Western Asset Core Bond Fund Commentary – Q3 2021
Thesis
WATFX (currently yielding 1.69%) is an actively managed fund that finds overlooked areas of the market that can go against consensus views and add value. Through internal macro, credit, and fundamental research WATFX identifies undervalued securities and takes on more credit exposure to generate alpha over time. Through a diversified approach to interest rate duration, yield curve, sector allocation, and security selection, the fund dampens exposure to volatility.
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Overview
In the third quarter of 2021, WATFX outperformed the benchmark (Barclays U.S. AGG) by 11bps largely due to the fund’s longer duration and yield-curve positioning. Overall exposure to spread products have been a tailwind, while Treasury-based products acted as a headwind during the quarter.
Q3 2021 Summary
- WATFX returned 0.16%, while the U.S. AGG returned 0.05%
- Quarter-end effective duration for WATFX was 7.10 and 6.71 for the U.S. AGG
- Extended duration, primarily in the intermediate part of the yield curve
- Continued to trim TIPS exposure and began trimming agency MBS exposure
- Reducing exposure to investment-grade and “plain vanilla” high-yield securities
- Increasing exposure to high-yield sectors, residential and commercial structured products, bank loans, and EM debt
Outlook
- We continue to hold this fund and believe in our thesis due to the fund’s diverse approach and strong top down-bottom up fundamental value investing over the long-term
- Expecting continued strengthening in global GDP and higher inflation
- Fed tightening could take longer than anticipated due to enormous economic slack, labor market scarring, and headwinds around debt and demographics
- Expect central banks to remain extremely accommodative in the near future, and focusing on diversification will be paramount to strong performance
[Category Mutual Fund Commentary]
Micah Weinstein
Research Analyst
Direct: 617.226.0032
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109