|
International Fixed Income – Investment Grade |
|
At a Glance
- Primary Benchmark: Citigroup World Government Bond Index ex-U.S. (unhedged) or other international bond benchmark, as specified by client direction.
- Universe: The sovereign debt and currencies of countries in the Citigroup World Government Bond Index ex-U.S., as well as the investment-grade corporate bond and mortgage-backed securities markets in those countries. We may also invest, to a limited degree, in countries rated A or better by a nationally recognized statistical rating organization.
- Real yield is our primary measure of value, followed closely by currency valuation. Inflation, monetary trends, political risks, the business cycle, and liquidity measures are also considered.
- Efficient duration management and country rotation (driven primarily by currency considerations) add incremental value.
- Investments typically are concentrated in 8-12 countries deemed to have the best total return potential.
Objectives
We strive to preserve capital, generate principal growth, and earn interest income. Over a complete market cycle of 3-5 years, we seek to outperform the benchmark, on an average annual basis, by at least two percentage points.Typical Investment Guidelines
Allocation Ranges for Selected Countries and Curriencies*| COUNTRY | CURRENCY | |
| Japan | 0%-70% | 0%-70% |
| Germany | 0%-50% | – |
| United Kingdom | 0%-50% | 0%-50% |
| Non-Index Countries | 0%-30% | 0%-30% |
| Euro | – | 0%-80% |
| United States | – | 0%-100% |
Investment Process Summary
We apply a top-down, value-driven process when structuring International Fixed Income portfolios. Real yield is our primary measure of value. Currency valuation is next in importance, as the real yield must be captured in the investor's local currency (dollars for U.S. investors and euros for many of those in Europe, for example). We focus on appreciating, undervalued currencies, and overvalued currencies that can be hedged. Inflation trends, political risks, monetary trends and business cycle and liquidity measures are also considered. We then typically concentrate investments in 8-12 countries that provide the best value and total return potential.Duration Management
We concentrate investments where we believe value is greatest; as a result, portfolios tend to have an intermediate- to long-duration bias when real interest rates remain high. Greater interest rate exposure is assumed in countries with more value, and positions are established along the yield curve where we find the best risk/reward profile. Portfolio duration generally ranges from 1-10 years.Country Rotation
We believe that concentrating investments in the markets with the greatest value and the highest potential return—thereby taking above-average country risk—actually reduces overall risk. Real rates are combined with currency analysis to derive value. Secular trends, political and monetary conditions, and business cycle risks are also considered in determining the likelihood of capturing the value seen in real interest rates and contribute to country weighting decisions.Currency
Currency and country decisions are intertwined. Bonds of countries with high real rates and a currency appreciating from an undervalued level will be held to take advantage of that appreciation as well as to benefit from the positive effects on inflation that a rising currency provides. Currency exposure in countries with high real rates and an overvalued currency will be hedged to take advantage of the disinflationary effects of past overvaluation.Issue Selection
Within the desired country and currency, security selection is based on yield-curve analysis, desired duration and wideness of credit spreads relative to government issues.Representative Portfolio Characteristics (as of 6/30/2008)*
| CHARACTERISTICS | BRANDYWINE | CWGBIxUS |
| Average Quality | AA | AA+ |
| Average Maturity | 5.65 | 8.49 |
| Modified Duration | 3.74 | 6.30 |
| Average Coupon | 3.87 | 3.50 |
| Average Yield | 3.39 | 3.57 |
| Yield to Maturity | 4.84 | 3.57 |
| Number of Issues | 35 | 575 |
* Supplemental Information. Data as of 6/30/2008. CWGBIxUS = Citigroup World Government Bond Index (Ex-U.S.).
Please refer to our GIPS compliant presentation, which includes performance footnotes, fee schedules, index descriptions and disclosures. The data represent the aggregate characteristics of all securities held in the representative portfolio, an actual account not subject to taxation. Data is obtained from FactSet and Bloomberg. Duration and quality allocations are included for informational purposes only and should not be perceived as investment recommendations. The duration and quality allocations of any particular account may vary based on any investment restrictions applicable to the account. International securities may be subject to market and currency fluctuations and other investment risk. Bond fund values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates. High-yield securities have a greater risk of default and tend to be more volatile than higher-rated debt securities. The use of derivatives may reduce returns and/or increase volatility.
