BBH Taxable Fixed Income Quarterly Strategy Update – 2Q 2022

Co-Portfolio Managers, Andrew Hofer, Neil Hohmann and Paul Kunz provide an analysis of the investment environment and most recent quarter-end results of the Taxable Fixed Income Strategy.

Silver Linings

Financial markets in the second quarter continued to grapple with intertwined macroeconomic questions: Will inflation recede, and if so, how fast? Are we headed into a recession, or has the rapid tightening by the Federal Reserve (the Fed) already helped drive us into a recession? How will continued reductions in the Fed balance sheet ultimately affect fixed income markets?

There is little consensus on these questions, and we are not likely to settle them in this commentary. Macroeconomic models have limited predictive value and are distorted further by investor hopes and expectations. As fundamentally driven, bottom-up investors, our active management philosophy does not rely on macro forecasts. We focus instead on whether valuation levels are attractive or unattractive in an extended historical context. The two “predictions” we make regularly are:

  1. Do valuations suggest that, by owning a particular debt security, we are more likely than not to outperform risk-free securities by an appropriate margin of safety1, over the next year?
  2. Is this debt instrument durable enough to repay us even in the most challenging economic circumstances?

Focusing on these objectives both drives long-term outperformance and helps us manage through economic cycles. For instance, if the economy heads into a recession, the credits we purchase must provide compensation over a safety margin that already takes into consideration elevated volatility. Focusing on bond-level valuation and credit strength is within our control and more dependable to follow, as well as more relevant to returns in our portfolios.

For the first time in recent quarters, our fixed income strategies underperformed duration-matched benchmarks as dramatically improved valuations led us to increase the weights to corporate and structured credit in the first half. This contrasts with the outperformance attained during the first quarter, when we observed that valuations moved from “broadly unappealing” to “improving.” New purchases emerged through our thorough, bond-by-bond analysis with respect to both valuation and durability – not by top-down thinking of “we want to add risk to capitalize on rising spreads” or “spreads may widen more, let’s wait to add credit exposure.”

Year-to-date, our strategies are generally performing in line with their benchmarks. We are encouraged that the quarters following a substantial rise in credit spreads are the ones that tend to generate the strongest outperformance for our clients’ portfolios. This happens as we add credit exposures during the periods when credit spreads – and often valuations – become more attractive.

Higher absolute interest rate levels and higher credit spreads are setting up for attractive return prospects from credit-oriented fixed income, although no one can predict when interest rates will peak (and bond returns bottom). In the short term, credit returns may continue to struggle, but credit risk spreads are already at the top quartile of their historic range and will increasingly provide some insulation from further spread widening. The credits we own are demonstrating their durability in several ways: upgrades are outpacing downgrades in investment-grade (IG) corporate bonds, default rates for high yield (HY) bonds and loans remain low (with none in our portfolios), credit enhancements for structured credits remain robust, and delinquency rates for consumer- and commercial mortgage-related loans remain at low levels.

Ahead are a series of topics we explore most relevant to our investment process and our client portfolios.

The Transition from Inflation Fears to Recession Fears

All investors know that it is impossible to consistently predict the timing and magnitude of market reactions to macroeconomic developments. A classic joke that illustrates this is that an inverted yield curve predicted 12 of the last 7 recessions. Investors often anticipate a recovery before a recession is officially recognized.

There are several market-based indicators that suggest investors are more focused on a potential recession than persistently high inflation.  Exhibit I shows the year-to-date trajectories of various longer-term breakeven inflation rates implied by the U.S. Treasury Inflation-Protected Securities (TIPS) market. Expectations for future inflation remained very optimistic in the face of historically high current prints, even ending the quarter on a downward path and at levels below where they were at the start of the year.


Exhibit I: U.S. TIPS Breakeven Inflation Rates – Line graphs with plots that show the breakeven inflation rates – computed as the difference between the yield to maturity on fixed-rate Treasury notes and bonds less the yield to maturity on U.S. Treasury Inflation-Protected Securities (TIPS) of the same maturity – for 5-, 10-, and 30-year maturities over the period December 31, 2021 to June 30, 2022, represented on the x axis. The exhibit shows these breakeven rates rose during the first quarter of 2022 but declined during the second quarter of 2022. 

