HEAD-TO-HEAD: Bluebay vs Legg Mason

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Investment strategy

Both the Bluebay and Western Asset funds belong to the Morningstar category of alternative long-short debt. These funds are classified as alternatives because they take long-short positions and tend to use derivatives, which makes them more complex than long-only fixed income funds, according to Dash.

However, both funds have differing objectives. The Bluebay fund is an absolute return fund, while the Western Asset fund is a total return fund, Dash said.

The Bluebay fund aims to return at least 300 basis points over the three-month Libor rate while targeting a volatility of around 3%. The fund tries to achieve this primarily from credit selection or taking long and short positions on sovereign and corporate bonds, Dash said.

The process is driven by ideas generated by the fund’s analysts, who analyse fundamentals and valuations and score each issuer from minus five to plus five.

The Western Asset product is the more aggressive of the two, Dash said. Its objective is to maximise total returns.

For example, the maximum target volatility is 10%, which is relatively high for the category. Its duration call is also wider than the Bluebay fund – it can move within the range of negative five to 10 years, while the Bluebay fund’s duration band is plus or minus 2.5 years.

In addition, while the Bluebay fund adds value through bottom-up credit selection, Dash believes that the Western Asset fund adds value by adding tactical strategies based on top-down views of the core portfolio.

The core portfolio is based on medium- to long-term fundamental views or themes, typically with an investment horizon of six-to-12 months, while the tactical overlay is used to manage the fund’s duration, yield-curve positioning and volatility. The tactical overlay’s investment horizon could vary from just days to a few weeks, Dash added.

There are also differences in terms of the markets they invest in. Although the Bluebay fund can invest in emerging market bonds, exposure tends to be focused on the more-liquid markets, such as Mexico.

In comparison, the Western Asset fund is flexible and has the allowance to invest up to 50% of assets in emerging market debt.

Top 5 country allocation

Source: Morningstar

Sector allocation

Source: Morningstar

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