Representative Region & Currency Weights (as of 6/30/2008)*
* Supplemental Information. Data as of 6/30/2008. CWGBIxUS = Citigroup World Government Bond Index (Ex-U.S.).
The data represent the aggregate characteristics of all securities held in the representative portfolio, an actual account not subject to taxation. Data is obtained from FactSet and Bloomberg. Region & currency weights are included for informational purposes only and should not be perceived as investment recommendations. It should not be assumed that investments in any regions or currencies listed were or will prove to be profitable. The region and currency weights of any particular account may vary based on any investment restrictions applicable to the account. International securities may be subject to market and currency fluctuations and other investment risk.
Quarterly Portfolio Manager Commentary (as of 6/30/2008)
In our opinion, the bull market against the dollar is long in the tooth. One sign is that fewer and fewer currencies are participating in the rally. In recent years almost every single currency was in a bull market versus the dollar. Over the last three months, however, almost as many currencies have been going down versus the dollar as have been going up. This new trading pattern served us well in the most recent quarter. We were overweight many of the best performing currencies and own few if any of the worst performing currencies.
Our portfolio shifts in recent quarters have lifted yields significantly above our benchmarks, which will help to provide great cash flow support to the challenges investors face today. While the revival of hope that followed the Fed's rescue package at the end of the first quarter has been buffeted by surging energy prices, the scenario we think most likely is that oil prices will soon stabilize given the weakness evident across the world. We expect the dollar to regain its footing and the high yielding corporate and mortgages to generate cash flow and to appreciate in value in our base case. We are underweight the euro because of the downside momentum we envisage in the economy relative to the U.S. for the remainder of this year and we feel the gyrations in the yen this year underscore our conviction in focusing on long-term macro-fundamentals.
You should not assume that investments or strategies discussed in this commentary were or will be profitable, or that the investment decisions Brandywine Global makes in the future will be profitable or equal to the investment performance discussed in this commentary. The data and information presented in a Brandywine Global commentary is believed to be accurate and reliable as of the date recorded. Brandywine Global will not undertake to update the data and information presented at a later date. This commentary may not reflect the current views of the featured speaker and may not reflect current or sudden market activity.
Annualized Composite Returns (as of 6/30/2008)
| PERIOD | GROSS | NET | CWGBIxUS | LGABxUS | EXCESS GROSS RETURN |
|
| CWGBIxUS | LGABxUS | |||||
| QTD | -0.88 | -1.02 | -4.72 | -3.96 | 3.84 | 3.08 |
| YTD | 3.51 | 3.23 | 5.70 | 5.00 | -2.19 | -1.49 |
| 1 Year | 12.44 | 11.83 | 18.72 | 16.53 | -6.28 | -4.09 |
| 3 Year | 5.40 | 4.82 | 6.65 | 6.86 | -1.25 | -1.46 |
| 5 Year | 7.45 | 6.87 | 7.06 | 7.30 | 0.39 | 0.15 |
| 7 Year | 12.51 | 11.90 | 9.76 | 9.99 | 2.75 | 2.52 |
| 10 Year | 8.81 | 8.21 | 6.67 | 6.25 | 2.14 | 2.56 |
| Since Inception** 10/1/1997 |
8.66 | 8.07 | 6.26 | 6.04 | 2.40 | 2.62 |
Calendar Year Composite Returns (as of 6/30/2008)
| YEAR | GROSS | NET | CWGBIXUS | LGABXUS | # of ACCTS |
MARKET VALUE ($MM) |
FIRM ASSETS ($MM) |
STD. DEV. (%) |
| 2008 | 3.51 | 3.23 | 5.70 | 5.00 | 12 | 903 | 47,243 | 0.24 |
| 2007 | 9.25 | 8.65 | 11.45 | 11.03 | 13 | 893 | 49,208 | 0.48 |
| 2006 | 5.17 | 4.60 | 6.94 | 8.16 | 15 | 678 | 39,241 | 0.58 |
| 2005 | -4.01 | -4.54 | -9.20 | -8.65 | 12 | 439 | 26,332 | 0.07 |
| 2004 | 14.75 | 14.13 | 12.14 | 12.55 | 8 | 344 | 18,547 | 0.41 |
| 2003 | 23.25 | 22.59 | 18.52 | 19.36 | 8 | 355 | 12,680 | 0.00 |
| 2002 | 29.99 | 29.29 | 21.99 | 22.37 | 4 | 159 | 7,990 | 0.00 |
| 2001 | -0.44 | -0.98 | -3.54 | -3.75 | 2 | 40 | 7,772 | 0.00 |
| 2000 | 6.85 | 6.26 | -2.63 | -3.91 | 1 | 3 | 6,683 | 0.00 |
| 1999 | -3.00 | -3.53 | -5.07 | -8.83 | 1 | 3 | 6,583 | 0.00 |
| 1998 | 13.40 | 12.79 | 17.79 | 18.44 | 1 | 3 | 7,327 | 0.00 |
Data as of 6/30/2008. CWGBIxUS = Citigroup World Government Bond Index (Ex-U.S.), LGABxUS = Lehman Global Aggregate Bond Index (Ex-U.S.).