Consistent with projecting lower inflation, the forward rate market suggests investors believe the Fed is already approaching the highest level of rates in this cycle. This can be seen in Exhibit II, where the difference between the actual and forward rate narrowed substantially.


Exhibit II: 1-Year Treasury Rates – Forward vs. Actual – Combination bar and line plot that shows the yield to maturity of the one-year Treasury note, the nine month forward one-year Treasury note yield to maturity implied from the shape of the yield curve, and a bar chart showing the differences in yield to maturity for the nine-month forward one-year Treasury rate less the actual one-year Treasury rate. The exhibit is a time series graph from June 30, 2021 to June 30, 2022, and it shows that the actual and forward rates diverged significantly from September 2021 to May 2022 but the differences subsided to less extreme levels by the end of June 2022. 

In fact, there is evidence of weakening economic activity in the near-term. Commodity prices have been falling and manufacturing activity has slowed. However, employment and services activity remain strong. Whether an investor is bullish or bearish, there is a data point to support both points of view.

The Compounding Impact of Quantitative Tightening on Top of Fed Rate Hikes

The Fed’s quick pivot to a tighter monetary policy regime has produced the most negative impact on financial markets since 1980. In the face of persistently higher-than-forecasted inflation, the Fed’s hopes for a gradual tightening of monetary policy gave way to more aggressive action. Treasury rates rose rapidly year-to-date as investors priced in (at the peak) nearly a 3% upward shift in the Fed funds rate.

Meanwhile, the Fed has begun shrinking its balance sheet holdings of Treasuries and mortgage-backed securities (MBS) – up to $48 billion in monthly bond run-offs that would not be reinvested, starting in June. The monthly run off grows to $90 billion per month by September.

To give a sense of potential impact, Exhibit III shows how the Fed’s purchases of agency MBS impacted risk spreads. Not surprisingly, the Fed’s plans to purchase agency MBS without regards to compensation drove rates and spread (and by extension, mortgage rates) lower. As the Fed recedes from being a constant and dominant purchaser of agency MBS, risk spreads widen as valuation-sensitive buyers now must absorb the larger volume of available supply. We have specifically avoided exposures of agency MBS in client portfolios for years due to wholly unappealing valuations. This has been a silver lining to client portfolios for two reasons: we invested in opportunities with more appealing valuations and spreads while agency MBS underperformed Treasuries in six out of the last seven years, and we avoided episodes of higher volatility driven by repricing of prepayment and extension risks. The Fed’s balance sheet reduction over the next few years will likely put additional pressure on interest rates and spreads, producing more attractive valuations than perhaps any period since 2009 (when the Fed’s Quantitative Easing began).


Exhibit III: Bloomberg MBS Index OAS vs.Fed MBS Purchase Campaigns – Line graph showing the average option-adjusted spread of the Bloomberg U.S. Mortgage-Backed Securities (MBS) Index over the time series of January 31, 2000 – June 30, 2022. Areas are shaded to represent periods during which the Federal Reserve was engaged in large-scale asset purchase programs involving MBS, excluding episodes of tapering. 

The Arrival of Compelling Corporate and Structured Credit Valuations

Credit spreads reached compelling levels during the quarter – a rapid reversal from the sparse valuation opportunities at the start of the year. According to BBH’s proprietary valuation framework2, over 50% of the IG corporate bond universe screens as a “buy” on June 30th – meaning credit spreads are at levels that compensate against potential credit losses plus an adequate margin of safety. In other credit segments, including loans, HY corporate bonds, nontraditional asset-backed securities (ABS), and nontraditional commercial mortgage-backed securities (CMBS), we observe attractive valuations that are even more abundant.

The current level of IG corporate spreads has not yet reached the peaks we observed in past credit cycles, but we caution against assuming spreads will continue to rise. In the recent past, spreads have been meaningfully higher only during short-lived periods marked by significant and widespread credit concerns. As Exhibit IV shows, valuations within the IG corporate index have been more compelling than its current level only 27% of the time since January 2010.


