BBH Taxable Fixed Income Quarterly Strategy Update – 3Q 2022

September 30, 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.

Q3 Highlights

  1. The taxable fixed income strategies we manage generally outperformed market benchmarks during the third quarter. A key contributing factor appears to be diversified credit exposures attained through a combination of investments in more and less traditional segments of the credit markets.
  2. Bond yields continued to rise during the third quarter as investors priced in a faster pace of rate hikes and a higher peak federal funds (fed funds) rate in this tightening cycle.
  3. Rising interest rates and credit spreads bring the prospect of an appealing return environment ahead. We ascribe the widening in credit spreads to both legitimate fundamental concerns as the Fed’s tightening cycle pushes the economy towards recession as well as unfavorable technical dynamics that have emerged with large bond fund outflows.
  4. Our portfolios are built on a bottom-up, bond-by-bond basis that stresses the durability of the individual credits we buy to survive more challenging economic conditions than even the worst that may arise in the coming quarters.

The bond market has experienced nearly unprecedented volatility in 2022, with each quarter contributing to the worst-performing year for bonds on record. During the third quarter, yields rose further as investors priced in a faster pace of rate hikes and a higher peak federal funds (fed funds) rate in this tightening cycle. Yields on the 2-year and 10-year Treasury rose 132 basis points1 and 81 basis points on the quarter, respectively. Interest rates have not risen this quickly since 1981 - and then it was from a much higher starting level. The 10-year Treasury note’s year-to-date return is -16.9%. Even the traditionally staid 2-year Treasury note’s year-to-date return is -4.6%.

The market’s turbulence stems from the confluence of rising interest rates with selling activity in government bonds and credit sectors. The Federal Reserve (Fed) is acting aggressively to combat inflationary pressures, and interest rates across the yield curve are marching higher in response. The Fed is simultaneously reducing its holdings of Treasury notes and mortgage-backed securities (MBS), adding further pressure on rates to attract the marginal buyer. Bond funds are also experiencing large and persistent outflows as investors prefer to wait-and-see where interest rates ultimately stabilize. These fund flows catalyze forced sales of high-quality bonds that have pushed credit spreads wider – albeit not to distressed levels. Together these developments have culminated in a -14.6% year-to-date return for the Bloomberg U.S. Aggregate Index ending September 30, 2022.

While rising interest rates and credit spreads have hindered returns this year, they bring the prospect of appealing returns. The rise in credit spreads certainly reflects increasing recession concerns for future credit losses. Futures markets suggest that the Federal Reserve (Fed) will become sufficiently concerned about a downturn to begin cutting rates by the end of 2023. We ascribe the widening in credit spreads to both legitimate fundamental concerns as well as unfavorable technical dynamics that have emerged with large bond fund outflows. Our research process sidesteps this dilemma by stressing the durability of the individual credits we buy to survive more challenging economic conditions than even the worst that may arise in the coming quarters. Our portfolios are built on a bottom-up, bond-by-bond basis to protect our investors while capturing the increasingly attractive valuations offered in the credit markets.

The taxable fixed income strategies we manage generally outperformed market benchmarks during the third quarter. A key contributing factor appears to be the diversified credit exposures we attained through a combination of investments in more and less traditional segments of the credit markets. We have well protected our investors’ capital this year, compared to broader fixed income market indices, and continue to find increasingly attractive valuations across credit sectors.

Monetary Policy, Fiscal Policy, and Credit Markets

The Fed’s policy tightening in 2022 has been remarkable in both pace and size, matched only by the Volcker Fed hikes of 1979 - 1981. The fed funds rate has risen by 300 basis points since March 2022, with two rounds of 75 basis point hikes occurring during the third quarter. Futures markets predict a rise of 100 – 125 basis points more by year-end, and another hike in Q1 2023 before the Fed pauses. At the same time, the Fed is reducing the size of its balance sheet, with the pace of decline by September accelerating to as much as $95 billion per month. The balance sheet reduction program (i.e. Quantitative Tightening) is having a sizable impact on Treasury note rates, but the largest impact may be on agency MBS. Option-adjusted spreads of MBS widened substantially during the third quarter and are poised to widen further with continued Fed inventory paydowns. U.S. mortgage rates have surged above 6.5%, and the Case-Shiller Index of U.S. housing prices experienced its sharpest ever one-month decline in July. Weakening home prices can impact several segments of the economy; effects we are closely considering in our current credit assessments.

