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New kid on the block: mean reversion

New kid on the block: mean reversion

After the best part of a decade when interest rates flatlined we are now in a new world.

Rates have steadily increased in the US, and Bank of England governor Mark Carney has seen fit to raise them in the UK.

This leads me nicely to a fund launch – the Legg Mason Brandywine Global Enhanced Absolute Return fund. 

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The key to this fund is mean reversion. Quite simply the premise is that currencies and bonds mean revert over time, based around what is happening in the wider economy.

Therefore, if you can identify the correct trigger points, you can go long or short of both bonds and currencies and make money when the bond or currency reverts to norm. This is an unashamed top-down macro-driven fund.

On the bond side the focus will be on sovereign bonds, rather than corporate bonds, though the experienced Brandywine team has the ability to invest in credit if so desired.

It can invest in emerging markets as well as developed markets, with liquidity the prime consideration.

Between 10 and 20 countries will be invested in and typically each investment is held for 12 to 18 months.

Currently the team sees emerging markets as an opportunity and are short some major developed markets.

One important thing to be clear on is, the fund can and will lose money over shorter time periods.

The managers are looking to deliver 6 per cent per annum outperformance, on a three-year rolling basis.

With the ongoing fund charge capped at 1.4 per cent, this is not a cheap fund, but the simple and clear approach and long-term focus means this is a fund worth considering. It should not be the only fixed interest fund you own, but it would sit nicely alongside more traditional ones. I will give it 3.5 out of 5, it would have been higher but for the annual fees.

Ben Yearsley is a director at Shore Financial Planning