Exhibit IV: Percentage of IG Corps in BBH's "Buy Zone" – Combination area and line plot that shows the percentage of the investment-grade bond index with valuations that fell into the “buy zone” using BBH’s proprietary valuation framework over the period January 31, 2010 – June 30, 2022. There is a horizontal line indicating the percentage of the index that screened as a “buy” as of June 30, 2022.

As credit spreads revalued during the interest rate rise in the first half of the year, investors experienced painful, double-barreled price declines. The silver lining is that the credit markets today offer an abundance of opportunities with strong return potential due to the combination of compelling spreads and increasingly attractive yields. In an environment like this, our process leads us to lean into credit, while making sure our in-depth analysis incorporates a full and reasonable range of economic outcomes for each issue we examine. There may be more pain in this cycle, but we believe it makes more sense to earn these spreads than to try to time and “top tick” any higher spreads that may be on the horizon.

Evidence of Credit Durability Abound

We have established that credit markets offer attractive value. The next step in our process involves a careful assessment of each bond’s durability characteristics. In reviewing credit positions in client portfolios, we see no degradation of durability or credit concerns so far.

Within the corporate credit markets, we observe upgrades outpacing downgrades in IG corporates, while default rates for senior bank loans and HY bonds remain low. Exhibits V and VI show these respective trends.


Exhibit V: Upgrade-to-Downgrade Ratio – IG Corporate Bonds – Line graph showing the monthly net rating changes of investment-grade corporate bonds over the period June 30, 2005 to June 30, 2022. 


Exhibit VI: Default Rates of Senior Bank Loans and High Yield Bonds – Bar graph showing the annual trailing twelve-month par-weighted default rate for senior bank loans and high yield bonds from 2000 – 2021 and including the twelve-month period ending June 30, 2022.

Structured credit durability arises from substantial credit enhancements that allow the securities to perform well even through particularly difficult environments. These enhancements remain healthy and are nowhere close to being tapped. If we look at where the earliest signs of where cracks may appear – in delinquency rates of loans that comprise some structured credit securities - we find healthy conditions. As Exhibits VII and VIII show, delinquency rates for a variety of ABS and CMBS collateral remain subdued.


Exhibit VII: Delinquency Rates of Various Loans – Line graph plotting the delinquency rates of credit cards, auto loans, all consumer loans, and business loans as reported by U.S. banks as a time series for the period December 31, 2015 to June 30, 2022.


Exhibit VIII: 60+ Day Delinquency Rates of CMBS Structures – Line graph plotting the 60 plus day delinquency rates of conduit, single-asset single-borrower (SASB), and commercial real estate collateralized loan obligations (CRE CLOs) as a time series for the period December 31, 2015 to June 30, 2022.

The state of credit fundamentals offers a silver lining to a seemingly gloomy market outlook: the environment appears ripe for identifying durable credits3 at attractive values. If the fundamentals remain solid, this raises the question of what else has caused valuations to become attractive? To address this question, we turn to our final topic.

Liquidity, Issuance, and Fund Flows

When discussing how the Fed’s quantitative tightening plans may impact the agency MBS market, we observed that supply/demand dynamics will change in a way that should widen spreads significantly – a major source of demand for MBS leaving the market should have that result.

Credit spreads react to shifting supply/demand imbalances as well, and we observed some of these shifts occurring year-to-date. Fixed income fund flows can impact some of these dynamics; during periods of heavy redemption activity, there are more bonds available to be purchased (supply increases). As Exhibit IX shows, the pace of fund outflows in 2022 has been remarkable in both scale and consistency. 


Exhibit IX: Cumulative Taxable Bond Fund Flows – Line graph plotting the cumulative taxable bond fund flows for each calendar year from 2014 to 2022 over the week of the year (represented on the x axis).