U.S. fiscal policy changes in the quarter had more limited impact on credit markets. The U.S. government passed the Inflation Reduction Act and introduced a Student Loan Forgiveness plan. The former focuses on corporate taxation, lowering health care costs, and transitioning to cleaner energy sources. The latter is expected to reduce consumer debt burdens. These policies will impact select businesses more than others, and we believe the implications for credit markets will be idiosyncratic rather than broad-based. We observed no substantial downside to the credits in our portfolios.

Corporate Credit Markets: Valuations Suggest Fear Prevalent

Corporate risk spreads remain elevated versus their longer-term averages. It is difficult to parse out the exact sources, including the weaker technical environment, reasonable concerns over a Fed-induced recession, the Ukraine/Russia conflict, currency market volatility, and a housing market correction. At current spread levels, our valuation framework2 reveals a broader set of potential “buy” opportunities. The percent of the investment-grade corporate bond, high-yield loan, and high-yield corporate bond indexes that screened as “buys” were at or near the low end of their historic ranges at the start of the year. Valuations in each of these market segments have increased dramatically to broadly appealing levels, as shown in Exhibit I.


Exhibit I: A dot plot comparing the index valuations, as a percentage of the index in the BBH buy zone, of investment grade corporate bonds, loans and high yield corporate bonds. Data as of December 31, 2021, June 30, 2022, and September 30, 2022.

Our valuation framework calibrates spreads for potential mean reversion and adjusts for the probability of credit losses, liquidity costs, and a margin of safety3 based on volatility. This framework is applied to individual credits – not to the market as a whole. While spreads can certainly move higher, we observe that the current level of spreads is relatively rare versus historical experience (see Exhibit II). Episodes of higher spreads tend to be short-lived when associated with significant market stress.


Exhibit II: A bar chart comparing investment grade corporate bonds, loans, and high yield corporate bonds on their credit spreads as a percentile of their respective historical spread levels. Data as of September 30, 2022.

Average credit spreads may not always offer enough compensation for the risk of bankruptcies or insolvencies across the corporate sector. One concern is the risks that drove spreads higher year-to-date will drive credit downgrades and defaults higher. We agree, but given our deep credit focus, we find it more helpful to assess individual credits than to speculate on average default rates. These assessments include an assurance that these companies will fare well during challenging environments – greater in severity than 2020, 2008, and certainly a looming recession. Corporate credit weights in our taxable fixed income strategies increased year-to-date and during the quarter as we adhered to this process. The weights to both corporate bonds most like the Index as well as less-traditional issuances increased throughout the year. We believe this exemplifies a constructive outlook at current valuations, although one that requires proper security-level diligence.

Structured Credit Markets: Resilience in the Face of Issuance and Market Volatility

The structured credit markets, namely asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS), all witnessed wider spreads but preserved capital well against the broader fixed income indices on the quarter. Performance versus Treasuries was sector dependent: traditional ABS performed in-line with Treasury alternatives, non-traditional ABS outperformed, and CMBS underperformed.

Valuations in the structured credit market are broadly compelling, as appealing credit spreads combined with the highest Treasury yields offered (around 2- to 3- year maturities) so that both structured credit index yields are at decade-long highs. As Exhibit III shows, yields of structured credit indexes are among the most attractive in the high-grade market. Even yields on traditional segments of the market that we tend to avoid (such as the ABS that dominate mainstream indexes) exceed intermediate corporate bond indexes despite carrying more-defensive durations.


