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GMS: Local Access to the Global Market

Ian R. Edmonds
Portfolio Manager/Research Analyst

Access to the global markets is of ever-increasing importance. Some investors may be looking to draw on a mix of sectors and asset classes within their own borders while also diversifying globally. Western Asset Management Company’s Global Multi-Sector (GMS) strategy is intended to enable just that. For over 15 years, this strategy has provided access to the global fixed-income universe and has aimed to reduce overall volatility by combining investment-grade corporate and government bonds with high-yield and emerging markets. Portfolio Manager Ian Edmonds explains how Western Asset approaches this strategy and the possible diversification opportunities that are offered.

Q: What are the distinguishing features of the Global Multi-Sector (GMS) product?

A: GMS, which we have managed since 1996, gives investors the advantage of accessing a significant portion of the global fixed-income universe. GMS seeks to provide total return over a market cycle by effectively combining some of the riskier assets, such as high-yield and emerging markets, with some of the generally less volatile assets, such as investment-grade corporate bonds, government bonds and agency mortgages. The overall portfolio has an investment-grade credit quality. Sector rotation is a big focus for the Fund. We monitor the market to spot changes in valuations and fundamentals of sectors that we feel offer good value. Security selection within the credit side also is important. The Fund has an internal asset allocation benchmark that draws on three major indices.

Q: What are some of the main advantages of GMS?

A: Diversification is a big factor. Riskier assets at times have higher volatility. But when you combine them with higher-quality assets, such as government bonds or investment-grade corporates, as GMS does, that can help to reduce overall volatility. GMS provides opportunities to access the potentially higher income generated from high-yield and emerging markets, while blending in higher-quality assets. This mix allows the Fund to retain an overall investment-grade profile. Essentially, GMS is one of the most diversified products that we manage within Western Asset. The Fund offers opportunities for currency diversification, as well.

Q: GMS invests in a variety of asset classes globally. How does Western Asset make allocation decisions?

A: At Western Asset, we have a team-oriented management approach which focuses on bottom-up analysis. In terms of GMS specifically, our key investment themes and strategies stem from the findings of our Global Investment Strategy Committee, which consists of senior professionals that meet regularly. In addition, the portfolio is influenced by the monthly meetings of our Global Credit Committee. As the portfolio manager, I then decide on what the asset allocation should be, taking into account the themes from the committees, as well as duration, currency exposure and other factors. Once we have the asset allocation determined, we will work with our local sector specialists, who select and buy the individual securities using the Western Asset bottom-up analytical approach. For example, we work with our US high-yield team, which selects and buys securities for us based on the Fund’s themes. Likewise, our emerging markets sector team focuses on buying emerging market (EM) corporates and sovereigns for GMS.

Q: So then you draw from the expertise of these different sector teams when constructing the portfolio?

A: Exactly. There is constant communication between us and the various teams. Effectively, we take all of the output and adjust the portfolio accordingly, taking into account valuations and any change in fundamentals. In addition, we leverage off of the expertise of our local offices and resources in Europe, Asia and Latin America. Having those local resources and knowledge base makes us well positioned to take advantage of opportunities in the various asset classes. We are experienced at proactively rotating among the variety of sectors, and a large part of the Western Asset investment management team works directly or indirectly on this product. The key alpha drivers come through sector rotation and security selection. At this stage of the cycle, security selection will be key.

Q: Given that strategy, what are some opportunities you are targeting as part of the GMS portfolio?

A: Currently the focus is on sectors such as European high-yield, which we think is a growing asset class that will steadily occupy an increasing share of the global high-yield market. Drawing on the expertise and experience of our London office, we are well positioned to take advantage of that and have been doing so since the Fund’s inception. Continuing on that theme, within investment-grade, European financials are currently attractively priced and still trading cheap relative to other investment-grade corporates. GMS has also taken advantage of all three sectors of emerging markets: sovereign, credit and local. Historically, we have always been very proactive in terms of investing in local-currency sovereign debt. We had begun to reduce exposure prior to 2007 and continued to do so in 2008. We are starting to rotate back into sovereign local-market debt because we see some good, long-term opportunities.

Q: Given the mix of investments, what does the Fund use as a benchmark?

A: Our starting point in building the portfolio is our internal asset allocation benchmark, which is comprised of 50% Barclays Capital Global Aggregate Bond Index, 25% Barclays Capital U.S. High-Yield 2% Issuer Capped Bond Index and 25% J.P. Morgan Emerging Markets Bond Plus Index (EMBI+). In addition to giving clients an idea of the risk profile of the product, this benchmark also provides clients a way to judge how we have performed. The J.P. Morgan EMBI+ is solely USD-denominated government and quasi-sovereign debt. But we don’t hug that internal benchmark component. We can and do deviate from it. The use of local-currency external EM debt and EM corporate credit is a good example of that.

Q: How does GMS approach duration?

A: We have a flexible approach to duration management in GMS and have a wide range built into mandates to permit that. We want the flexibility to take a defensive duration position to protect the portfolio in a rising rate environment. We also use other, less interest-rate-sensitive sectors such as high-yield and bank loans.

Q: How do you deal with currency risk in this portfolio?

A: We manage currency risk through a variety of measures. We use active currency overlay strategies to hedge out various risks within the portfolio, such as those arising from credit, peripheral markets, rising commodity prices, etc. Approximately 25% of the currencies currently held in the portfolio are in non-US dollars—a combination of EM and European currencies, and the Japanese yen. That currency flexibility can help dampen the volatility of the portfolio. We also want clients to have the opportunity to diversify away from the US dollar, if appropriate.

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