** Supplemental Information.
Organization: Brandywine Global Investment Management, LLC (the "Firm") is a wholly owned, independently operated, subsidiary of Legg Mason, Inc. The Firm has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®). For the periods July 1, 2000 through June 30, 2005, the Firm has been verified by Kreischer Miller. A verification includes assessing whether the Firm (1) complied with the composite construction requirements of the GIPS standards on a firm-wide basis, and (2) designed its processes and procedures to calculate and present performance results in compliance with the GIPS standards. Copies of the verification reports are available upon request. Composite Description: International Fixed Income Investment Grade Composite (the "Composite") Inception date: October 1, 1997. Creation date: March 2006. The Composite includes all fully discretionary, fee-paying, actively managed International Fixed Income accounts invested in foreign investment grade bonds. The Composite utilizes forward exchange rate contracts to manage its currency exposure. These contracts are valued daily using closing forward exchange rates, matched to the settlement day of the contract. These instruments involve credit risk from the possible inability of counterparties to meet the terms of their contracts. Investment will result in approximately holdings from 8 - 12 different countries. Brandywine uses WM/Reuters daily FX rates taken at 4 p.m. London time, which may vary from Benchmark indices' exchange rates periodically. There is a $3 million minimum account size for this Composite. The Composite returns are benchmarked to the Citigroup World Government Bond Ex-U.S. Index (CWGBI Ex-U.S.®) and Lehman Brothers Global Aggregate ex-U.S. Index (LB Global Agg ex-U.S®). The CWGBI Ex-US measures the developed countries' fixed income markets, invested in debt issues of non-U.S. governmental entities and supra-nationals. The CWGBI Ex-U.S. base includes 21 countries. The LB Global Agg ex-U.S. Index provides a broad-based measure of the global, excluding the U.S., investment-grade fixed income markets, by including agencies, corporates and asset backed issues. Performance Calculation: Portfolios are valued daily on a trade date basis and include dividends and interest as well as all realized and unrealized capital gains and losses. Return calculations at the portfolio level are time-weighted to account for periodic contributions and withdrawals. Performance results are calculated on a before tax, total return basis. Prior to July 1, 2007, portfolios were included in the Composite beginning with the first full quarter of performance through the last full quarter of performance. After July 1, 2007, portfolios are included in the Composite beginning with the first full month of performance through the last full month of performance. The Composite returns consist of size-weighted portfolio returns using beginning of period values to weight the portfolio returns. Monthly linking of interim performance results is used to calculate quarterly and annual returns. Composite's valuations and returns are computed in U.S. Dollars ("USD"). The results are presented in USD or in other currencies (to accommodate overseas investors), the latter by converting monthly USD returns into other currency returns using the appropriate currency returns. Gross returns reflect the deduction of trading expenses. Net of fee returns reflect the deduction of trading expenses and the highest investment management fees charged within the composite membership as stated in the following fee schedule. Preliminary data, if so noted, reflects unreconciled data for the most recent reporting period. Composite dispersion is calculated using the asset-weighted standard deviation method for all portfolios that were in the Composite for the entire year. Composite dispersion is not presented for periods with five or fewer portfolios. The number of accounts and market values are as of the end of the period. Past performance is no guarantee of future results. A complete list describing the Firm's composites as well as any additional information regarding the Firm's policies for calculating and reporting performance results is available upon request. Fee Schedule: Institutional Client Separate Account Management Fee Schedule (minimum initial investment: $50 million): 0.450% on the first $50 million; 0.400% on the next $50 million, and 0.350% on portion of assets in excess of $100 million. Institutional Client Commingled Account Management Group Trust Fee Schedule (minimum initial investment: $1 million): 0.550% flat fee on all assets. Institutional Client Commingled Account Management Investment Trust Fee Schedule (minimum initial investment: $1 million): 0.450% on the first $50 million; 0.400% on the next $50 million, and 0.350% on any portion of the assets in excess of $100 million. Additional information on the Firm's fee schedule can be found in Form ADV Part II which is available upon request.
