Exhibit I: A line graph showing the correlation between the implied fed funds rate and actual FOMC meeting dates, predicted through January 31, 2024, showing the dramatic shift in expectations for prospective Fed policy.
1Q Highlights
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Turbulence Anew…
The first quarter of 2023 revealed the weak bond market performance of 2022 was only the first unwelcome reality facing investors. Early in the quarter, unrelenting monetary policy tightening amid continued strong economic growth lifted rates to cyclical highs until a run on SVB changed the trajectory of rates and prospective monetary policy. SVB experienced large unrealized losses on its portfolio of Agency Mortgage and Treasury bonds causing depositors to question the bank’s solvency. SVB’s closure spurred risk contagion among U.S. regional banks and shined a light on steep mark-to-market losses following a year of record interest rate increases. Just a few days later, the New York State Department of Financial Services seized Signature Bank, and Swiss regulators facilitated the takeover of Credit Suisse by UBS for $3.7 billion (USD) – a 70% discount against the market capitalization of Credit Suisse’s stock at the end of February.
Banking system difficulties can feed numerous investor concerns: availability and stability of deposits, the opacity of bank balance sheets, the interconnectedness of the banking system, and the impact of tightening credit on the broader economy. Bank runs can be a self-fulfilling prophecy arising from depositors’ fears – whether legitimate or not. In early March, the Fed and Federal Deposit Insurance Corporation (FDIC) attempted to quell depositor concerns through several actions. The FDIC assured full access to uninsured deposits at SVB and Signature Bank. Meanwhile, the Fed introduced a new Bank Term Funding Program (BTFP) allowing banks to pledge U.S. Treasuries, agency debt, agency mortgage-backed securities (MBS), and other qualifying assets – valued at par rather than market value – as collateral for loans. As the quarter ended, conditions seemed to have stabilized. The most severe impacts were isolated to the securities and instruments of a limited number of banks, with secondary price impact on the types of securities that regional banks traditionally purchase, such as agency MBS. Investors are left to navigate the ruins associated with these financial losses and face renewed uncertainty about the U.S. banking sector.
These events left central banks facing a trade-off between continuing tightening campaigns to combat inflationary pressures and pausing interest rate hikes to stabilize financial conditions for banks. Thus far, the Fed stated they will separate “financial stability” measures from monetary policy moves. Additionally, the Fed hiked the target range of the federal funds rate by 0.25% only 12 days after SVB’s collapse. Meanwhile, the European Central Bank (ECB) hiked rates 0.50% in mid-March as Credit Suisse’s share price plummeted. Questions over whether the Fed will navigate a hard or soft landing seem less relevant today than a now unambiguous fact: there will be more turbulence before the landing. Exhibit I shows the dramatic shift in expectations for prospective Fed policy. Investors now believe the banking crisis ended the Fed’s rate hiking campaign and expect three cuts of 25 basis points to unfold by the end of 2023.
We are pleased to report these volatile conditions had minimal impact on our clients’ portfolios, and our strategies again outperformed their respective benchmarks during the first quarter. Our clients held no exposure to corporate debt instruments tied to SVB, Signature Bank, or Credit Suisse, nor did clients have exposure to debt instruments of the most-impacted regional banks.
Let us turn our focus to the implications the quarter had on the credit markets.
Fed Assurances Did Not Impact Depositors’ Economics, Leaving the Banking System Vulnerable
Bank runs serve as unwelcome reminders that banks can fail when depositors or investors lose confidence. Typically, a bank run follow problems in a bank’s credit portfolio (loans and/or investments) coupled with large and wide-spread withdrawals by depositors. The recent spate of bank runs, however, were driven less by credit concerns in the banks’ asset portfolios and more by interest rate-related losses on high-quality fixed income securities. It most resembles the thrift banking crisis of decades past when many of today’s investors (and bank risk managers) were not around.
The Fed deserves credit for assuring depositors of the failed banks, introducing the BTFP, and providing liquidity to banks on advantageous loan terms. These actions helped stem depositor concerns that could have resulted in other bank runs. However, the Fed cannot address the economic reasons that depositors are incentivized to leave the banks: they can earn better money elsewhere. Exhibit II illustrates this by showing the historical yields of U.S. savings accounts versus U.S. dollar money market funds. Banks have barely increased the interest rate on savings accounts amid a 5% rise in fed funds. Depositors have been withdrawing assets from banks still paying near zero interest in favor of outright purchases of short Treasuries or money market funds.
