Strategies: Core Fixed Income; Limited Duration; Unconstrained Credit; Intermediate Duration

BBH Taxable Fixed Income Quarterly Strategy Update 3Q 2021

September 30, 2021
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.

Opportunities Remain, but Valuation Outlook Demands Caution

The third quarter brought a bit more volatility to credit and rate markets than the first or second quarters of 2021, although credit valuations for larger, index credits remain extremely rich. As our clients know, the longer we remain in this valuation desert, the more reserves and short maturity credit tend to build up in our portfolios, effectively de-risking them, but also reducing the yield. There have been cases in the past when unattractive valuations have persisted for years, particularly when fundamentals are strong as they appear to be now. De-risking in this environment takes a toll on value investors’ patience. There are still attractive opportunities in parts of the credit markets less overrun by more index-oriented investors. We have so far found enough of these to record three strong performance quarters in 2021. The coming quarters may require more patience, however. History shows us that liquid reserves have an enormous option value when markets hit a rough spot, and this is particularly true in the sort of ‘priced to perfection’ credit market we see around us. History also shows it can take time for that rough spot to arrive. In this update, we’ll take you through the valuation environment for credit, the fundamental backdrop, and a few speed bumps the markets may encounter in the coming months, including the Evergrande insolvency, the end of LIBOR, Fed tapering, and more.

Continued dearth of value opportunities in credit indexes

Treasury rates and investment grade (“IG”) corporate credit spreads ended the quarter little changed. Rates exhibited some volatility, with the 10-year yield falling as low as 1.17% before the curve backed up to match where it had started the quarter (see Exhibit I). IG credit spreads simply bounced around between 0.82% and 0.88%, which are extremely unattractive levels in an historical context. High yield valuations also ended the quarter roughly where they started: levels that are more attractive than IG, but only in shorter expected maturities.

Corporate bond risk spreads ended the quarter at historically low levels (see Exhibit II). Over the past 20 years of daily observations, index spreads were at or below the index’s current level only 3% of the time. This extreme is compounded by the facts that the Index has lower-quality and longer-maturity orientations than it did historically (see Exhibits III and IV). A case can be made that spreads will remain at these levels for some period of time, but it certainly appears reasonable to expect spreads to widen at some point.


Exhibit I: U.S. Treasury Curve – Line graph of the US Treasury curve as of 6/30/2021, 8/31/2021 and 9/30/2021.


Exhibit II: Bloomberg US Corporate Index OAS– - Line chart of the average option adjusted spread (OAS) of the constituents of the Barclays Investment Grade Corporate Index reported daily from September 28, 2001 to September 30, 2021. The chart also includes a horizontal line showing that 3Q 2021 Quarter-End value of 0.84%.


Exhibit III:  Corporate Index – Quality Composition – Area chart of rating weights in  the Barclays Investment Grade Corporate, reported daily from September 28, 2001 to September 30, 2021. The Baa weight rose from 34% to 51% over the time period.


Exhibit VI:  Bloomberg US Corporate Index – Average Maturity – Line chart of the average maturity of the Barclays Investment Grade Corporate Index reported daily from September 30, 2001 to September 30, 2021. The Index’s average maturity lengthened by 2.0 years over the time period and stood at to 12.2 as of 9/30/2021.

It is clear that investors are accepting record low levels of return per unit of risk in index IG corporates. With IG and HY index spreads at tights, attractive investments are hard for investors to source – we see only 1% of the IG Corp Index and 25% of the HY Bond Index in the buy zone of our valuation framework (see Exhibit V). High Yield opportunities are primarily shorter maturities, likely to be repaid or refinanced in the next year or two.

This environment emphasizes the importance of an investment process that can still uncover numerous attractive opportunities in sectors seeing upgrade activity (many sectors), quality credits within sectors that are still tainted by COVID association (aviation, CRE, energy), smaller overlooked sectors with a smaller investor base (BDCs, ABS subsectors, P&C), and HY loans (many sectors).


Exhibit V:  Percentage of IG and HY Indexes in BBH Buy Zones- Line chart of the percentage of the Merrill Lynch Bank of America Investment Grade Corporate Index and the percentage of the Merrill Lynch Bank of America High Yield Corporate Index in the BBH “Buy” Zones, reported quarterly from September 30, 2009 to September 30, 2021.

Nonetheless, this pool of opportunities is diminishing gradually. How long might this cyclical low in spreads last? The Index’s month-end spread level was below 1% from November 1992 – July 1998 (5 years, 9 months) and for all but one month during the period from November 2003 – June 2007 (3 years, 8 months). If it lasts as long as these cycles, patience will be required for value-oriented credit investors such as ourselves. Typically, some unexpected news or events will end an era of complacency – such as the Russian Default and Long-Term Capital Management insolvency in 1998 or the Enron and Worldcom scandals in the early 2000s, revealing deteriorating fundamentals or an under-appreciated pocket of speculative leverage.

