Manage Fixed Income Uncertainty with Multiple Return Drivers

By Mark Lindbloom and Travis Carr, Western Asset Management, a Franklin Templeton Specialist Investment Manager

(Sponsor Content)

The new investing year started with renewed uncertainty around the Omicron wave of the COVID-19 pandemic, inflation, central bank policy and the global recovery.

What are Canadians with fixed income investments to do? Our answer is to use diversified strategies in this market to find yield across a broad range of sources.

This is certainly a challenging time for an investment manager to arrive in Canada, but we at Western Asset Management welcome the challenge to help Canadians build fixed income portfolios with substantial yield advantages within their risk tolerance.

Western Asset is a Specialist Investment Manager of Franklin Templeton, with US$492.4 billion in assets under management as of December 31, 2021. Founded in 1971, we specialize in active fixed income investing — it’s our sole focus. All our attention and resources are concentrated on the bond market and active strategies for investors. We are a globally integrated firm with offices and senior investment professionals in North America, South America, Europe, Asia and Australia, which gives us direct knowledge of and expertise in markets around the world.

Investment Approach

Financial markets tend to move from euphoria to depression — sometimes quickly — and this affects the pricing of individual securities, sectors of the fixed income market, and interest rates. As a fundamental value investor, we strive to find opportunities in this mispricing by doing research and analysis of a security or sector. We want to buy when prices are below our assessment of fair value and when prices are likely to increase over time.

As we are an active manager, we work together globally to employ a top-down view of markets, economies and central banks and develop our macro and credit investment outlook. This will drive decisions on duration (a measure of the sensitivity of the price of a bond or other debt instrument to interest rate changes), yield curve, country, currency, sector, and subsector positioning. We also use our deep bottom-up research and analysis to make individual security selections, supported by rigorous risk management.

Four core beliefs describe our investment philosophy and drive how we make investment decisions:

  • Markets often misprice securities: Prices can deviate from fundamental fair value, but over time, they typically adjust to reflect inflation, credit quality fundamentals and liquidity conditions. Consistently investing in undervalued securities may deliver attractive investment returns.
  • We strive to identify mispricing: We try to identify and capitalize on markets and securities that are priced below their fundamental fair value. We do this through deep analysis to compare prices to the fundamental fair values estimated by our macroeconomic and credit research teams around the world.
  • Our portfolios emphasize our highest convictions: The greater the difference between our view of fair value and a market price, the bigger the potential value opportunity. The greater the degree of confidence in our view of fundamentals, the greater the emphasis of the strategies in our portfolios.
  • We seek diversified sources of investment returns: We aim to meet or exceed the performance objectives of our investors, within their risk tolerance. We seek to diversify investments and add value across interest rate duration, yield curve, sector allocation, security selection, countries and currencies. We deploy multiple diversified strategies that benefit in different environments so no one strategy dominates performance, which can dampen volatility.

By looking for inefficiencies in the fixed income markets, we try to capitalize on undervalued securities and sectors in order to deliver superior long-term risk-adjusted returns for investors.

Western Asset in Canada

While we’ve managed assets on behalf of some Canadian pension plans, Western Asset’s fixed income capabilities are now available to retail investors in Canada through our flagship “core plus” strategy. Franklin Western Asset Core Plus Bond Fund , launched on January 11, 2022, is designed to lower volatility and maximize returns through different market cycles. The fund’s portfolio includes a core of high-quality global fixed income securities plus limited opportunistic investments in high-yield, emerging markets, and other off-benchmark debt securities.

The fund aims to provide Canadian investors with:

  • Exposure to high-quality global fixed income securities with a tilt toward U.S. markets
  • Strategic exposure to spread sectors (i.e., non-governmental fixed income investments)
  • Portfolio ballast against riskier assets

This new fund uses an approach that’s similar to the U.S. version of this strategy, Western Asset Core Plus Bond Fund. The U.S. fund has been available since July 8, 1998, and had approximately US$41.6 billion in net assets as of December 31, 2021. Across the firm, Western Asset’s total assets under management for this strategy were approximately US$121 billion as of December 31, 2021.

A Canadian ETF, Franklin Western Asset Core Plus Bond Active ETF (FWCP), was listed on the TSX on January 24, 2022.

Amid all the uncertainty, we are hopeful that the worst of the pandemic is behind us. As a result, the Western Asset team remains focused on finding long-term value for investors while using multiple diversified strategies for returns. For Canadian retail investors, our new “core plus” strategy offers an important diversifier for domestic fixed income portfolios.

Mark Lindbloom is a Portfolio Manager in Western Asset’s office in Pasadena, California, and has more than 43 years of experience in the investment industry. Prior to joining Western Asset in 2005, Mark was a Portfolio Manager at Citigroup Asset Management and at Brown Brothers Harriman & Company. Mark holds an MBA from Pace University in New York, NY, and a Bachelor of Science from Rider University in New Jersey.

Travis Carr is a Product Specialist in Pasadena, California, and has been with Western Asset Management Company, LLC since 2000. Before joining Western Asset, he was Senior Associate at Pacific Investment Management Company (PIMCO), Secondary Market Analyst at Royal Thrift & Loan Company and Mortgage Broker at Home State Financial Corporation. Travis is a graduate of the University of California, Los Angeles, and holds the Chartered Financial Analyst designation.

Western Asset Management Company, LLC is a wholly owned subsidiary of Franklin Resources, Inc.

This commentary is for informational purposes only and reflects the analysis and opinions of Western Asset Management Company, LLC as of January 28, 2022. Because market and economic conditions are subject to rapid change, the analysis and opinions provided may change without notice. The commentary does not provide a complete analysis of every material fact regarding any country, market, industry or security. An assessment of a particular country, market, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus or fund facts document before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.

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