Exhibit II: A line graph showing the historical yields of U.S. savings accounts versus U.S. dollar money market funds as of October 2022, where banks have barely increased the interest rate on savings accounts amid a 5% rise in fed funds.
Many banks are facing a Catch-22: do they increase rates to retain deposits, or do they emphasize higher liquidity to meet potential future deposit redemptions? Both cases likely lead to less credit creation and lower profitability. We believe this has several implications for the economy and investors. Investors will more closely scrutinize the diversification of a bank’s depositor base and asset portfolio, as well as their strategy for managing through a period of fragile depositor psychology. We also expect private lenders and capital market issuance to pick up some of the slack if small- and medium-sized banks retreat, creating new opportunities in structured and corporate sectors which play prominently in BBH client portfolios.
During this Banking Crisis, Direct Effects in the Bond Market Were Limited…
Credit Suisse, SVB, and Signature Bank were about 0.4% of the Bloomberg U.S. Corporate Index and less than 0.1% of the Bloomberg U.S. Aggregate Index. By comparison, banks represent 23% of the Bloomberg U.S. Corporate Index (and 38% of the Bloomberg 1-5 Year U.S. Corporate Index).
When large banks are liquidated or merged, the overall impact is never as obvious as simple index weightings. For example, Credit Suisse is a leading manager of collateralized loan obligations (CLOs), and SVB Capital is a large venture debt asset-backed security (ABS) issuer. Investors appeared to correctly distinguish the risks of these banks from that of structured credit securities whose assets are held in bankruptcy-remote trusts that may have no direct ties to the banks themselves.
Regional banks are also a relatively small component of each index, representing just under $100 billion in the Bloomberg U.S. Aggregate Index and the Bloomberg U.S. Corporate Index, a figure that represented 0.4% and 1.6%, respectively, of each Index. The performance effect the bonds and debt instruments of the impacted banks had on the indexes was negligible, and the same can be said of the impacts of volatility in regional banks during the quarter.
Within our client portfolios, there were no exposures to corporate debt issued by Credit Suisse, SVB, or Signature Bank. Exposures to regional banks were relatively small, as positions in bank debt leaned heavily towards global systemically important banks (GSIBs) and domestic systemically important banks.1 The absence of these credits in client portfolios was a direct result of our investment process and stringent credit criteria.
Exhibit III below shows how the average spread of investment-grade corporate bonds of banks have contrasted to industrials and utilities. Banks substantially underperformed industrials and utilities, while spreads of all indexes widened during this crisis (and subsequently all narrowed into the end of the quarter).
Exhibit III: A line graph comparing investment-grade corporate bond spreads across various sectors as of March 2023, showing how the average spread of investment-grade corporate bonds of banks have contrasted to industrials and utilities.
…But Concerns Remain Wide-Ranging
Below, we opine briefly on current concerns and implications in various markets.
Commercial Real Estate
Most questions we received amid the banking crisis involved its impact on the commercial real estate market. Legitimate concerns emerged because of regional bank exposure to commercial real estate loans, the queue of commercial real estate borrowers who already needed to refinance, and the low occupancy rates in the office sector as work-from-home patterns continue to hamper demand for office space throughout the United States. A major question is whether non-bank financing will be available to accommodate loans that need to be refinanced.
We believe many of the borrowers, particularly the stronger ones, will turn to the commercial mortgage-backed securities (CMBS) market. The advent of single asset, single borrower (SASB) securitizations afford investors the ability to target their lending with tremendous transparency, strong structural protections, and experienced management teams that align interests through retention of equity in the securitization. Borrowers are already adding mezzanine financing tiers to improve loan-to-value ratios (LTVs) on their senior issuance. Weaker commercial properties may struggle, but we are confident strong properties can have their loans refinanced with a proper appreciation for their underlying risk profile.
Asset Backed Securities
The ABS market is poised to continue to absorb lending activity away from banks. An abundance of nontraditional ABS issuers and securitizations has already diminished the lending footprint of banks. We naturally believe that trend to continue given some inevitable near-term retreat in the banking sector.
While issuance may dip temporarily during volatile market conditions, most ABS issuers are programmatic, so issuance tends to be relatively stable. ABS issuers reprice the loan and lease rates in their new originations in line with any higher funding costs and prefer to be consistent issuers of new transactions as their older transactions amortize down. We believe there will be meaningful issuance (and opportunity) ahead.