Fundamentals

Corporate fundamentals are mostly very strong, not only suggesting that spreads could remain lower for longer, but also helping our high yield exposures de-lever to pre-COVID levels. Upgrades are outpacing downgrades (see Exhibit VI), while actual and forecasted default rates are low (1-2% for high yield and leveraged loans). We note particularly strong fundamentals in the leveraged loan market (see Exhibit VII), the target of a bulk of our newly-initiated credit positions over the past few months.


Exhibit VI:  Rolling 3-Month Count of Loan Ratings Upgrades and Downgrades – Combination column chart and line chart. The columns represent upgrades and downgrades in leveraged loans, and the line represents the net of upgrades and downgrades in leveraged loans in the S&P/LSTA Leveraged Loan Index. The data is reported monthly from September 30, 2010 to September 30, 2021.


Exhibit VII:  S&P/LSTA LL Index Distress Ratio and LTM Default Rate - Combination column chart and line chart. The columns represent the percentage of distress leveraged loans and the line represents the rolling 12-month default rate of leveraged loans in the S&P/LSTA Leveraged Loan Index. The data is reported monthly from September 30, 2007 to September 30, 2021.

One risk to improving fundamentals is the ongoing impact of COVID-19. Despite half the U.S. population now being fully vaccinated, COVID-19 cases rose sharply in August, fueled by the Delta variant. Increased cases of the virus can cause supply chain issues for U.S. companies that may persist longer than anticipated. It is easy to see a situation where corporate credit spreads widen from their current low levels due to deteriorating statistics regarding employment, growth, corporate performance, and COVID-19 cases.

The third quarter also reminded us of another risk that is always present: a failure of a globally interconnected company that feeds systemic volatility. The prices of shares and debt tied to the Chinese real estate company The Evergrande Group collapsed on concerns the company could not afford its debt payments. Global investors were exposed to Evergrande’s speculative developments amid ballooning debt issuance, weak transparency into the company’s asset portfolio, and plans to discriminate Chinese onshore from offshore investors in a bankruptcy. Transparency into a company’s operations and financials is a cornerstone of our investment process. On this score, the Evergrande saga is a self-evident lesson and a serious reminder. Events like Evergrande can and will happen. The timing and magnitude of such events is difficult to forecast. There is reason to continue to be cautious and selective within the high-grade and high-yield corporate bond markets despite the seemingly strong broad state of fundamentals.

Technicals

When we review supply and demand factors that might impact valuation levels, we see a mixed picture of the risk profile for the major spread sectors.

Issuance

Credit spreads proved resilient in the face of heavy issuance. During the third quarter, investors absorbed issuance of $319 billion of Treasuries, $615 billion of mortgage-backed securities (through August), $427 billion of corporate securities, $73 billion of asset-backed securities, and $36 billion of commercial mortgage-backed securities. The demand for these issues has been substantial; we observe many deals across these sectors that experience abnormal oversubscriptions and subsequent spread tightening.

Many segments of the debt markets are on pace to experience record issuance levels, including investment-grade corporates, ABS, CMBS, and CLOs. One interesting dynamic is a growing supply of loans relative to bonds among high yield corporates, partly driven by CLO formation and demand for floating rate credit. We have been active participants in the new-issue loan market for client portfolios. Our ability to participate meaningfully in the loan market is a source of value to our investors and underlines the benefits of a flexible approach to active management offers to investors.

There are plenty of reasons why valuations remained stable despite such large issuance volumes: there is a global appetite for yield, $US/Yen and $US/Euro hedging costs remain low for Asian and European investors, the Federal Reserve remains accommodative, and fundamentals appear to be strong.

Tapering is coming

Federal Reserve Chair Jerome Powell indicated that the Fed could begin to moderate its $120 billion per month asset purchase program after the Fed meets in November. However, Chairman Powell surprised investors a bit with a speedier pace of tapering than expected: Purchases could end by middle of next year. He also stated, at Jackson Hole, that “the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff,” so a rate hike may not come until 2023. Yield curves steepened in response. Owning longer durations unhedged continues to look like a poor risk/return tradeoff at these low rates and only average curve slopes.

History suggests agency MBS markets could also soften on the removal of Fed support. MBS Index OAS has widened 25bps over the last 3 months with the Fed’s more hawkish tone on QE, but the current 30bp OAS level may not draw enough interest from private buyers to prevent some further widening as Fed MBS purchases decline. In the last tapering cycle, MBS OAS continued to widen for months through the actual tapering.

Tapering should have limited impact on investment-grade credit, as the sector remains supported by strong fundamentals and favorable technicals. In addition, apart from the very brief “taper tantrum” in 2013, the sector has not widened during past episodes of tapering.

Other topics of note

Certain structural changes and risks are building into the fourth quarter and could drive volatility... and opportunity.

