Local investors looking offshore for fixed income

Brandywine Global Investment Management should know a lot about the Australian institutional market, for which it manages about US$4.4 billion. Big super funds are worried about China and they’re worried about currency. But things are looking up.

On a regular visit to Australia, Tad Fetter, Brandywine director and head of business development and client service for international, said last week that while interest rates would rise again over time, “it won’t be a vertical shift”.

Australian investors, which had reduced their global fixed income exposures in recent years, with good effect, were starting to increase them again, he said, despite the rise in US rates and the US dollar.

About half of Brandywine’s US$65.5 billion under management is invested outside the US, where rates have continued to sink since the global financial crisis and returns have been better.

There are dark clouds on the domestic horizon, for Australian fixed interest, however – a scenario which is prompting a reassessment, Brandwine believes, but opportunities are presenting themselves elsewhere.

“We have already made a lot of money in a low-yield environment back to about 2010,” Fetter says. “During that time yields have gone lower and lower… Now there is a synchronized uptick in global growth, which actually started prior to the US elections and should continue, maybe at a slower pace.”

He says that President Trump and the uncertainty about his fiscal policies have huge implications on global economic growth and, by default, on global markets and the “jury is still out” on whether the deflation versus reflation trend was the start of a new secular shift. “Some markets have overshot,” he says.

Brandwine, an affiliate manager of Legg Mason Global Asset Management, is an active index-agnostic value manager with a range of fixed income strategies dating back to 1992. Most of the Australian-sourced funds are institutional mandates, however, Fetter says that the retail market is presenting increasing opportunities. It also has about A$1 billion in New Zealand-sourced money.

“The retail side has been given a kick-along by some good ratings,” Anthony Kaleta, the regional relationship manager for Australia and New Zealand, said.

The firm launched an Australian-domiciled trust in 2011, which currently has about A$530 million invested in an “opportunistic” fashion. The fund last year provided a return of 8.75 per cent, compared with the index return of only 1.65 per cent, on an Australian-dollar basis. Its five-year return was 8.50 per cent, against the index of 5.84 per cent.

“I can argue all day as to why active management is worthy of higher fees [than passive] and why we can beat the index all day every day,” Fetter says.

He believes that while China “was not on the global market’s front burner” during the first quarter of this year, it still provides a favourable backdrop for risk assets, particularly in emerging markets portfolios.

“We’re still attracted to emerging markets valuations despite the ‘Trump protectionist’ risk,” he says. “There’s an invisible hand pushing Australian investors outside your local market.”