We sometimes hear concerns that growth in ABS financing might result in novel, untested types of securitizations, weakened structural protections, an influx of weaker issuers, or pressure on underwriting standards. Our strong presence and established investment process in the ABS markets are as important as ever in capitalizing on opportunities and avoiding traps.
Investment Grade Corporate Bonds
Unsurprisingly, credit spreads widened to the highs of the year starting on March 9th as the SVB collapse was unfolding. Banking spreads widened significantly, while spreads in other sectors widened to a lesser degree. Wider spreads initially created more bonds that screened as “buy” candidates according to our valuation framework,2 though once again spreads of all sectors narrowed quickly from mid-March levels.
The wider spread environment only became actionable as issuance emerged later in the month. Issuance was nonexistent during the depths of the banking crisis, but issuance rebounded with over $53 billion of volume over the last three weeks of the quarter. We actively participated to take advantage of spread concessions on new issues. Over the final three weeks of the quarter, we leaned into this environment and purchased bonds from a broad range of industries that met our valuation and credit criteria.
Issuance in the quarter came in relatively close to expectations, so companies that needed to refinance have been able to access the market. With valuations mixed and the prospect of elevated volatility, cautious selection remains necessary.
Leveraged (High Yield) Bonds and Loans
High yield issuance halted completely after SVB’s failure, re-starting only tentatively with just a few deals in the last week of March. The highest-quality names can issue bonds or loans if desired, but lower-quality names are in a tougher situation, as increased concerns of recession are keeping buyers away. Within the loan market, the economics of CLO arbitrage need to recalibrate before demand for loan issuance rebounds, thereby complicating the issuance outlook. Our positioning within high yield is even more “up in quality” than usual.
The high yield markets tend to exhibit a “self-resuscitating” cycle when events like this happen. Generous coupon income accumulates quickly in portfolios and needs to be reinvested so managers can remain fully invested. This creates a cycle of demand for issuance of the highest quality and safest names, thus re-opening issuance and ultimately stabilizing the market. This process takes time to unfold, yet we remain confident the credits selected for client portfolios have the requisite durability to manage through this environment.
Residential Mortgages
We have largely avoided investing in both agency and non-agency residential mortgage-backed securities (RMBS) for the better part of a decade. Valuations of agency MBS have been wholly unappealing due the Fed’s large scale asset purchase program targeting MBS. In non-agency RMBS, we have had longstanding concerns with the transparency, lower supply, thinner credit enhancement, and lower comparable value. The first quarter continued to validate our reasoning. Agency MBS notably underperformed during the quarter as spreads widened. The Fed’s waning support of the mortgage market requires risk-sensitive investors to become the marginal buyers, and those buyers require higher compensation for the risks assumed. Agency MBS valuations remain poor, and we continue to prefer other opportunities in credit or holding Treasuries. At the same time, slowdowns in origination and refinancing activity have caused MBS durations to extend to the detriment of MBS holders. The duration of the Bloomberg U.S. MBS Index hovers near 6.0 years as the quarter closed, up markedly from 4.8 years at the end of 2021 (for most of the past decade, the average duration of the Index ranged between 3.0-5.0 years). The combination of higher mortgage rates and elevated home prices has decreased the affordability of U.S. housing to levels last seen during the mid-1980s, all but eliminating refinancing activity.
The non-agency RMBS market is tied up with regional banks’ exposures. Regional banks own an estimated 30% of the non-agency RMBS market. Deposit outflows could place further forced selling pressure and price volatility on RMBS. As such, we continue to avoid the sector for both credit and valuation concerns. We find the strong structural protections of nontraditional ABS and CMBS markets, as well as their attractive valuations, to be far superior investments.
Collateralized Loan Obligations
The CLO market is primed to be a solution to banks’ slowdown in lending. Middle market companies will likely look to private credit and away from banks for their financing needs. As CLO arbitrage calibrates, loan issuance should rebound and facilitate the creation of CLOs. We believe issuance of middle market CLOs may increase in quarters ahead, and we stand ready to increase our exposure at attractive valuations.
Business Development Companies
Concerns regarding private credit originated by business development companies (BDCs) emerged briefly in early March over whether portfolio companies could access their deposits at SVB. Those concerns quickly evaporated, as reflected in strong price recovery. BDCs have very low leverage and are financed not with deposits, but with longer-term bonds. We are pleased with the performance of BDCs we own that reported strong recent results (e.g., low levels of non-accrual loans). The financial structure of BDCs truly stands out as a contrast to banks during this current crisis. Assured long-term capital means they can manage through periods of stress without concerns about liquidity drawdowns or forced sales. J.P. Morgan Global Credit Research estimates that over 70% of BDC debt is long-term with maturities greater than one year. Many BDCs afford their portfolio companies access to larger private lending platforms as well. Finally, BDC leverage is constrained by law to 2:1 debt/equity. This limits the effect of credit performance on lender equity relative to the banks, which are leveraged at 10:1 or more. We believe this current episode of stress will reveal the durability offered by well-managed BDCs.