We observe several areas where demand is weakening at the same time. Besides the Fed’s waning participation in the market, insurance companies have indicated that higher claims costs impede their ability to invest in the market while bank demand for credit has decreased due to a renewed focus on liquidity and capital needs. Exhibit X demonstrates the weakening appetite for credit among banks, as dealer inventories declined substantially since the Global Financial Crisis while the value of corporate bonds outstanding more than tripled.


Exhibit X: U.S. Primary Dealer Inventories vs. Market Value of U.S. Corporate Bond Market – Line graph plotting the inventory of all corporate bonds held by primary dealers and the market value of outstanding corporate bonds as a time series over the period of December 31, 2001 to June 30, 2022.

The combination of these forces creates widening risk spreads due to a mismatch between sellers and buyers. Exhibit XI illustrates one way to observe the changes in these spreads between a wide variety of cash bonds and the cost to insure 125 of the most liquid names in the IG indexes. The difference, or liquidity premium, between these two measures stands at levels seen recently only in the March 2020 and 2015-2016 credit cycles. When reviewing our credit positions, the yield advantages are quite compelling, often reaching one or two additional percentage points yield for similar levels of credit risk. As time goes by, investors stand to benefit from that additional yield.


Exhibit XI: IG Cash Bond Spreads over CDX – Line graph plotting the cash bond spread, computed as the average spread on an investment-grade (IG) corporate bond index less the average spread on the investment-grade credit default swap index (CDX), as a time series for the period January 31, 2013 to June 30, 2022. The exhibit contains two lines as a time series: the prevailing levels of cash bond spreads over that time period and a horizontal line showing the average spread that existed over that time period.  

One may wonder how these liquidity dynamics impact credits seeking to refinance their debt obligations. We draw a distinction between the liquidity dynamics discussed above and new issuance supply. Issuance in some market segments, such as HY corporate bonds, have been challenged and significantly lower. Structured credit issuance remains strong, and high-grade corporate issuance has been lower than during previous years, but not at worrisome levels.

Our Activity Last Quarter

As valuations improved throughout the quarter, we added credit risk exposure to client portfolios in a diversified manner across corporate and structured credit. We found several attractive on-the-run and niche IG corporate bonds (defined as corporate bonds represented in market indexes) issued by companies in the automotive, banking, electric utility, food and beverage, life insurance, real estate investment trusts (REITs), and property and casualty insurance industries. We added to loan participations in the technology sector and to an asset manager at spreads of +470 to +500 basis points over the 1-Month Term SOFR4. We participated actively in high-quality single borrower floating rate CMBS deals at spreads of +200-400 basis points over SOFR. In segments of the non-traditional ABS market, we were active in seven different subsectors, including aircraft equipment, collateralized loan obligations, auto fleet leases, large ticket equipment, personal consumer loans, small ticket equipment, and subprime auto loans, where we found opportunities with spreads ranging from +150-350 basis points over Treasuries for IG securities with strong credit enhancement.

Concluding Thoughts

The debate over the state of the economy will not be resolved until we are well past the peak in vulnerability from higher inflation and tighter monetary policy. However, credit markets at present offer higher yields and attractive compensation against actual credit and liquidity risk. We believe that these assets will outperform as greater certainty about the economy unfolds. It may take a bit longer if we tip into a recession, but, for durable credits, the outcome is the same. While we always move incrementally, valuations suggest that selectively adding credit exposure today is the appropriate course of action.

