Bond stars ditch Asia for LatAm currencies

Citywire AAA-rated duo Stephen Smith and David Hoffman are increasing their Latin American currency exposure at the expense of a long-held overweight to Asia Pacific, the global bond managers have revealed.

In the $1.48 billion LM Brandywine Global Fixed Income fund, Hofmann and Smith are moving away from Asian currencies due to valuation concerns and instead looking at potential ‘currency skirmishes’ around the world.

In an investor conference call, portfolio manager Jack McIntyre, who works alongside Smith and Hofmann on the sovereign bond fund, said they are now investing more aggressively in Latin American markets.

‘We have started to redeploy our Asia Pacific currency exposure into Latin America. That is a pretty big development because going back to 2004, we had been managing our portfolios with an overweight to Asian Pacific currencies.’

McIntyre said interest in Asia Pacific currencies was mainly driven by the Chinese growth story but other concerns, particularly Japan’s increasingly loose monetary policy, had forced them to address their positioning.

‘Part of that was motivated by the strength of China and its influence on the global economy and from a valuation position a few of these Asian currencies have become a bit more expensive.’

‘However, we do feel China is still going to have an impact on Latin America because those countries do have very strong trading relationships with China as well. China is Brazil’s largest trading partner.’

At present, the fund has zero exposure to the Japanese yen, which makes up 29% of the fund’s benchmark, the Citigroup WGBI TR index. It does, however, have a 4.48% overweight to the South Korean won.

Commenting on this allocation McIntyre said: ‘Perhaps it is time to start paring that down.’

‘If the yen continues to weaken then the won is going to weaken compared to the dollar as well. This means we are more likely to build out a broader theme in looking at Latin American currencies.’

The majority of exposure to Latin American currencies is through pronounced overweights to the Mexican peso, which they hold 13.45 percentage points more than the index, as well as modest overweights in the Brazilian real (4.49%) and the Chilean peso (3.25%).

The LM Brandywine Global Fixed Income Fund has returned 26.74% in the three years to the end of January 2013. This compares to its Citywire benchmark, the Citigroup WGBI TR USD, which rose 14.8% over the same period.