GUEST COMMENT: Brandywine Global Sees Diamonds In The Market Rubble

Tom Burroughes

29 August 2013

Recent “panic” sales of high-yielding assets is a one-off event and the turmoil has created buying opportunities for investors willing to see through the headlines, according to Brandywine Global, part of US-listed fund management firm Legg Mason.

As has been noted by other wealth and asset management firms, the prospective end – or “taper”- of US Federal Reserve quantitative easing has unsettled emerging market countries that had previously benefited indirectly from QE-inspired inflows to their capital markets.

“Any kind of volatility creates opportunities and there are markets we did not own coming into the turmoil that we can now think about buying,” Brian Hess, co-manager of the $614 million Legg Mason Brandywine Global Fixed Income Absolute Return Fund, said in a note.

“Indonesia’s bonds and currency stand out so we are watching them closely. Similarly, we did not have exposure to Colombia, but, having been hit hard, it is another country in which we are interested,” Hess said.

Thai bonds and the Thai baht are increasingly attractive, as well as the Philippine peso, a currency that Hess described as having “strong underlying fundamentals, growth and remittance flows”.

“We are hoping to take this volatility and use it to our advantage, and are optimistic we can deliver strong returns for the second half of 2013 and as we move into 2014,” he added.

Down Mexico way

The fund’s Mexico and India exposure was worst hit and a yen short was also detrimental. “Our yen position had been positive in the first part of the year as the currency continued to sell off on the back of dovish Bank of Japan comments,” he says. “However, as volatility spiked, with many investors forced to cut positions, we had a huge reversal in the dollar/yen trend. This has since reversed again and we took the opportunity to take profits by reducing our yen short by half,” Hess said.

From a macro-economic perspective, Hess expects the US private-sector economy to continue to expand around trend levels, and the broad economy may expand at above-trend growth rates once the impact of government cutbacks have diminished.

“We see growth in housing, auto sales and job markets, and based on that, we think the Fed will cut back on its bond purchases,” he adds. “We see tapering as likely in the fourth quarter but at the same time, because inflation metrics are so far below Fed targets, there is no imminent prospect of rate hikes. It is important to separate the two, as rate hikes are likely to be more disruptive to markets than tapering QE.”

He added that 30-year US treasury yields could be back above 4 per cent and 10-year yields above 3 per cent in the next six to nine months, as long as the economy continues to evolve in line with expectations.

Legg Mason said Hess’ fund has returned 4.99 per cent versus 0.31 per cent for the benchmark over one year and 7.90 per cent vs 0.46 per cent for the benchmark since inception in April 2012.