Brandywine Global Investment Management’s fixed-income strategy is beating larger competitor PIMCO’s performance, and its open secret is that Brandywine portfolio manager Stephen Smith is shortening his exposure to the U.S. bond market as he waits for it to return to what he calls “normalization.”
Brandywine Global’s U.S. Fixed Income strategy earned a gross return of 13.39% , according to Morningstar data for one-year returns for the period ended June 30. PIMCO’s U.S. fixed income offering, the U.S. Core Plus strategy, earned a 7.21% gross return during the period.
Smith has succeeded recently in his judgment of the Treasury market. In the last half of 2011 when eurozone debt worries were intensifying, he owned long-maturity Treasuries, which tend to outperform in times of stress. This produced strong returns for the strategy versus peers like PIMCO that decided not to own Treasuries based on credit concerns. Smith has since sold those long-maturity Treasuries and now favors U.S. corporate debt, which he believes will perform well if the U.S. and global economies improve.
“People are not making investments as they normally do,” said Smith at an American Beacon Funds media day on Wednesday at the Waldorf-Astoria in New York, noting that a failure of world leadership has created a topsy-turvy world where bond yields are at historic lows and debt-to-GDP ratios keep climbing. “As Margaret Thatcher said, socialism works until you run out of other people’s money.”
Saying he awaits a period of “normalization” in the bond market, Smith also criticized Federal Reserve Chairman Ben Bernanke for “hindering growth because interest rates are too low.”