Portfolio Team
Stephen S. Smith
Managing Director & Portfolio Manager
Steve is co-lead portfolio manager for the firm's Global Fixed Income and related strategies. He joined the firm in 1991, bringing with him 23 years of industry experience. Previously, Steve was with Mitchell Hutchins Asset Management, Inc. as managing director of taxable fixed income (1988-1991); Provident Capital Management, Inc. as senior vice president overseeing taxable fixed income (1984-1988); Munsch & Smith Management as a founding partner (1980-1984), and First Pennsylvania Bank as vice president and portfolio manager in the fixed income division (1976-1980). Steve earned a B.S. in Economics and Business Administration from Xavier University. He is a member of the firm's Executive Board.
David F. Hoffman, CFA
Managing Director & Portfolio Manager
David is co-lead portfolio manager for the firm's Global Fixed Income and related strategies. He joined the firm in 1995, bringing with him 20 years of industry experience. Previously, David was president of Hoffman Capital, a global financial futures investment firm (1991-1995); head of fixed income investments at Columbus Circle Investors (1983-1990); senior vice president and portfolio manager at INA Capital Management (1979-1982), and fixed income portfolio manager at Provident National Bank (1975-1979). David is a CFA charterholder and earned a B.A. in Art History from Williams College. He is a member of the firm's Executive Board, currently serving as the Board's chair.
Jack P. McIntyre, CFA
Associate Portfolio Manager, Senior Research Analyst
As associate portfolio manager and senior research analyst for the firm's Global Fixed Income and related strategies, Jack provides valuable analytical and strategic insight. He joined the firm in 1998, bringing with him 11 years of industry experience. Previously, he held positions as market strategist with McCarthy, Crisanti & Maffei, Inc. (1995-1998); senior fixed income analyst with Technical Data, a division of Thomson Financial Services (1992-1995); quantitative associate with Brown Brothers Harriman & Co. (1990), and investment analyst with the Public Employee Retirement Administration of Massachusetts (1987-1989). Jack is a CFA charterholder and earned an M.B.A. in Finance from the Leonard N. Stern Graduate School of Business at New York University and a B.B.A. in Finance from the University of Massachusetts, Amherst.
Francis A. Scotland
Director of Global Macro Research
As Brandywine Global's director of global macro research, Francis contributes his extensive knowledge toward development of the firm's proprietary macro research facility and the furtherance of its Global Fixed Income and related strategies. He joined the firm in January 2006, bringing with him 25 years of industry experience. Previously, he was editor-in-chief, chief global strategist and former principal of the BCA Research Group, one of the world's leading independent research and investment strategy firms (1984-2005), and an economist with the Bank of Canada (1977-1984). Francis earned an M.A. in Economics from the University of Western Ontario and a B.A. in Economics from Queen's University in Ontario.
Dennis W. Dow
Head Trader, Fixed Income
Dennis is the head trader for the firm's Global Fixed Income and related strategies. He joined Brandywine Global in 2000, bringing with him eight years of industry experience. Previously, Dennis was with Merrill Lynch Asset Management as vice president and portfolio manager (1992-1999). He holds his Series 3 license and earned a B.A. in Accounting, with a concentration in Finance, from Rutgers University School of Business.
