Fixed Income  

US deadlock dents Borromeo’s euro call

Legg Mason’s Regina Borromeo said her decision to short the euro against the dollar during the recent US government shutdown dented performance on the fund.

Ms Borromeo, manager of Legg Mason’s Income Optimiser fund, said positions that would benefit from a weakening of the euro hit performance during the recent political impasse in the US.

Politicians in America failed to agree a budget, which meant non-essential workers were put on enforced leave and the deadlock, which extended 16 days, nearly saw the country register its first default.

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Investors questioned the greenback recently when the dollar index fell to a seven-month low on October 1 after the Federal Reserve unexpectedly decided not to reduce the size of its asset purchase programme known as quantitative easing.

This move in the world’s reserve currency was exacerbated by the uncertainty surrounding the recent governmental shutdown, while the euro rose to an eight-month high.

Ms Borromeo said because of the uncertainty created by the situation in the US, investors took refuge in the euro because it had become “more of a safe haven currency than it has been for some time”.

This meant the euro strengthened and the fund’s positions that would have benefited if the single currency weakened instead detracted from performance.

Elsewhere, Ms Borromeo said she had been increasingly using floating rate securities and interest rate futures to help adjust the fund’s sensitivity to rises in interest rates.

The fund had an average duration – a fund’s sensitivity to interest rates – of 3.5 years at the end of 2012, which fell to 2.8 years in May. At the start of October, though, it had risen again to four years.

“The reason we have added a bit of duration is the move in rates was quite dramatic and, in the near term, our view is that there will be a pause in view of the softer data,” she said.

“Yes, in the longer term rates will eventually rise [but] in the near term, some of these markets have been oversold.”

The manager said since the fund launched in December 2011, there had been unprecedented levels of volatility. “There has been a lot of volatility and challenges in the global fixed income space post Federal Reserve president Ben Bernanke’s statement in May, and one of the good things about the Income Optimiser fund is its flexible strategy,” she said.

The £70m fund is managed by Legg Mason subsidiary Brandywine and has no benchmark. It aims to maximise income yield in all market conditions over a rolling 3-5 year period while preserving capital.