouf said managers combine long-term value bets with short-term tactical trades.
The managers have just finished unwinding one such trade, having built up a 20 per cent position in high yield bonds at the start of 2014.
Mr Zelouf said he thought the short-term opportunity the managers had spotted in the market had now played out and the position has been reduced to 5 per cent.
“Looking at use of the funds for high yield bonds, a lot of it used to be for refinancing debt, but we are now seeing more being deployed to shareholder-friendly strategies.”
The managers are also being more active in the government bond market, where they can take long and short positions, betting on whether the bond price moves up or down.
Having had a duration on the fund – a measurement of the fund’s exposure to interest rate movement – of nine years back in September 2013, that has now fallen to between two and three years, reflecting the US Federal Reserve’s commitment to tighten monetary policy, which will see interest rates rise and bond values fall
‘Investors want protection from rising rates but also to find value’
The Legg Mason Western Asset Macro Opportunities Bond fund was launched in the US in 2012 but registered in Ireland in November 2013 to provide access to investors in the UK and Europe.
The Irish fund has already surpassed $500m (£300m) in assets, demonstrating the demand in the market for global bond funds run in a flexible way, targeting an absolute return.
“The fund meets a need of investors right now to have exposure that protects from asymmetric risk,” Mike Zelouf (pictured) said.
“Investors want the combination of protection from rising rates but also to find value in certain sectors.”
The fund’s combination of very active tactical moves and long-term value bets means that its volatility is higher than a conventional fixed income fund.
However, Mr Zelouf said the fund was still very different from hedge funds in that all its positions can be sold, meaning the fund does “not seek to leverage up”.
The fund is one of a range of Dublin-domiciled funds that Legg Mason is pushing to get onto platforms in the UK, to widen its distribution capabilities to financial advisers.
Earlier in March the fund was added to Cofunds, and Adam Gent, head of UK sales at Legg Mason, said the firm is also in talks with other platforms.
