The WisdomTree Western Asset Unconstrained Bond Fund (UBND)
, the first unconstrained bond exchange-traded fund (ETF), was launched on June 11, 2015. Recently, we thought it might be instructive to publish a discussion we had with the Fund’s portfolio manager, Mark Lindbloom, from Western Asset Management Company (Western Asset). Below, we summarize Western Asset’s outlook for global markets for the coming months and ultimately how these views impact the positioning of UBND. At present, the portfolio is over-weight credit risk
, under-weight interest rate risk
, with select exposures to emerging markets.
U.S. economic data, while somewhat stagnant in recent months, continues to support Western Asset’s view of modest growth over the next year (2.0% to 2.5%). As a result of recent data, including an extremely strong payroll number on November 6, Mark believes the process of interest rate normalization is likely to begin in December. However, inflation
remains low, implying a very gradual pace of tightening
. For this reason, he views the prospect of a sustained rise in long-maturity
U.S. bond yields as less likely. Looking forward to 2016, Western Asset estimates three to four rate hikes
, depending on the strength of underlying economic data.
Globally, the outlook remains uncertain in light of recent developments, particularly in China. As a result of a decline in global commodity prices, select emerging market (EM) countries are experiencing stress. However, Western Asset still believes EM represents value
in the medium to long term. Importantly, the European Central Bank (ECB) and Bank of Japan (BOJ) are poised to increase their level of accommodation in the coming months, in Western Asset’s view. As a result, it believes that the global outlook for growth may be poised to improve heading into 2016.
Global Credit Conditions
Corporate balance sheets
generally remain in good shape, but the strong U.S. dollar is negatively affecting corporate earnings of some large U.S. multinationals. In Europe, Western Asset anticipates that the economy will continue to avoid recession largely due to aggressive action from the ECB. It continues to keep a close eye on geopolitical tensions in various hotspots, such as Ukraine and the Middle East.
Looking ahead, Western Asset will continue to determine whether to adjust risk positions by weighing the much-improved valuations
, which in certain cases may now be fair, against a still-favorable backdrop of mild economic expansion and accommodative policy.
UBND’s portfolio management team expects to remain over-weight to certain spread sectors
that have demonstrated strong fundamentals. It is maintaining a significant allocation to investment-grade
financials, which currently offer attractive yields while appearing more utility-like in the face of increased regulation. The team also has allocations to the high-yield
and bank loan
sectors, as it believes these sectors should benefit from the continued economic recovery. On a fundamental value
basis, very high implied default rates
, which are much higher than realized rates, signal attractive valuations. The spread between EM and developed market yields remains wide, and, in our opinion, presents an opportunity to add value in select countries.
View current UBND exposures, here.
Also, the portfolio will maintain a tactical duration
strategy and will continue to favor a curve-flattened
position. Western Asset believes a short position
in the intermediate portion of the U.S. yield curve
is warranted, as intermediate rates will likely rise the most in response to the normalization of U.S. monetary policy
. At the longer end, it is possible that rates could rise by 50-75 basis points (bps)
by the end of 2016. Additionally, market volatility
has risen sharply, and the risks to a fragile global recovery are not insignificant. Western Asset’s focus remains on longer-term fundamentals with diversified strategies to mitigate risk. Ultimately, it sees greater value in nongovernment sectors while maintaining a meaningful position in long-dated Treasuries
as an offset against deflation
or slower growth.
While UBND has only been on the market a few months, our discussions with financial advisors have generally been positive. For many asset allocators, the fact that they know every day exactly what they hold has been a strong differentiator, particularly in light of the volatility that has occurred over this time. While performance will ultimately be driven by Western Asset’s views on the markets, we believe an unconstrained approach to investing focused on prudent risk management has the potential to add value as interest rates in the U.S. ultimately rise.