Real Yields Helped Bonds Perform Resiliently Amid Widening Credit Spreads
Investors may be pleasantly surprised by their fixed income investments’ performance amid an otherwise volatile environment. This is due, in part, to the fact that real yields were positive and higher (and remain so) than they were during episodes of credit market volatility since the Global Financial Crisis. Positive real yields serve as a shock absorber against credit spread widening. Exhibit IV shows real yields remain positive and well above their recent lows, offering fixed income investors a continued cushion against any potential volatility that may arise. With positive real yields, we believe fixed income should continue to perform well, particularly as a cushion against volatility in riskier assets.
Exhibit IV: A line graph comparing the U.S. TIPS yield curve as of 3/31/2023, 12/31/2022, and 12/31/2021, where yields remain positive and well above their recent lows.
State of Credit Market Valuations
Credit valuations became more appealing during the quarter amid volatility that arose from the banking crisis, but valuations did not reprice to levels that suggest there are an abundance of buying opportunities across the market. We believe the current state of credit spreads underscores the importance of disciplined assessment of valuation in conjunction with credit and stress-test analyses.
We estimate 47% of the investment-grade corporate bond market meets our valuation criteria for potential purchase, meaning the bond’s credit spread – adjusted for mean reversion tendencies – offers sufficient compensation beyond charges for the bond’s credit, liquidity, and volatility risk profiles. We estimated 36% of the investment-grade corporate bond universe screened as a purchase candidate at the start of the year, so there are more opportunities available now. But a significant part of the market does not meet our criteria for purchase regardless of the strength or weakness of its credit risk profile.
Like high-grade bonds, valuations in the high yield corporate bond and loan markets improved slightly during the quarter. We estimated 47% of the high yield bond market screened as a buy candidate at quarter end versus 46% at the start of the year, while roughly 95% of the loan market screened as a buy candidate at quarter-end versus 80% at the end of 2022. With issuance in the high yield markets stalled, and almost $5 billion of mutual fund outflows during the weeks of the banking crisis, the high yield markets appear primed for opportunities of high-quality names to emerge at attractive valuations.
Valuations in nontraditional segments of the structured credit markets remain appealing, and their performance this past quarter demonstrated their durability through yet another episode of volatility. We continue to find attractive opportunities in nontraditional segments of the ABS market, where we expect issuance to be resilient. This past quarter, we purchased opportunities in 17 different categories of securitizations, including cell tower, data center, insurance-linked, device payment, venture debt, and rental fleet deals. We purchased bonds of seven different SASB CMBS during the quarter and participated in five CLO deals.
Conclusion
First quarter fixed income returns were positive and may seem unexciting against the volatility that occurred within it. Yet it is a welcome development after the worst performance year in the history of the bond markets and the decade-plus of zero interest rate rates that preceded it. The impacts of higher interest rates and Fed tightening are beginning to manifest in the markets. Current credit market conditions provide opportunities, but there remain pockets of turbulence related to both inadequate valuations and nondurable credit profiles. Our conviction is high that our process of identifying durable credits3 with attractive valuations will help provide resilient returns ahead.
1 DSIBs: banks identified as systemically important by a national regulator and subject to rigorous, public stress tests.
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. Durable means the ability to withstand a wide variety of economic conditions.
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.
Returns of less than one year are not annualized
On 7/11/2022, the BBH Unconstrained Credit – Fixed Income Composite was renamed the BBH Multisector Fixed Income Composite.
BBH Limited Duration Fixed Income Composite inception date is 1/1/1990, BBH Multisector 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.
The BBH Structured Fixed Income Benchmark is a combination of two indices. The Bloomberg US ABS Index was used prior to 11/1/2023; the Bloomberg U.S. ABS ex. Stranded Cost Utility Index is used subsequently. Due to recent changes in the composition of the Bloomberg US ABS Index, the new Bloomberg US ABS ex. Stranded Cost Utility Index more closely reflects the effective duration of the strategy.
Index Definitions
BDC Corporate is computed as an equal-weighted index of corporate bonds issued by business development companies (BDCs) that BBH holds with at least one year until legal, final maturity.
