| Performance As of June 30, 2024 |
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|---|---|---|---|---|---|---|---|
|
Total Return |
Average Annual Total Returns |
|||||
Composite/Benchmark |
3 Mo. |
YTD |
1 Yr. |
3 Yr. |
5 Yr. |
10 Yr. |
Since Inception |
BBH Multisector Fixed Income Composite (Gross of Fees) |
2.05% |
5.13% |
13.58% |
4.93% |
5.50% |
4.76% |
4.75% |
BBH Multisector Fixed Income Composite (Net of Fees) |
1.95% |
4.92% |
13.13% |
4.51% |
5.08% |
4.35% |
4.34% |
Bloomberg US Aggregate Bond Index |
0.07% |
-0.71% |
2.63% |
-3.02% |
-0.23% |
1.35% |
1.34% |
| Past performance does not guarantee future results Returns of less than one year are not annualized BBH Multisector Fixed Income Composite inception date is 06/01/2014 |
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| Bloomberg US Aggregate Bond Index is comprised of U.S. dollar-denominated investment grade fixed income securities with maturities of at least one year. The index includes corporate, government, and mortgage-backed securities. One cannot invest directly in an index. Sources: Bloomberg and BBH & Co. |
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2Q Highlights
|
Market Environment
Treasury rates continued to respond to investors’ predictions for forward-looking Federal Reserve (Fed) interest rate decisions. Strong economic data and still-high inflation data caused investors to continue to shift towards a “higher for longer” disposition for the remainder of 2024. Investors still believe the Fed will cut rates by 50 basis points1 during 2024, but the anticipated amount of rate cuts was 150 basis points at the start of the year. Longer-term interest rates increased across the yield curve to reflect those changes in expectations. Shorter duration fixed income indexes generated positive returns during the second quarter while longer duration indexes experienced negative total returns. Excess returns to credit were generally positive with two notable exceptions: agency mortgage-backed securities (MBS) and long duration corporate bonds.
Credit conditions remain accommodative. High yield default rates remain subdued and continue to be concentrated among CCC-rated issuers, although default rates for all rating categories are below their respective long-term averages. Economic data remained strong, with inflationary pressures persisting and few signs of recession on the horizon. Headline consumer inflation prints have been declining, but wage growth and job openings remains higher than historic averages and could still exert upward pressure on inflation. The Chicago Fed National Activity Index remains above its recession indicator. The U.S. consumer appears to be strong, with loan delinquency rates generally rising off very low bases and not indicating widespread issues. Auto loan delinquency rates rose to their highest levels since 2009 but are within expected ranges for Asset-Backed Securities (ABS) to withstand losses without risk of impairment to bondholders. Business loan performance appears healthy, as delinquency rates are low and default rates are declining. Office delinquency rates remain elevated, while non-office commercial mortgage delinquency rates rose moderately. Return to office dynamics remain weak and continue to pressure office real estate values. The weakening office market has not had an outsized impact on banks’ commercial real estate loan portfolios to date, as delinquency rates and charge-offs have been muted.
Valuations
We are finding fewer opportunities in traditional segments of the credit markets as risk spreads remain narrow and net issuance is low. According to our Valuation Framework,2 the percentage of investment-grade corporate bonds that screened as a “buy” remained near to 13%, and the percentage of high yield corporate bonds that screened as a “buy” in our Valuation Framework increased to 20% from 16% at the start of the quarter. No cohort of 30- or 15-year agency MBS met our Valuation Framework for purchases at quarter-end. There remain opportunities in select subsectors of the market.
The percentage of corporate loans that screened as a “buy” according to our Valuation Framework stood near 60% at quarter-end, down slightly since last quarter. Investment-grade corporate bonds in several interest rate sensitive subsectors, such as life insurance, banking, and finance companies, continue to offer attractive opportunities. In the structured credit markets, we continue to find opportunities in select sectors despite the recent narrowing of risk spreads. Opportunities are arising in the commercial mortgage-backed securities (CMBS) market as investors are differentiating among property types with differing credit dynamics.
We continue to avoid emerging markets credits due to concerns over creditor rights in most countries and its impact on their durability. We continue to avoid non-agency residential mortgage-backed securities (RMBS) due to poor technical factors, and weak fundamentals, underpinned by poor housing affordability, low inventory of homes for sale, and stable-to-declining home prices.
Performance
The portfolio generated a positive return during the second quarter due to its defensive interest rate posture, its sector and quality positioning, and security selection results.
The portfolio’s duration posture was managed near shorter-term interest rates that maintained positive returns despite changes to longer-term interest rates. This contributed to performance results as shorter-duration bonds managed positive returns despite the overall rise in interest rates.
The portfolio’s sector and quality positioning contributed to performance as the portfolio emphasized stronger-performing segments of the credit markets while our valuation discipline helped us avoid two underperforming segments of the market: agency MBS and long-dated corporate bonds.
Finally, selection results contributed. Subsectors with the highest impact on results included electric utility corporate loans, high-grade property and casualty (P&C) insurers, high yield pharmaceutical bonds, high yield technology bonds, aircraft equipment ABS, and high-grade banking bonds. Subsectors that detracted from selection during the quarter included healthcare corporate loans, agency multifamily CMBS, and media entertainment corporate loans.
Transaction Summary
We continued to find durable credits3 offering attractive value despite weak attractiveness of valuations of credits in Indexes. The purchases were made across a variety of sectors and industries. The table below summarizes a few notable portfolio additions.