Exhibit III: Scatter plot of various fixed income indexes, positioned by their respective durations on the x-axis and their respective yield-to-worsts on the y -axis. The chart also includes the U.S. Treasury yield curve at key durations. Data as of September 30, 2022.

Meanwhile, the fundamentals of ABS, collateralized loan obligations (CLOs), and CMBS appear strong. The U.S. consumer and commercial borrower balance sheets show evidence of strength and health at this point in the cycle. CMBS loan delinquencies continued to decline, and valuations have been supported by cap rates on commercial properties that have only partially reflected rising Treasury rates. Pockets of weakness remain in retail and office properties, but we manage those risks through focusing on high quality, Single Asset Single Borrower (SASB) transactions.

The environment in 2022 offers another proof point of the improved durability that structured credit provides. High quality collateral, low delinquency rates, and hefty credit enhancement beneath notes provide tailwinds to strong underlying credit performance. We have seen scant ratings watch or downgrade activity in ABS, CLOs, and CMBS this year.

Structured credit issuance slowed somewhat during the third quarter with elevated rate volatility and fund flows as a few issuers awaited calmer conditions. We expect issuance to rebound during the fourth quarter even as year-to-date volumes remain only slightly behind last year’s record pace.

A couple of events during the quarter impacted securitizations, neither with any detrimental impact to our holdings. First, the U.S. government’s Student Loan Forgiveness plan was announced. Student loans held by the Department of Education are eligible for forgiveness, and federal privately held loans, including in ABS trusts, are not. Student loan forgiveness should be a positive to the U.S. consumer, as it should further ease consumer debt burdens and provide more capacity in budgets for credit card, auto, and home spending. We do not carry any meaningful positions in student loan ABS in our clients’ portfolios. Second, Hurricane Ian damaged parts of Florida, South Carolina, and Cuba, tragically impacting the lives of many. Positions in SASB CMBS in our strategies avoided direct path damages from the hurricane, although it is important to note that proper insurance coverage is a key component of our investment criteria.

Our Activity

Portfolio changes are the result of our bottom-up credit selection process, not a reaction to market events. At the end of the quarter, yields on our clients’ portfolios reached decade-long highs on the heels of further rises in Treasury rates. Average risk spreads of portfolios were little changed quarter over quarter.

We identified numerous opportunities to add durable credits4 at attractive valuations during the quarter. Below are some opportunities that were allocated broadly among portfolios, subject to guideline constraints.

We added intermediate maturity (five- to 10- year maturity) corporate bonds during the quarter issued by several banks, including Banco Santander, Comerica, Fifth Third Bank, and Goldman Sachs at spreads of +211, +238, +190, and +154 basis points over Treasuries, respectively. These credit spreads compared favorably to spreads of intermediate corporate bonds in the Bloomberg U.S. Aggregate Index that ranged between +112 to +144 basis points.

We also identified attractive opportunities in bonds issued by insurance companies. These included bonds issued by title insurer First American Financial Corp at a spread of +268 basis points over Treasuries and bonds issued by life insurer Corebridge Financial at a spread of +385 basis points over Treasuries.

We purchased a variety of attractive credits in structured credit sectors. In the ABS market, we participated in a triple net lease deal issued by CF Hippolyta Investor LLC, a subsidiary of funds managed by Fortress Investment Group, rated AA- at a spread of +300 basis points over Treasuries. We invested in a small business loan deal issued by National Funding, where we found the AA- and A-rated notes appealing at spreads of +325 and +400 basis points, respectively, over Treasuries. We also purchased bonds of a floating-rate, single borrower CMBS deal secured by 196 InTown Suites extended stay hotel properties rated A- at a spread of +380 basis points over the Secured Overnight Financing Rate (SOFR)5 and BBB- at a spread of +425 basis points over SOFR.

Concluding Remarks

We remain cautiously optimistic about the future state of fixed income returns given both the higher yields and higher credit spreads on offer. Our caution is born from the possibility that both yields and spreads can move higher, while our optimism is rooted in the caliber of opportunities we are unearthing from our bottom-up selection process. We know the events of 2022 may have profound impacts on the investment programs of institutional and high net worth investors. We thank you for your ongoing support and hope to be a part of the solution in this uniquely challenging environment. We look forward to our dialogues with you over the coming months.