As of 2Q 2022 Total Return Average Annual Total Return
Composite/Benchmark 3 Mos.* YTD* 1 Yr. 3 Yr. 5 Yr. 10 Yr. Since Inception
BBH Limited Duration Fixed Income Composite (gross of fees) -1.16% -2.28% -1.97% 1.35% 1.80% 1.71% 4.41%
BBH Limited Duration Fixed Income Composite (net of fees) -1.22% -2.40% -2.22% 1.09% 1.57% 1.49% 4.20%
Bloomberg US 1-3 Year Treasury Bond Index -0.50% -2.84% -3.30% 0.23% 0.93% 0.78% 3.74%
BBH Multisector Fixed Income Composite (gross of fees) -4.63% -5.97% -3.94% 2.81% 4.08% N/A 3.57%
BBH Multisector Fixed Income Composite (net of fees) -4.73% -6.16% -4.32% 2.40% 3.67% N/A 3.16%
Bloomberg US Aggregate Bond Index -4.69% -10.35% -10.29% -0.93% 0.88% N/A 1.47%
BBH Structured Fixed Income Composite (gross of fees) -2.61% -4.25% -2.97% 1.87% 3.28% N/A 3.73%
BBH Structured Fixed Income Composite (net of fees) -2.70% -4.42% -3.31% 1.52% 2.92% N/A 3.37%
Bloomberg US ABS Index -0.91% -3.77% -4.27% 0.51% 1.38% N/A 1.55%
BBH Intermediate Duration Fixed Income Composite (gross of fees) -2.59% -6.48% -6.75% 0.73% 1.78% 1.95% 5.82%
BBH Intermediate Duration Fixed Income Composite (net of fees) -2.65% -6.60% -6.99% 0.48% 1.53% 1.70% 5.56%
Bloomberg Intermediate Gov/Credit Index -2.37% -6.77% -7.28% -0.17% 1.13% 1.45% 5.49%
BBH Municipal Fixed Income Composite (gross of fees) -1.52% -6.54% -6.31% 0.43% 1.84% 2.34% 3.58%
BBH Municipal Fixed Income Composite (net of fees) -1.58% -6.66% -6.55% 0.18% 1.59% 2.09% 3.32%
Bloomberg 1-10 Year Municipal Bond Index -0.84% -5.55% -5.39% 0.21% 1.32% 1.79% 3.23%
BBH Core Plus Fixed Income Composite (gross of fees) -6.03% -10.98% -9.85% 1.58% 3.33% 3.71% 6.40%
BBH Core Plus Fixed Income Composite (net of fees) -6.09% -11.10% -10.08% 1.33% 3.07% 3.45% 6.14%
Bloomberg US Aggregate Bond Index -4.69% -10.35% -10.29% -0.93% 0.88% 1.54% 5.78%
BBH Inflation-Indexed Fixed Income Composite (gross of fees) -6.48% -8.88% -5.39% 2.97% 3.16% 1.86% 5.38%
BBH Inflation-Indexed Fixed Income Composite (net of fees) -6.52% -8.95% -5.53% 2.81% 3.00% 1.71% 5.22%
Bloomberg US TIPS Index -6.08% -8.92% -5.14% 3.04% 3.21% 1.73% 5.02%
BBH Intermediate Inflation-Indexed Fixed Income Composite (gross of fees) -3.65% -5.12% -2.41% 3.18% 3.20% N/A N/A
BBH Intermediate Inflation-Indexed Fixed Income Composite (net of fees) -3.69% -5.19% -2.56% 3.03% 3.05% N/A N/A
Bloomberg 1-10 Year US Treasury Notes -3.42% -5.11% -2.03% 3.36% 3.24% N/A N/A
Source:  BBH Analysis

 

1 With respect to fixed income investments, a margin of safety exists when the additional yield offers, in BBH’s view, compensation for the potential credit, liquidity and inherent price volatility of that type of security and it is therefore more likely to outperform an equivalent maturity credit risk-free instrument over a 3-5 year horizon.
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.
4 SOFR = Secured Overnight Financing Rate, which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.

Past performance is no guarantee of future results.

Gross of fee performance results for the composites do not reflect the deduction of investment advisory fees. Actual returns will be reduced by such fees. Net of fees performance reflects the deduction of the maximum investment advisory fees. Performance is calculated in U.S. dollars.

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.

The Core Plus Fixed Income Representative Account is managed with the same investment objectives, employs substantially the same investment philosophy as the strategy.

* Returns are not annualized

On 12/31/2021, the BBH Core Fixed Income Composite was renamed the BBH Core Plus Fixed Income Composite.

