Exhibit I: Fixed income index returns for various indexes as of March 31, 2025, displaying duration, total return, and excess return.
1Q Highlights
|
| Performance As of March 31, 2025 |
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|---|---|---|---|---|---|---|
|
Total Return |
Average Annual Total Returns |
||||
Composite/Benchmark |
3 Mo. |
YTD |
1 Yr. |
3 Yr. |
5 Yr. |
Since Inception |
BBH Structured Fixed Income Composite (Gross of Fees) |
1.86% |
1.86% |
9.26% |
5.99% |
6.17% |
4.86% |
BBH Structured Fixed Income Composite (Net of Fees) |
1.78% |
1.78% |
8.88% |
5.62% |
5.80% |
4.50% |
BBH Structured Fixed Income Benchmark |
1.51% |
1.51% |
6.22% |
3.46% |
2.34% |
2.31% |
Past performance does not guarantee future results Composite Inception Date: 01/01/2016 Sources: Bloomberg and BBH & Co. |
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Market Environment
First quarter 2025 may have been the calm before the storm. Treasury rates declined across the yield curve as concerns about muted growth prospects emerged due to indications the U.S. government planned to introduce protectionist trade policies. These concerns impacted investor predictions for forward-looking Fed interest rate decisions, indicating one additional Fed rate cut was expected and bringing the tally of expectations to four cuts by year end. The next Fed decision is scheduled for May 7th, and investors predict no change to the federal funds rate at that meeting.
The Bloomberg U.S. Aggregate Index returned 2.8% during the first quarter as interest rates declined and credit spreads widened modestly from a low base. Riskier market segments underperformed high-quality bonds. The Bloomberg U.S. Corporate High Yield Index returned 1.0%, and the S&P 500 Index returned -4.3%. All major credit segments of the Bloomberg U.S. Aggregate Index had negative excess returns during the quarter.
Credit issuance remained robust during the quarter, with issuers refinancing short maturities amid low credit spreads, muted volatility, and strong demand. High-grade corporate bond issuance increased 19% while high yield issuance (bonds plus loans) was flat year over year. Asset-backed securities (ABS) issuance was flat, but nontraditional ABS volumes increased 10% from 2024’s pace. Commercial mortgage-backed securities (CMBS) volumes jumped 139% off a lower base year over year. Net issuance was modest but positive in all credit sectors.
With spreads wider and positive net issuance, opportunities are emerging in pockets of the market. The percentage of credits that screened as a “buy” increased to 11% from 4% for investment-grade corporate bonds and to 38% from 16% for high yield corporate bonds. The percentage of loans screening as a “buy” decreased though to 45% from 58%. Within the investment-grade corporate credit market, interest rate-sensitive sectors like life insurance, finance companies, and banks continue to screen attractively, while opportunities are also emerging in consumer cyclical companies. Tariff pressures should have a greater effect on more leveraged businesses in the high yield market, which drove credit spreads toward more appropriate ranges.
Away from credits in mainstream indexes, spreads in some ABS subsectors increased toward their long-term averages. Most nontraditional ABS continue to screen attractively in our valuation framework and offer appealing yield prospects. Data center ABS spreads widened from very low levels as concerns over long-term data center demand arose from artificial intelligence (AI) efficiency improvements and potential tariffs. CMBS spreads in select opportunities remain disconnected from their credit profiles, as property-level dynamics remain imperative for performance.
Valuations
Valuations are not yet broadly attractive, and caution is still warranted in several areas of the market. Agency mortgage-backed securities (MBS) valuations remain broadly unattractive as spreads compressed further, with no cohort of the 15- or 30-year MBS market screening as a “buy” candidate. Negative excess returns remain possible for most of the investment-grade corporate bond universe. Less than half of the high yield corporate bond and loan markets screen attractively, highlighting the importance of a selective approach. Spreads on collateralized loan obligation (CLO) debt widened from very narrow levels to below-average levels. Emerging market credits remain unappealing due to concerns over creditor rights in most countries and its impact on their durability, compounded with the uncertainties that tariffs may impose on supply chains. We believe nonagency residential mortgage-backed securities (RMBS) remain plagued by poor issuance trends, unattractive valuations, and weak fundamentals.
Valuations reflect a growing belief that the U.S. economy is slowing. GDP estimates declined and suggested a recession is possible. Changing global tariff policies have weighed on business and consumer sentiment while also driving concerns about inflation.
