Legg Mason: Affiliate Debuts Bond ETF

Legg Mason: Affiliate Debuts Bond ETF

Active ‘core-plus’ total return strategy managed by Western Asset Management hits the firm’s sweet spot, delivered in an ETF.

Reviewed by: Legg Mason
Edited by: Legg Mason

[This ETF Industry Perspective is sponsored by Legg Mason.]

Mark Lindbloom

Mark Lindbloom
Portfolio Manager
Western Asset Management


Western Asset Management, an affiliate of Legg Mason, has introduced its first ETF in the Legg Mason lineup. The Western Asset Total Return ETF (WBND) showcases what it does best: actively managed core and core-plus global bond strategies. Here, Portfolio Manager Mark Lindbloom, a 40-year veteran of the industry, discusses what makes WBND stand out.

Tell us about “WBND.” What are the ETF’s key features?
One way we thought about the launch of WBND was to bring Western’s vast experience and expertise to market in ETF form—leveraging our long-standing heritage in delivering effective fixed-income solutions to our clients, along with our robust research and risk management programs.

That means the themes, the strategies, the risk budgeting, the insights coming out of our forums and our discussions will find their way into WBND the same way as they would with any of our other products. We wanted to differentiate it a bit from a regular core-plus bond fund, so we built some greater flexibility into the ETF around duration and credit quality, for example.

The objective was delivering an ETF that, over the long term, aims to exceed the performance of the fund’s benchmark while managing excess risk. The benchmark is the Bloomberg Barclays U.S. Aggregate Index.* This approach has been the hallmark of our Core Plus products. The guidelines for WBND are similar, but allow for some additional bandwidth.

In our opinion, WBND is a core product that fits into the more traditional core fixed-income category. It’s not an unconstrained fund. It’s not a long duration fund. It’s a broad-based, active core fund with an ample level of flexibility for us to target value opportunities, manage risk, pursue income and maximize total-return potential.

Western Asset Management is one of the best-known brands under the Legg Mason umbrella. What can you tell me about Western?
We’re one of the few global fixed-income-only specialists, and we’ve been around since 1971. Also, we have about 850 employees worldwide, and more than $420 billion in assets under management.

We’re strictly an active manager. I like to joke that there’s not a passive bone in our bodies. For over 46 years, we’ve been able to add excess returns relative to a benchmark through very active strategies directed by highly experienced managers.

What has defined us historically has been the fact that we’re resilient. We’ve been through a lot of cycles. We’ve learned a lot as the world has changed and the economies around the globe have changed. Secondly, we’re driven by a valuation approach, meaning that we use both macro and bottom-up points of view to systematically identify the differences between our opinion and the market consensus.

And to the extent that we have very high convictions around those differences, Western is also known for being able to use the risk budget that we’re allotted to represent those differences in a portfolio. Finally, the thing that has always been a part of our DNA is diversification. You want to make sure you’ve got a diversified portfolio at all times. That can mean different things at different times, depending on where you are in the economic cycle.

You highlighted Western’s heritage in active management. How important is active management to bond investing? How does that drive WBND’s strategy?
When you look at something like our benchmark, the Barclays Bloomberg U.S. Aggregate, it’s mostly made up of just four sectors: U.S. Treasuries, agency mortgages, investment-grade corporates and a small sliver—about 4-5% of asset-backed securities.

When you look at the broad categories of fixed-income investing, the aggregate represents about 35% of those global opportunities. If we were to limit our investments to just the aggregate components, we’d be excluding a lot of opportunity that we see elsewhere.

From an active manager’s point of view, it’s somewhat nonsensical to follow an index that’s weighted by large debt issues like U.S. Treasuries and huge corporations. It goes against our value proposition. One of the ways we’ve been able to add a lot of value is to be in sectors where we’re being compensated in terms of the yield and the risk. Or to underweight sectors that are in the Barclays Bloomberg Aggregate if we don’t think they offer a lot of value. That’s a big part of the reason we believe that active management is the best value approach rather than the “follow the debt” approach.

The way that ends up in WBND is exactly the same way it finds its way into every other portfolio that Western Asset Management manages. It’s exactly that same process in terms of how we go about our managing strategies and risk budgeting.

What can investors in WBND expect from Western in general? How does Western Asset Management add value to its funds?
In addition to our decades of experience, something that may stand out to investors is that Western Asset is truly a global firm. We have professional staff in multiple continents across the globe, giving us the ability to source ideas and investment solutions worldwide. What investors can expect from the management of our funds, including WBND, is to leverage that global coverage and expertise to integrate as a key component of the management process.

When you look at the attribution of returns over time, we expect to see the majority of excess return potential coming from sector selection rotation and from bottom-up security selection. We have a deep pool of more than 120 investment professionals around the globe with analysts in each of the sectors that we’re managing, who are doing the bottom-up research. We, the macro portfolio managers—the quarterbacks, if you will—are budgeting the risks from the top down. And between those two approaches, we’ll go about choosing the sectors and the securities in the portfolio.

The remainder of return potential over time should come from the macro decisions; specifically, interest rates and core volatility.

Why do you think WBND’s approach is particularly suited to an ETF?
Developing and bringing ETFs like WBND to market is a logical extension of our business. And in fact, we’ve had quite a few folks tell us, “We love what you do. We understand how you go about your business. We like how you complement other managers because of your value approach. But we sure would like the same strategy in an ETF vehicle.”

We’ve got the individual portfolios. We’ve got the mutual funds. We’ve got the commingled funds. ETFs are another tool for us to provide quality fixed-income solutions for our clients.

That said, we’re very excited about the launch of WBND. Pairing Western’s strengths as a long-standing specialist and industry pioneer in the fixed-income space with a cost-efficient, transparent and liquid vehicle is a powerful combination, and one that we’re happy to provide to investors.

*The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index that measures the performance of the investment-grade universe of bonds issued in the United States. The index includes institutionally traded U.S. Treasury, government-sponsored, mortgage and corporate securities. Please note an investor cannot invest directly in an index.

What should I know before investing?

The Fund is newly organized, with a limited history of operations. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed-income securities falls. High-yield securities include greater price volatility, illiquidity and possibility of default. International investments are subject to special risks, including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Derivatives, such as options and futures, can be illiquid, may disproportionately increase losses, and have a potentially large impact on fund performance. The use of leverage may increase volatility and possibility of loss. Potential active and frequent trading may result in higher transaction costs and increased investor liability. Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks. Active management and diversification do not ensure gains or protect against market declines.

Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.

If you are neither a resident nor a citizen of the United States or if you are a non-U.S. entity, a fund’s ordinary income dividends (which include distributions of net short-term capital gains) will generally be subject to a 30% U.S. federal withholding tax, unless a lower treaty rate applies. For further information, please see each fund’s prospectus which is available on the website www.leggmason.com. Redemption payments will be effected within the specified number of calendar days following the date on which a request for redemption in proper form is made. For more information, please see the ETF’s statement of additional information (SAI) which can be found on www.leggmason.com.

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