Legg Mason: A Case For Active Short Duration Income

Legg Mason: A Case For Active Short Duration Income

A new fund for an evolving fixed-income market.

Reviewed by: Legg Mason
Edited by: Legg Mason

[This industry perspective is sponsored by Legg Mason.]


The composition of the fixed income market has evolved, and bond investors face more challenges today than they have for decades. In general, yields have trended downwards, and average duration has trended upwards, creating divergent paths and ultimately resulting in a lower yielding and higher interest rate risk environment. In response, some investors have taken on more credit risk and have turned to the equity markets to supplement their income needs.

Conversely, lower yields have given corporations an opportunity to borrow cheaply and for an extended period of time. In the wake of the credit crisis, corporations de-levered their balance sheets but, more recently, have taken on higher levels of debt. While debt levels have been rising, overall credit quality has been eroding. All the while, yields have trended higher, making it more difficult for corporations to borrow and refinance their debt, and the yield curve has been flattening.

What does this mean for fixed income investors today? Consider an actively managed, shorter duration, bond strategy.

Shorter duration bonds now offer a relatively attractive yield and risk/reward tradeoff – capturing 85% of the yield with only 36% of the duration* of the broader market.

Sources: Bloomberg, Legg Mason, Western Asset. As of 31 Dec 18.

Note: Past performance is not a guarantee of future results. For illustrative purposes only, does not represent the performance of an actual investment. Index returns do not reflect any fees, expenses or sales charges. Indexes are unmanaged and investors cannot invest directly in an index. Duration measures the sensitivity of a bond’s value to a change in interest rates. The higher the duration number, the more sensitive a bond’s value will be to interest rate changes.

Bloomberg Barclays US 1-5 Year Corporate Bond Index vs the Bloomberg Barclays US Corporate Bond Index. Aggregate = Bloomberg Barclays US Aggregate Index. Yield = Yield to Worst.

The use of active management may help to enhance outcomes of a portfolio by selectively identifying both value and income opportunities and potentially enhancing diversification. Active management of duration, sector and security selection also provides the opportunity to be nimble, allowing for flexibility to respond to dynamic market conditions.

Active management may also help to address any potential risks that are inherent in today’s fixed income markets.

The credit landscape of the investment-grade corporate bond space has changed significantly over the past decade as overall credit quality has eroded—creating potential forced buying and selling challenges for some index-based passive strategies.

*Bloomberg Barclays US Investment Grade Corporate Bond Index. Sources: Bloomberg, Legg Mason. As of Dec.31, 2018

Note: Credit Quality is a measurement of a bond issuer's ability to pay interest on the bond in a timely manner; it informs investors of an investment’s creditworthiness, or risk of default. The credit quality ratings provided by ratings agencies such as Standard and Poor’s (S&P), Moody’s Investors Service and/or Fitch Ratings, Ltd. typically range from Aaa (highest) to D (lowest). Below investment grade bonds are rated Ba or lower.

Western Asset Management, one of the world's leading active fixed-income managers, was founded in 1971. The firm has 9 offices around the globe and deep experience across the range of fixed income sectors. Western Asset has been recognized for its emphasis on team management and intensive proprietary research, supported by robust risk management.

Western Asset's active fixed income expertise may help investors take advantage of market opportunities, generate current income and manage risk.


The Western Asset Short Duration Income ETF (WINC)

  • Active Income. A diversified strategy with flexibility to actively seek value opportunities, manage risk, and pursue income
  • Low Duration. An effective average duration target of 3 years or less
  • Quality Focus. A maximum of 15% below investment grade
  • Cost Effective. A net expense ratio of just 0.29% (as of the most current prospectus)

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.


© 2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and Western Asset Management Company, LLC are subsidiaries of Legg Mason, Inc. ETF.com is not affiliated with Legg Mason, Inc.