With interest rates rising in the U.S., income investors might want to look abroad, where a rally in higher-yielding emerging-market bonds is delivering outsized gains, said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management.
McIntyre, who’s based in Philadelphia, co-manages the Legg Mason BW Global Opportunities Bond Fund
and the Legg Mason BW Absolute Return Opportunities Fund
Brandywine Global Investment Management has about $65 billion in assets under management, with $54 billion in fixed-income securities, mainly in separate client accounts.
Here’s a geographic breakdown of assets held in the Legg Mason BW Global Opportunities Bond Fund as of Dec. 31:
In an interview on March 27, McIntyre said the Brazilian 10-year government bond is showing investors’ increased confidence, not only in that country but in emerging markets around the world:
You can see that, after peaking at a yield near 16.9% in September 2015, when Brazil’s political crisis was in full swing, the market yield on the government bond has fallen to below 10%. (When prices rise, yields fall, and vice versa.) That is still very high, in a world with 10-year U.S. Treasury notes
yielding roughly 2.40% and negative interest rates for sovereign debt in many eurozone countries.
So this spells opportunity for income-seeking investors, especially if emerging-market sovereign bonds continue to rise in value, while the dollar declines against emerging-market currencies.
“The dollar has been strong for years. If it is starting to roll over, I expect more and more people in the U.S. to get excited about global bonds,” McIntyre said. He went on to say that while stocks were rising, following Donald Trump’s election in November, “there was a big sell-off in bonds post-election; now the market is coming back to reality.”
The dollar has had a monstrous rally over the past five years, as central banks in Europe and Japan have pushed their short-term interest rates to near, or even below, zero.
Usually when U.S. interest rates rise, the dollar strengthens, but the Federal Reserve is “keeping one eye on the dollar,” according to McIntyre, which helps explain why the central bank has been so hesitant to raise rates.
The Fed and President Trump would both love to see a sustained decline for the dollar, because it would boost U.S. exports. McIntyre expects Trump to use the “bully pulpit” of the presidency to help push down the dollar.
“This guy’s really in tune with business leaders,” he said.
Two income funds
Both of the bond funds McIntyre discussed seek a relatively high level of current income, mainly from government bonds anywhere in the world, supplemented with capital gains, and use currency hedges. The Legg Mason BW Global Opportunities Bond Fund
is a “long-only” fund, which means it purchases bonds and holds them. Its average duration (average time until the bonds held by the fund mature) is seven years, showing the managers’ confidence that world interest rates will remain relatively low. Its class A shares have a 30-day yield of 3%, which compares with a yield of 1.64% for the benchmark Bloomberg Barclays Global Aggregate Index.
The fund’s class A shares have an upfront sales charge of as much as 4.5%. However, most investors can avoid paying a sales charge if they purchase the shares through a broker. The fund’s institutional shares
have lower expenses, with a 30-day yield of 3.39%. The investment minimum for this fund varies, depending on the relationship between your broker and investment adviser Legg Mason. You can see the fund’s investment breakdown as of Dec. 31, on its fact sheet.
The Legg Mason BW Absolute Return Opportunities Fund
takes long or short positions in bonds, with a total-return objective of “300 basis points above LIBOR,” according to McIntyre. The three-month London Interbank Overnight Rate was 1.51% on March 27.
For the fund’s class A shares, the 30-day yield is 2.29%. The class A shares have a sales charge of up to 2.25%, which you can likely avoid by making a purchase through a broker. The fund’s institutional shares
have a 30-day yield of 2.81%. Once again, the minimum investment will be higher, and vary by broker or investment adviser. You can see the fund’s most recently published investment positions on the fact sheet.