The main difference between the two funds’ investment strategies is, broadly, in the investment universe.
First, there is a currency bias difference. The Blackrock fund is benchmarked to the JP Morgan Asia Credit Index (JACI), which tracks the Asian US dollar bond market. While the fund has the flexibility to add bonds in local currencies, US dollar bonds dominate the portfolio, with the currency’s weighting at 90.5% on 31 August, according to data from FE.
By comparison, the Legg Mason fund uses as its reference benchmark the Markit iBoxx Asian Local Bond Index (ALBI), which covers the local currency bond market in Asia. The fund manager also has the flexibility to stray from the benchmark and to invest in hard currencies. On 31 August, the weighting of US dollar exposure in the fund was 28.1%, as per FE.
Second, the two funds differ in their focus on the source of risk and return. The Blackrock fund puts emphasis on credit, with a higher exposure to corporate bonds, which on 31 August constituted 43.3% of the portfolio, according to FE.
By comparison, the Legg Mason fund has a stronger focus on interest rates and currency, which results in a higher exposure to government bonds. They accounted for 70.3% of the portfolio on 31 August.
After the US dollar, the fund’s highest currency exposures are to the Indonesian rupiah (18.1%), the Indian rupee (15.2%) and the renminbi (11.5%).
The top holdings in the Legg Mason fund are also larger, with single issues of government bonds of India, Philippines, Malaysia and Thailand each constituting 3%-4.75% of the portfolio.
The Blackrock fund, approximately six times larger by AUM, has more diversified positions, with the largest around 2% of the portfolio.
The managers of both funds use a combination of the top-down and bottom-up approach to investment, which is common for fixed income funds. The bottom-up selection of issues, based on credit analysis, is essential for the Blackrock fund, where it plays a more important role due to the focus on corporate bonds. In contrast, the Legg Mason fund manager’s focus on rates and currencies require a more thorough top-down analysis of macroeconomic factors.
Both fund managers use their capability to stray from the benchmark. Besides local currency exposure, the Blackrock fund has been making off-benchmark active country bets on Sri Lanka and Mongolia, which have added value this year, according to Ng.
Legg Mason has stepped beyond the benchmark in its US dollar exposure and also in overweighting duration. At 7.04 years it is higher than Blackrock’s 6.09, which leaves it more exposed to changes in interest rates.