As of Q3
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) 0.21% -2.08% -2.16% 1.11% 1.74% 1.61% 4.39%
BBH Limited Duration Fixed Income Composite (net of fees) 0.15% -2.26% -2.41% 0.85% 1.50% 1.39% 4.17%
Bloomberg US 1-3 Year Treasury Bond Index -1.56% -4.35% -4.86% -0.48% 0.56% 0.60% 3.66%
BBH Multisector Fixed Income Composite (gross of fees) -0.43% -6.32% -5.59% 2.11% 3.56% N/A 3.42%
BBH Multisector Fixed Income Composite (net of fees) -0.53% -6.61% -5.97% 1.71% 3.15% N/A 3.01%
Bloomberg US Aggregate Bond Index -4.75% -14.61% -14.60% -3.25% -0.27% N/A 0.83%
BBH Structured Fixed Income Composite (gross of fees) -0.81% -5.02% -4.72% 1.20% 2.82% N/A 3.47%
BBH Structured Fixed Income Composite (net of fees) -0.89% -5.27% -5.05% 0.84% 2.47% N/A 3.11%
Bloomberg US ABS Index -1.34% -5.06% -5.61% -0.24% 1.02% N/A 1.29%
BBH Intermediate Duration Fixed Income Composite (gross of fees) -2.69% -9.00% -9.30% -0.62% 1.11% 1.47% 5.70%
BBH Intermediate Duration Fixed Income Composite (net of fees) -2.75% -9.17% -9.53% -0.87% 0.86% 1.21% 5.44%
Bloomberg Intermediate Gov/Credit Index -3.06% -9.62% -10.14% -1.64% 0.38% 1.00% 5.36%
BBH Municipal Fixed Income Composite (gross of fees) -2.66% -9.03% -8.65% -0.89% 1.05% 1.91% 3.40%
BBH Municipal Fixed Income Composite (net of fees) -2.72% -9.20% -8.88% -1.14% 0.80% 1.65% 3.14%
Bloomberg 1-10 Year Municipal Bond Index -2.30% -7.72% -7.55% -0.83% 0.71% 1.41% 3.07%
BBH Core Plus Fixed Income Composite (gross of fees) -3.87% -14.43% -13.93% -0.54% 2.23% 3.05% 6.24%
BBH Core Plus Fixed Income Composite (net of fees) -3.93% -14.59% -14.14% -0.79% 1.97% 2.79% 5.98%
Bloomberg US Aggregate Bond Index -4.75% -14.61% -14.60% -3.25% -0.27% 0.89% 5.60%
BBH Inflation-Indexed Fixed Income Composite (gross of fees) -4.98% -13.42% -11.43% 0.74% 1.95% 1.10% 5.12%
BBH Inflation-Indexed Fixed Income Composite (net of fees) -5.02% -13.52% -11.57% 0.59% 1.79% 0.95% 4.96%
Bloomberg US TIPS Index -5.14% -13.61% -11.57% 0.79% 1.95% 0.98% 4.76%
BBH Intermediate Inflation-Indexed Fixed Income Composite (gross of fees) -3.55% -8.49% -7.22% 1.71% 2.32% N/A N/A
BBH Intermediate Inflation-Indexed Fixed Income Composite (net of fees) -3.59% -8.59% -7.36% 1.56% 2.17% N/A N/A
Bloomberg 1-10 Year US Treasury Notes -3.94% -8.84% -7.44% 1.79% 2.27% N/A N/A

1 A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.
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
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.
4
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.
5
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.

* Returns are not annualized

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

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.

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.

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.

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 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 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 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 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

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.

NOT FDIC INSURED    NO BANK GUARANTEE           MAY LOSE MONEY

IM-11780-2022-10-13              Exp. Date 01/31/2023

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

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


captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction