Legg Mason affiliate Western Asset Management’s chief investment officer Ken Leech believes fixed income investors should be as active in asking questions as asset managers must be in navigating unexpected swings in the global financial markets.
He discussed his views at a recent investor conference hosted by Legg Mason.
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"Unconstrained bond strategies are something investors should at least consider," Mr. Leech told an investor forum. "The point is there’s no benchmark and no implied duration." With investors that means "you can talk about objectives. Investors should be very explicit."
In these markets, passive strategies may not deliver the returns investors seek: "Fixed income returns are 3 to 4 percent in a low-risk environment."
Mr. Leech advised active portfolio management and unconstrained strategies through an experienced asset manager and responsible financial advisors.
"There is a drive from those who need a strategy that seeks to protect principal and generate income," Mr. Leech said. "How do I get yield? What’s the program? ‘Unconstrained’ is kind of amorphous but it can allow investors to get income, protect principle and take advantage of interest rates."
He noted that unconstrained strategies also can take advantage of emerging market opportunities and capture over-performance, benefits benchmarked strategies typically cannot offer.
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By GlobalDataAsked if recent market swings will slow the U.S. Federal Reserve’s announced plans to raise interest rates, Mr. Leech did not hesitate: "Yes," suggesting any moves may wait two more cycles as a result.
When considering Europe, Mr. Leech sounded cautionary notes.
"Right now it’s two steps forward, one step back in Europe," he said. "That has created anxiety, which moved to fear and even panic" when global markets experience sharp downturns. "U.S. fundamentals are pretty good. They’re solid. Europe’s are not. Growth is going to be very sluggish there."
The issues are not entirely economic in Mr. Leech’s view: "There is a political logjam between Germany, Italy and France. Is anything going on that can effect global aggregate supply, or global aggregate demand? What I am most worried about is another policy error."
Still, he sees reason for optimism, even as markets may force ECB President Mario Draghi’s hand.
"Draghi has surprised the market on the positive side," Mr. Leech said. "He is moving as quickly as he can under the circumstances. I wouldn’t bet against him."
In the U.S. Mr. Leech observed that, "Inflation has been the dog that didn’t bark in this recovery. Policy has to be proactive, accommodative and provide a tailwind."
He does have concerns: "The asymmetry of policy risk is important to understand. Volatility was very strained until six weeks ago but now it’s back."