Characteristics
At the end of the quarter, the portfolio’s duration was 2.2 years and remained near levels consistent with long-term capital preservation. The portfolio’s holdings of reserves declined to under 5% as we identified credit investments that met our valuation and durability criteria. The portfolio’s allocation to high yield and non-rated instruments increased to 52%. The portfolio’s yield to maturity was 9.3% and remained elevated versus bond market alternatives. The portfolio’s option-adjusted spread was 420 basis points over Treasuries; for reference, the Bloomberg U.S. Corporate Index’s was 94 basis points and the Bloomberg U.S. Corporate High Yield Index’s was 309 basis points at quarter-end.
Conclusion
An environment like this can test the resolve of credit investors. Credit conditions appear relatively benign and issuance is robust, leading even the most disciplined investors to question the virtues of a valuation discipline when no observable risk event appears on the horizon. Opportunities remain, yet the importance of calibrating valuation and credit discipline is of utmost importance when conditions appear calmest.
1 Basis points (bps) is a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.
2 Our valuation framework is a purely quantitative screen for bonds that may offer excess return potential, primarily from mean reversion in spreads. When the potential excess return is above a specific hurdle rate, we label them “Buys” (others are “Holds” or “Sells”). These ratings are category names, not recommendations, as the valuation framework includes no credit research, a vital second step.
3 Obligations such as bonds, notes, loans, leases, and other forms of indebtedness, except for cash and cash equivalents, issued by obligors other than the U.S. Government and its agencies, totaled at the level of the ultimate obligor or guarantor of the Obligation. Durable means the ability to withstand a wide variety of economic conditions.
The securities do not represent all of the securities purchased, sold, or recommended for advisory clients and you should not assume that investments in the securities were or will be profitable.
Issuers with credit ratings of AA or better are considered to be of high credit quality, with little risk of issuer failure. Issuers with credit ratings of BBB or better are considered to be of good credit quality, with adequate capacity to meet financial commitments. Issuers with credit ratings below BBB are considered speculative in nature and are vulnerable to the possibility of issuer failure or business interruption.
Purchase and sale information provided should not be considered as a recommendation to purchase or sell a particular security and that there is no assurance, as of the date of publication, that the securities purchased remain in a portfolio or that securities sold have not been repurchased.
Opinions, forecasts, and discussions about investment strategies are as of the date of this commentary and are subject to change without notice. References to specific securities, asset classes, and financial markets are not intended to be and should not be interpreted as recommendations.
Definitions
The Bloomberg US Aggregate Bond Index is a market-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed-rate, publicly placed, dollar-denominated, and non-convertible investment grade debt issues with at least $300 million par amount outstanding and with at least one year to final maturity.
Duration is a measure of the portfolio’s return sensitivity to changes in interest rates.
An index is not available for direct investment.
“Bloomberg®” and the Bloomberg indexes are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indexes (collectively, “Bloomberg”) and have been licensed for use for certain purposes by Brown Brothers Harriman & Co (BBH). Bloomberg is not affiliated with BBH, and Bloomberg does not approve, endorse, review, or recommend the Strategy. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to the Strategy.
RISKS
Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, maturity, call and inflation risk; investments may be worth more or less than the original cost when redeemed. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. Mortgage-backed securities have prepayment, extension, and interest rate risks.
Asset-Backed Securities ("ABS") are subject to risks due to defaults by the borrowers; failure of the issuer or servicer to perform; the variability in cash flows due to amortization or acceleration features; changes in interest rates which may influence the prepayments of the underlying securities; misrepresentation of asset quality, value or inadequate controls over disbursements and receipts; and the ABS being structured in ways that give certain investors less credit risk protection than others. Below investment grade bonds, commonly known as junk bonds, are subject to a high level of credit and market risks.
The Strategy invests in derivative instruments, investments whose values depend on the performance of the underlying security, assets, interest rate, index or currency and entail potentially higher volatility and risk of loss compared to traditional bond investments.
Foreign investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.
The Strategy may engage in certain investment activities that involve the use of leverage, which may magnify losses.
A significant investment of assets in one or more sectors, industries, securities and/or durations may increase its vulnerability to any single economic, political, or regulatory developments, which will have a greater impact on returns.
Illiquid investments subject the investor to the risk that she may not be able to sell the investments when desired or at favorable prices.
Portfolio Characteristics are of the Representative Account. The Representative Account is managed with the same investment objectives and employs substantially the same investment philosophy and processes as the Strategy.
Brown Brothers Harriman Investment Management (“IM”), a division of Brown Brothers Harriman & Co (“BBH”), claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
To receive additional information regarding IM, including a GIPS Composite Report for the strategy, contact John W. Ackler at 212 493-8247 or via email at john.ackler@bbh.com.
Gross of fee performance results for this composite do not reflect the deduction of investment advisory fees. Actual returns will be reduced by such fees. Net of fees performance results reflects the deduction of the maximum investment advisory fees. Returns include all dividends and interest, other income, realized and unrealized gain, are net of all brokerage commissions, execution costs, and without provision for federal or state income taxes. Results will vary among client accounts. Performance calculated in U.S. dollars.
The objective of our Multisector Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite includes all fully discretionary fee-paying with an initial investment equal to or greater than $10 million that are managed using the Multisector Fixed Income Strategy. Accounts are invested in a broad range of taxable bonds, with the duration target approximately 4.5 years. Investments are primarily investment grade securities. Account guidelines are not materially restrictive. Account that subsequently fall below $9.25 million are excluded from the Composite.
Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2024. All rights reserved.
Not FDIC Insured No Bank Guarantee May Lose Money
IM-15034-2024-07-25 Exp. Date 10/31/2024
