Managing the £81m Legg Mason Income Optimiser Fund through affiliate Brandywine, Borromeo has said while fundamental research and technical analysis will still support her asset class in general, at the riskier end of the spectrum a more stock-specific approach was required as average spreads no longer looked attractive.
Credit makes up almost 80% of the fund and within this asset class her team is overweight sectors with strong asset values and positive industry dynamics, such as the telecoms and media.
“Average spreads in high yield are no longer attractive but if you dissect the market, there are pockets of opportunity.
“In Europe for example, there are plenty of lesser-known companies trading on 6.5% yields against the average globally of less than 5.5%. Security selection will be key in high yield this year whereas simply investing in the sector has previously been good enough,” she explained.
The manager said high yield remained attractive, in particular B or higher high-yielding credits in the UK, US and Europe as well as select developing markets.
Borromeo remains bullish on Mexico for its links with the improving US economy while “benefiting from fiscal flexibility and structural reforms.”
Ready if real yields shoot upwards
While the fund is currently giving a distribution yield of 6.5%, Borromeo uses hedge techniques to mitigate downside risk.
Taking an active view on managing duration exposure, she increased it on the fund from 2.8 to 4.3 years following the Fed’s first taper announcement in May 2013, subsequently bringing it back down to 2.3 years towards the end of the year. This was her lowest position on the fund since it launched just over two years ago and the manager said if real yields were to rise faster than expected, she would again adjust the exposure accordingly.
The team is short the yen and Canadian dollar and overweight the Mexican peso, Indian rupee and some of the harder-hit EM currencies such as the Philippine peso, South African rand and Indonesia rupiah, which she has built up recently.
Cautiously optimistic for the year ahead, Borromeo added: “We will not sacrifice quality to stretch for yield and see select opportunities in high-yield and US agency mortgages, the latter as a play on the recovering housing market,” she says. “We are also staying out of negative real yield safe-haven and focusing on higher real-yielding sovereigns.”