BBH Limited Duration Fixed Income Composite inception date is 1/1/1990, BBH Unconstrained Credit – Fixed Income composite inception date is 5/15/2014, BBH Structured Fixed Income Composite inception date is 1/1/2016, BBH Intermediate Duration Fixed Income Composite inception date is 7/1/1985, BBH Municipal Fixed Income Composite inception date is 5/1/2002, BBH Core Plus Fixed Income Composite inception date is 1/1/1986, BBH Inflation-Indexed Securities Composite inception date is 4/1/1997, BBH Intermediate Inflation-Indexed Securities Composite inception date is 11/1/2004.

Index Definitions

The BofA Merrill Lynch US Corporate Index tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued in the U.S. domestic market.

Bloomberg US Aggregate Bond Index is a market value-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.

Bloomberg US 1-3 Year Treasury Bond Index is an index of fixed rate obligations of the U.S. Treasury with maturities ranging from 1 to 3 years.

Bloomberg 1-10 Year Municipal Bond Index is a component of the Bloomberg Municipal Bond index, including bonds with maturity dates between one and 17 years. The Bloomberg Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year.

Bloomberg Intermediate Gov/Credit Index is a broad-based flagship benchmark that measures the non-securitized component of the US Aggregate Index with less than 10 years to maturity. The index includes investment grade, US dollar-denominated, fixed-rate treasuries, government-related, and corporate securities.

Bloomberg US TIPS Index includes all publicly issued, U.S. Treasury inflation-protected securities that have at least one year remaining to maturity, are rated investment grade, and have $250 million or more of outstanding face value.

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.

Bloomberg US MBS Index tracks fixed-rate agency mortgage-backed pass-through securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon, and vintage.

“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 BBH Strategy. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to the fund.

The Indexes are not available for direct investment.

Composites Description

The objective of our Limited Duration Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite includes all fully discretionary fee-paying accounts with an initial investment equal to or greater than $10 million with a duration of approximately 1.5 years. Accounts that subsequently fall below $9.25 million are excluded from the Composite.

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 Uncon­strained Credit – 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.

The objective of our Structured Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite includes all fully discretionary fee-paying accounts with an initial investment equal to or greater than $10 million that are managed to the Structured Fixed Income strategy. The target duration may range from 2 to 6 years. Investments are focused on asset-backed and related structured fixed income securities. Holdings are primarily investment grade but non-investment grade securities may be held. Investments may include non-dollar fixed income.

The objective of our Intermediate Duration Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite included all fully discretionary fee-paying fixed income accounts over $5 million that are invested in governments and corporates, with a duration of approximately 2 years. Accounts that subsequently fall below $4.5 million are excluded from the Composite.

The objective of our Municipal Fixed Income Strategy is to deliver excellent after-tax returns in excess of industry benchmarks through market cycles. The Composite includes all fully discretionary fee-paying municipal fixed income accounts with an initial investment equal to or greater than $5 mil­lion that are managed to an average duration of approximately 4.5 years. Portfolios that subsequently fall below $4.5 million are excluded from the Composite.

The objective of our Core Fixed Income Strategy is to deliver excellent after-tax returns in excess of industry benchmarks through market cycles. The Composite included all fully discretionary, fee-paying core fixed income accounts over $10 million that are managed to a duration of approximately 4.5 years and are invested in a broad range of taxable bonds. Accounts that subsequently fall below $9.25 million are excluded from the Composite.

The objective of our Inflation-Indexed Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite included all fully discretionary, fee-paying domestic accounts over $10 million with an emphasis on U.S. inflation indexed securities. May invest up to approximately 25% outside of U.S. inflation indexed securities, and a duration of approximately 7-9 years. Accounts that subsequently fall below $9.25 million are excluded from the Composite.

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.

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.

Investing 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.

Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax.

Single Asset-Single Borrower (SASB) securities lack 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.

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.

Portfolio holdings and characteristics are subject to change.

Basis point 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.

The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is then adjusted to take into account an embedded option.

Traditional ABS include prime auto backed loans, credit cards and student loans (FFELP). Non-traditional ABS include ABS backed by other collateral types.

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. High yield bonds, commonly known as junk bonds, are subject to a high level of credit and market risks.

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. 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.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term 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. 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. 2022. All rights reserved.

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You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


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