ICE BofA US Corporate Index tracks the performance of USD denominated investment grade corporate debt publicly issued in the U.S. domestic market.
ICE BofA 1-5 Year US Fixed Rate CMBS Index consists of USD denominated, fixed rate commercial mortgage-backed securities (CMBS). The Index is comprised of CMBS tranches where the issues are rated investment-grade using an average of Moody’s, S&P, and Fitch and have durations greater than 1 year but less than 5 years when the index is constituted. To be eligible for inclusion, CMBS issues must have a minimum original deal size of $250 million, at least $50 million current outstanding for senior tranches and $25 million for mezzanine and subordinated tranches, and at least 10% of the original deal size must be currently outstanding.
ICE BofA US Fixed-Rate Miscellaneous Asset-Backed Securities (ABS) Index is a subset of the ICE BofA US Fixed-Rate ABS Index, ex securities collateralized by auto loans, home equity loans, manufactured housing, credit card receivables and utility assets. Securities are publicly issued, USD, with an IG rating based on an average of Moody’s, S&P and Fitch.
JP Morgan CLO Index (JPM CLO) is a market value weighted benchmark tracking U.S. dollar denominated broadly-syndicated, arbitrage CLOs. The index is comprised solely of cash, arbitrage CLOs backed by broadly syndicated leveraged loans. All CLOs included in the index must have a closing date that is on or after January 1, 2004. There are no weighted average life (WAL) limitations. There are no minimum tranche size restrictions.
JP Morgan Other ABS Index (Non-Tradional ABS), is an index that represents ABS backed by consumer loans, timeshare, containers, franchise, settlement, stranded assets, tax liens, insurance premium, railcar leases, servicing advances and miscellaneous esoteric assets of the The J.P. Morgan Asset-Backed Securities (ABS) Index. The JP Morgan Asset-Backed Securities (ABS) Index is a benchmark that represents the market of US dollar denominated, tradable ABS instruments. The ABS Index contains 20 different sub-indices separated by industry sector and fixed and floating bond type. The aggregate index represents over 2000 instruments at a total market value close to $500 trillion dollars; an estimated 70% of the entire $680 billion outstanding in the US ABS market.
ICE BofA 1-3 Year US Treasury Index is an index of fixed rate obligations of the U.S. Treasury with maturities ranging from 1 to 3 years.
Morningstar /LSTA Leveraged Loan Index (the Index) is a market value-weighted index designed to measure the performance of the U.S. leveraged loan market based upon market weightings, spreads and interest payments. Facilities are eligible for inclusion in the indexes if they are senior secured institutional term loans with a minimum initial spread of 125 and term of one year. They are retired from the indexes when there is no bid posted on the facility for at least 12 successive weeks or when the loan is repaid.
S&P 500 is a market-capitalization-weighted stock market index that tracks the stock performance of the 500 largest U.S. public companies.
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.
Intermediate Aggregate (AA) represents securities in the intermediate maturity range of the Bloomberg Aggregate Index.
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, USD denominated, fixed-rate treasuries, government-related, and corporate securities.
Bloomberg US Corporate Bond Index represents the corporate bonds in the Bloomberg US Aggregate Bond Index, and are USD denominated, investment-grade (rated Baa3 or above by Moody’s), fixed-rate, corporate bonds with maturities of 1 year or more.
Bloomberg US Intermediate Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by U.S. and non-U.S. industrial, utility and financial issuers that have between 1 and up to, but not including, 10 years to maturity.
Bloomberg US Corporate High Yield Index (BBG HY Corp) is an unmanaged index that is comprised of issues that meet the following criteria: at least $150 million par value outstanding, maximum credit rating of Ba1 (including defaulted issues) and at least one year to maturity.
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. The Bloomberg US ABS ex. Stranded Cost Utility Index excludes certain stranded cost utility bonds included in the Bloomberg US ABS Index.
The Bloomberg Non-AAA ABS Index (Non-AAA Traditional ABS) is non-AAA ABS components of the Bloomberg US Aggregate Bond Index, 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 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 Non-Agency CMBS Index (Non-Agency CMBS) is the Non-Agency CMBS components of the Bloomberg US Aggregate Bond Index, 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®” 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 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 changed slightly altered to establish a duration band around the duration of the Bloomberg ABS ex-Stranded Cost Utility Index.
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. 2023. All rights reserved.
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IM-12709-2023-04-18 Exp. Date 07/31/2023
