Recent softness in the U.S. dollar suggests the start of a new era for global bonds. Yields are attractive again and investors have more options for using fixed income to position for different outlooks, including possible hard or soft landings for the U.S. and global economies.
Furthermore, global fixed income investing offers multiple sources of alpha. As active managers, we dynamically apply all drivers, including country rotation, duration decisions, credit selection and currency exposure. This flexibility allows us to respond and adjust more effectively as the investment climate turns more volatile and bond markets become increasingly complex, without sacrificing quality or incurring additional risk.
We believe global bonds, both developed and emerging, now offer compelling opportunities for investors seeking value, diversification, and return potential – while still offering safety.
Bond investors often have a strong home-country bias, but investing in one country and currency may be risky. Since the majority of developed market sovereign bonds are found outside the U.S., investing across global fixed income markets provides an expanded opportunity set, including exposure to multiple business cycles.
Top-down macro analysis provides the necessary broad perspective for understanding the interdependencies between countries, bond markets, and currencies. In our view, it is also an efficient way to focus research on identifying the best relative opportunities.
We have always held the belief that global bond indices are flawed due to their construction methodology, which assigns weightings based on the amount of eligible issuance. The largest issuers of debt are allotted the largest benchmark weights, skewing indices toward the biggest issuers. We contend this approach to index construction creates a misalignment of interests between issuers and investors. As market conditions become more challenging amid rising interest rates, our view is that a best opportunity for outperformance lies in an approach that is either benchmark-agnostic or benchmark-aware.
We believe greater flexibility allows investors to actively seek out areas of the global bond markets offering the best combination of real yield, valuation, and quality while avoiding or minimizing exposure to unattractive countries or sectors, regardless of benchmark weightings.
For bonds, minimizing tracking error has been the traditional approach to controlling risk. However, underperformance – not tracking error – may be bond investors’ greatest enemy. For example, what is the advantage of closely tracking a negatively performing index? In this case, higher tracking error could be beneficial to an actively managed portfolio.
We believe equating volatility with risk limits the performance potential of a fixed income strategy and may even be a possible hidden source of risk. Believing that a pragmatic view of risk is necessary for long-term outperformance, we are willing to incur some volatility to find what we consider the best real yield opportunities.
Instead of tracking error, we feel our value-driven approach focused on uncovering the most attractive combinations of value, quality, and strong or improving fundamentals may help investors outperform the market during periods of negative performance for the indices, resulting in strong down-market capture.
*Supplemental to the Global Multi-Sector Income GIPS Report.
**Supplemental to the Global Aggregate Bond GIPS Report.
***Supplemental to the Global Opportunistic Fixed Income GIPS Report.
In this podcast, Portfolio Manager Anujeet Sareen and Senior Vice President – Investment Specialist Katie Klingensmith take a forward-looking view on the U.S. dollar. Together, they discuss the:
Several drivers that were behind the dollar’s strength now look set to reverse, such as the overinvestment and overconsumption of technology. There are some cyclical tailwinds that could still sustain the currency’s strength nearer term, and Anujeet and Katie assess the possibility that the dollar spends the better part of this year in some type of a topping pattern. Fundamentally, however, they conclude that the factors that drove the dollar up over the last decade are reversing, increasing the likelihood of a sustained, multi-year dollar decline from here.
While significant uncertainties and risks still loom, and we’re still in the early days for some nascent trends, recent data generally continues to surprise positively.
Expectations at the start of the year were quite pessimistic. However, growth has remained surprisingly resilient—along with inflation. Senior Vice President – Investment Specialist Katie Klingensmith and Paul Mielczarski, who joined Brandywine Global earlier this year as the Head of Global Macro Strategy, discuss the three factors that could drive inflation lower in the second half of the year. They assess the likelihood that the U.S. and the global economy can avoid recession, and how this outlook translates to views on duration.
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Any views expressed by Brandywine Global or its employees should not be construed as investment advice or a recommendation for any specific security or sector.
Brandywine Global Investment Management, LLC ("Brandywine Global") is an investment adviser registered with the U.S. Securities and Exchange Commission ("SEC"). In rendering portfolio management services, Brandywine Global Investment Management, LLC may use the portfolio management services, research and other resources of its affiliates. Characteristics, region and currency weightings are subject to change and should not be considered as investment recommendations. It should not be assumed that investment in the regions or currencies listed and account quality ratings or duration ranges were or will prove profitable, or that investment decisions we make in the future will be profitable. Region and currency weights, account quality ratings or duration ranges with regard to any particular client account may vary based on any investment restrictions applicable to the account. International securities and ADRs may be subject to market/currency fluctuations, investment risks, and other risks involving foreign economic, political, monetary, taxation, auditing and/or legal factors. There may be additional risks associated with international investments. These risks are magnified in emerging markets. International investing may not be suitable for everyone. Fixed income instruments are subject to credit risk and investment rate risk. Ratings by S&P or another Nationally Recognized Statistical Rating Organization. Brandywine Global believes that transactions in any option, future, commodity, or other derivative product are not suitable for all persons, and that accordingly, clients should be aware of the risks involved in trading such instruments. There may be significant risks which should be considered prior to investing. Derivatives transactions may increase liquidity risk and introduce other significant risk factors of a complex character. All securities trading, whether in stocks, options or other investment vehicles, is speculative in nature and involves substantial risk of loss. Indices are unmanaged and not available for direct investment. Target Returns are aspirational in nature; criteria and assumptions were not used in their calculation. Performance results of the named strategy are presented gross and net of management fees. Gross performance returns include transaction costs but do not reflect the deduction of Brandywine Global’s management fee. Net performance returns reflect the deduction of all applicable management fees and expenses, before custody charges, withholding taxes and other indirect expenses. Gross and net performance returns over one year are annualized and assume the reinvestment of all dividends, interest, and capital gains. Please refer to Part 2A of Brandywine Global’s Form ADV for a description of its advisory fees. As fees are deducted quarterly, the compounding effect will be to increase the impact of fees by an amount directly related to the gross account performance. The above are the views of Brandywine Global and are not intended as a forecast or guarantee of future results. Brandywine Global’s selection process may prove incorrect, which may have a negative impact on performance. Please refer to our GIPS reports, which include important performance footnotes, fee schedules, index descriptions and disclosures.
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