Key points

• Investing in global high yield bonds, the Legg Mason WA Global HY Fd A SGD H (qdis) has one of the highest yields amongst funds on the platform
• The manager tends to be positioned aggressively, while a highly-diversified portfolio minimises company-specific risk
• Riding on the performance of riskier bonds in 2012, the fund is one of the best-performing fixed income funds on a year-to-date basis
• The fund would be suitable for investors seeking stronger returns in the fixed income space

The Legg Mason Western Asset Global High Yield Fund is a global fund investing in high yield debt securities. We highlight three key points of this fund:

+ Really High Yield; Aggressive Portfolio Positioning

The investment team behind Legg Mason Western Asset Global High Yield Fund are indeed not lying when they claim to be managing a “high yield” bond fund. Based on its latest factsheet dated 31 May 2012, the fund’s current yield was a staggering 8.28% (gross of fees); based on prior monthly factsheets, the fund has tended to have a relatively high yield compared to typical global high yield bond benchmarks.

Accompanying this attractive yield is a weighted duration of 4.1 years, which is in line with its peers in the high yield space. While the investment team has not traded interest rate risk for higher yields, they have managed to attain the fund’s high yield number through a more aggressive approach to credit selection. As of the fund’s latest factsheet, its portfolio only had 16.65% allocated to investment grade debt instruments (including cash), with the bulk of its holdings in securities rated BB (35.69%) and B (36.90%). The aggressive positioning of the fund means it is likely to benefit when investors’ appetite for risk returns.

In addition to the higher allocation to the lower-rated bond segments, the fund manager, Michael Buchanan has also indicated in a teleconference call that he is also taking advantage of dislocations in the market, such as capitalising on the significantly higher yield offered by lower liquidity issues compared to those with higher liquidity levels. An example quoted was the bonds issued by Carrols Restaurant, the largest franchisee of Burger King fast food restaurants, and Burger King Corporation, the franchisor. Both bonds were rated B3/B- and share similar credit metrics such as leverage, net leverage, coverage and same store sales. The two bonds only differed in size. While the bond issued by Carrols Restaurants was worth USD 150 million, the corresponding issue size of the Burger King bond was USD 800 million. The difference in issue size resulted in a large difference in yield; the Carrols Restaurants bond was trading on a yield of 10.45% whereas the Burger King bond was trading on a yield of 5.69%. The fund manager believes that the significant yield pick-up is sufficient compensation for the lower liquidity in the Carrols Restaurants issue.

+ Highly Diversified Portfolio and Risk Management Strategies

While investing in the high risk-high return space of high yield bonds, the fund’s very well diversified portfolio will be able to mitigate company-specific risks associated with investing in these higher risk instruments. As of the fund’s latest factsheet, the fund had 402 holdings and only 6 individual securities had a greater than 1% allocation. This highly diversified portfolio suggests that the fund will not experience a significant decline in its net asset value (NAV) even if a specific holding within its portfolio encounters a default.

Another downside protection strategy utilised by the fund is to maintain its bias towards senior secured high yield bonds that have the advantage of collateral protection. These secured bonds also have the potential to be redeemed early, and hence at a premium, are also favoured by the fund.

+ Strong Return Following Great Financial Crisis

Chart 1: performance of fund in USD terms

The Legg Mason Western Asset Global High Yield Fund is managed from a USD perspective and though the SGD-hedged class is available on our platform, it has a shorter track record. Hence, we have presented the returns of the USD share class to better understand how the fund’s strategy has performed since inception. Though the fund recorded a -37.4% maximum drawdown as a result of the 2008 financial crisis, the degree of decline was in line with its peers. While the fund posted a -31.4% decline in 2008, the fund subsequently posted a strong 56% return in 2009, more-than-reversing losses in the previous year, and even outpacing several equity funds that year.

On a year-to-date basis (as of 18 July 2012), the fund has delivered an 8.8% return (in SGD terms), making it one of the stronger-performing fixed income funds on the platform in 2012 (see "Top Funds 2Q 2012: Thai and Singapore Equity Funds were Big Winners").

A WISE Investment

With its high yield and high-conviction aggressive positioning, the Legg Mason WA Global HY Fd A SGD H (qdis) will be suitable for investors who are looking for stronger returns in the fixed income space. Such higher returns will come with higher investment risk, but investors in the fund will benefit from the extensive diversification across different issuers, minimising the impact of a single default on the overall investment. Investors should also note that currency risks are minimised due to the SGD-hedged nature of the fund.

Investors who are seeking even higher yields may wish to consider the AUD-hedged version of the fund, the Legg Mason WA Global HY A AUD H (mdis), which utilises the same global high yield strategy, but swaps currency exposure to the AUD, which provides an additional form of return (due to the interest rate differential). Investors in this class of the fund will be exposed to the Australian dollar, in addition to the underlying credit risk of the fund's holdings.

With the fund’s participation in the WISE@fundsupermart.com programme, investors will be able to participate in the fund’s steady growth at 0% sales charge.

In conjunction with the launch of WISE, investors with at least SGD 100,000 worth of investments in any of the WISE fixed income funds will automatically participate in our exciting lucky draw.

In addition, investors who need any advice with regards to the Legg Mason WA Global HY Fd A SGD H (qdis) or their portfolios may read more about the fund in its Fund Review or contact our friendly Client Investment Specialist team at advisory@fundsupermart.com.

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