Bryan C. Raynor
Quantitative Analyst/Fixed Income Trader
Bryan joined the firm's Global Fixed Income team in 2003 and is responsible for providing quantitative analysis for the Global Fixed Income and related strategies as well as trade execution. Previously, he held positions with Prudential Financial (1997-2003) as an associate both with the quantitative modeling & research group and on the global bond desk. Bryan is a 2008 Level III CFA candidate, holds his Series 3, and earned both a M.S. and B.A. in Physics from Rutgers University.
Brian Hess
Research Analyst
Brian is a research analyst for the firm's Global Fixed Income and related strategies. In this role, he is responsible for tracking and analyzing economic and market data. Prior to joining Brandywine Global in 2003, he served as a trading assistant at Bear Stearns & Co (2003) and on the analytics desk at Bloomberg LP (2002). Brian earned a B.A. in both Economics and Politics from Ursinus College.
Tracy Chen, CFA
Senior Research Analyst - Credit Specialist
As a senior research analyst - credit specialist with the Global Fixed Income Team, Tracy will be responsible for providing research on corporate and mortgage backed credits within the global bond market. She will focus on uncovering undervalued fixed income securities that have the potential to produce excess returns over comparable government securities. Those insights will be particularly useful in the mortgage?backed securities market where complex security structures require specialized analytical skills. Her insights will provide valuable input into the fixed income teams search for value propositions in the global credit market. Tracy joined the firm in August 2008, bringing with her 13 years of analytical experience. Previously, she was with UBS Investment Bank as director, fixed income valuation group (2006-2008); GMAC Mortgage Group as a mortgage pricing analyst (2003-2006); Deloitte Consulting as senior consultant, corporate strategy (2001-2003); J&A Securities Ltd. in Shenzhen, China as corporate finance international associate (1995-1997). Tracy earned a M.B.A. with a concentration in finance from Kenan-Flagler Business School at the University of North Carolina, a M.A. in American Studies from Sichuan University in Chengdu, China, and a B.A. in English for Scientific Purposes from University of Electronic Science & Technology of China in Chengdu, China. Tracy is a CFA charterholder and has been published in the Spring 2007 addition of Journal of Structured Finance.
Min Tian
Global Macro Research Specialist
As a global macro research specialist, Min provides support to Francis Scotland, director of macroeconomic research. Min maintains a financial/economic database and internal website, which are used to support research tasks as well as respond to research requests from members of the Global Fixed Income team. Min joined the firm in October 2006. Previously, she worked as a data analyst for the Bank of New York (2006) and as a research assistant for the University of Delaware (2005-2006). Min earned a M.S. in Agricultural Economics from the University of Delaware and a B.S. in Pharmacy from West China University of Medical Science.
John Tsao
Director, Client Service-Singapore
John is a client service professional for Brandywine Global Investment Management (Asia) Pte. Ltd. and is responsible for maintaining and enhancing our relationship with clients based in Singapore and throughout Asia. He also serves as a research analyst for Brandywine Global's Global Fixed Income and related strategies, covering Asia and emerging market securities. John joined the firm in 2003, bringing with him 23 years of industry experience. Previously, he was with J.P. Morgan Chase Bank as vice president and senior economist (1999-2002), Chemical/Chase Bank as a vice president (1994-1999), Manufacturers Hanover Trust/Chemical Bank as senior economist (1981-1993), and Brooklyn College of the City of New York as an instructor in the Economics Department (1980-1981). John earned an M.A. in Economics from the Graduate Facility, New School for Social Research and a B.A. in Economics from Hobart and William Smith Colleges.
Travis Crumley
Assistant Trader, Fixed Income
Travis is an assistant trader for the firm's Global Fixed Income and related strategies. Prior to joining the trading group in June 2008, he provided quantitative and fundamental analysis and support as a fixed income client service associate. His additional experience within the industry includes serving as funds investor services assistant with Legg Mason (2004-2005). Travis earned a B.A. in Communications from the University of Delaware. He is also commercially licensed and instrumented rated by the Federal Aviation Administration to operate single and multi engine aircraft.
Renato Latini
Junior Trader, Fixed Income
Renato is the junior trader for the firm's Global Fixed Income and related strategies. He joined the firm in October 2006. Previously, Renato was with Watson Wyatt Investment Consulting as an investment analyst (2004-2006). He is a Level III CFA candidate and earned a B.A. in Physics and Economics from the University of Pennsylvania.