Credit performance of business loans have been strong, although recent tariff policies may challenge future credit performance. Defaults trended lower, while recoveries improved. U.S. business bankruptcies remain low, and business loans held at banks are performing well. There has been an increase in pay-in-kind (PIK) interest for loans held in some private credit structures. We are monitoring the increase in PIK loans closely to distinguish between unique borrower business models vs. inabilities to service debt.
Performance
- The strategy outperformed its benchmark during the quarter ending March 31, 2025. Security selection paced relative results during the past twelve months.
- Holdings of cell tower ABS, CLOs, recurring revenue ABS, and triple net lease ABS contributed, while positions in Freddie K CMBS and collateralized fund obligations detracted from performance.
- Sector and quality allocations were additive to relative results, as the strategy’s exposures within its holdings of CMBS and ABS were additive to results.
- Interest rates had a small but positive impact on relative performance.
Exhibit III: Attribution as of March 31, 2025, showing average portfolio weight and gross contribution displayed in basis points.
Transaction Summary
We continued to find durable credits offering attractive value even as valuations reflect a growing belief that the U.S. economy is slowing. The table below summarizes a few notable portfolio additions.
Characteristics
- At the end of the quarter, the portfolio’s duration was 2.0 years and continued to approximate that of its benchmark.
- The portfolio’s weighting to high yield and nonrated instruments stood at 15% at quarter end, while ABS increased and its weight to corporate credit decreased.
- The portfolio’s option-adjusted spread was 279 basis points (bps)1 over Treasuries, while the benchmark was 56 bps over Treasuries.
Exhibit V: Characteristics as of March 31, 2025, including credit rating and sector allocation.
Concluding Remarks
Uncertainty over tariffs is already having a recessionary impact on business activity and could pressure the performance of many industries and companies. We remain steadfast in our approach, focusing on identifying durable credits2 – those that can withstand the worst environments faced by their issuer’s industries – at attractive yields. We do this by evaluating individual opportunities bottom-up and not allowing top-down sentiments to alter the application of this approach. We believe this decision-making structure serves our clients well in all environments, whether markets are calm and complacent or volatile and uncertain.
1 Basis point (bp) is a unit that is equal to 1/100th of 1% and is used to denote the change in price or yield of a financial instrument.
2 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
Definitions
Bloomberg US ABS Index is the asset backed securities component of the Bloomberg US Aggregate Bond Index. The index includes pass-through, bullet, and controlled amortization structures. The ABS Index includes only the senior class of each ABS issue and the ERISA-eligible B and C tranche. The Bloomberg U.S. ABS ex. Stranded Cost Utility Index excludes certain stranded cost utility bonds included in the Bloomberg US ABS Index.
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, and inflation risk; investments may be worth more or less than the original cost when redeemed. Mortgage-backed and asset-backed securities have prepayment and extension risks.
SASB lacks the diversification of a transaction backed by multiple loans since performance is concentrated in one commercial property. SASBs may be less liquid in the secondary market than loans backed by multiple commercial properties.
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.
Foreign investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.
The Structured Fixed Income Strategy Representative Account is managed with the same investment objectives and employs substantially the same investment philosophy and processes as the strategy.
The securities discussed 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.
Opinions, forecasts, and discussions about investment strategies represent the author’s views as of the date of this commentary and are subject to change without notice.
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 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. The Not Rated category applies to Non-Government related securities that could be rated but have no rating from Standard and Poor’s or Moody’s. Not Rated securities may have ratings from other nationally recognized statistical recognized statistical rating organizations.
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 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 reflect 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 Structured Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite is comprised of all fully discretionary, fee-paying structured fixed income accounts over $10 million. Investments are focused on asset-backed securities, commercial mortgage-backed securities, collateralized loan obligations, and corporate debt securities that are primarily investment grade. Non-investment grade securities may be held. Investments are focused on U.S. dollar denominated securities, but non-U.S. dollar securities may be held. The accounts are managed to a duration +/- 2 years of the Bloomberg ABS ex-Stranded Cost Utility Index. Effective December 1, 2022, the composite definition was slightly altered to establish a band around the duration of the Bloomberg ABS ex-Stranded Cost Utility Index.
Duration is a measure of the portfolio’s return sensitivity to changes in interest rates.
Standard deviation measures the historical volatility of a returns. The higher the standard deviation, the greater the volatility. The Sharpe ratio is the average return earned in excess of the risk-free rate (the Fed Funds rate).
Traditional ABS include prime auto backed loans, credit cards and student loans (FFELP). Non-traditional ABS include ABS backed by other collateral types.
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. 2025. All rights reserved.
Not FDIC Insured No Bank Guarantee May Lose Money
IM-16565-2025-05-07 Exp. 07/31/2025