LIBOR reform – “nothing like a deadline to trigger action”

LIBOR reform has been a lingering focus for market participants. The first deadline in the transition away from LIBOR approaches. The ICE Benchmark Association (IBA) plans to cease publications of some lesser-used USD LIBOR tenors at the end of 2021. U.S. regulators strongly encourage market participants to cease entering new USD LIBOR-based financial contracts before the end of 2021.

The biggest challenge to industry participants is finding a suitable replacement to LIBOR. A case can be made that there will be multitudes of reference rates used in financial contracts going forward. U.S. issues will mostly start referencing a version of the Fed’s SOFR (Secured Overnight Financing Rate) in 2022 as competing reference rate providers introduce themselves to the industry.

There are reasons to believe the fallout from LIBOR reform will be well-contained. The IBA will continue to publish commonly used LIBOR tenors through June 30, 2023, allowing shorter-term securities to mature without amending contract terms. The Fed’s Alternative Reference Rate Committee (ARRC) has provided market participants fallback provisions as the world prepares for a move away from LIBOR, and many newer issuances contain the ARRC’s fallback provisions in their prospectuses and legal documents. Many contracts without fallback language can be amended to add the ARRC’s fallback provisions with relative ease. Securities issued under New York law will reset to SOFR if not amended through other means.

There is a relatively small group of securities that are not covered by one of the sentences in the preceding paragraph – for example, a legacy bond that had no contract language that was issued outside New York law. U.S. federal lawmakers could still mandate benchmark changes to such securities.

With all this considered, we expect conditions to crystallize as we approach the end of the calendar year and the deadline spurs market participants to change their preference for reference rates.

U.S. debt ceiling

Another U.S. debt ceiling deadline looms, and Congress is divided along partisan lines regarding the concessions necessary to find agreement and avert a technical default on the country’s debt obligations. We do not believe that the deadline will pass without a deal to raise the debt ceiling. However, we expect a fair amount of partisan finger pointing and negotiating before, and even possibly shortly beyond, the October 18 deadline (or the deadline’s extension to early December). There could certainly be some market volatility should the situation remain unresolved later in October.

The bond market continues to innovate and accommodate financing needs

We continue to find opportunities in newer segments of the bond market that other investors may avoid for reasons that include lack of familiarity, issuance size preferences, higher complexity, credit rating criteria, and lack of inclusion in major indexes. Two of these segments that our clients inquire about are business development companies (BDCs) and Collateralized Fund Obligations. We thought we would profile a few here.

Ares Capital Management brought a collateralized fund obligation (CFO) to market during the quarter that had a durable structure and compelling valuation characteristics. The issuance was collateralized by partnership interests in three well-established fund products managed by Ares, with ample liquid asset pools, liquidity facilities and interest reserves to assure timely interest payment. The equity position beneath our debt is substantial – our stress analysis reveals that the diversified collateral pool would need to experience lifetime IRR’s on the magnitude of -4% to -2% for the notes to experience any interest or principal shortfall – an exceedingly remote outcome. We participated primarily in the BBB-rated 6-year notes at an attractive spread to Treasuries of over 500 basis points.

We have found business development companies (BDCs) debt securities to have compelling yield and credit characteristics. BDCs are publicly-registered, specialty-lending companies that provide capital to lower middle market and middle market companies (EBITDA of $10 - $250 million). BDCs are required by statute to maintain an unusually low leverage within the finance industry – less than 2.0x debt to equity. Consequently, BDCs exhibit impressive durability; the historic loss rate in underlying loans is generally less than 1%. Leveraged loan portfolio losses would have to exceed an inconceivable 40% to impair BDC debt. The sector performed well through the COVID pandemic without stress or downgrades. Many BDCs are operated by seasoned direct lending companies with established histories of solid performance. During the quarter, we identified several compelling BDC debt opportunities for client portfolios. We participated in Trinity Capital’s new issue 5-year bond at a spread of Treasuries + 361 basis points with a debt-to-equity ratio of 1.0. In addition, we participated in Apollo Investment Corporation’s new issue 5-year bond that came at a spread of Treasuries + 375 basis points and a debt-to-equity ratio of 1.3.

Other opportunities

We found some appealing opportunities in the more-traditional segments of the market as well during the quarter, particularly among loan issuance. Air Canada issued a term loan that we purchased for portfolios. Our research revealed that Air Canada had a durable position as being the market leader for domestic and trans-border traffic to Canada. The company has a strong liquidity position, and the company pledged virtually the entirety of its international route network to the deal, which is estimated to provide collateral value that covers the debt by over 2.3 times. We purchased the loans at a spread of over +400 basis points.

Another new issue term loan we purchased for client portfolios during the quarter was issued by MultiPlan. The company is the largest provider for out-of-network claim services, has a 40-year track record, possesses a national footprint, and has direct contracts with more than 1.2 million providers and 700 payors with +60 million members. We discovered the company has an established and differentiated business model with high switching costs and a unique data advantage. The company has been generating consistent and strong free cash flows that would be used, in part, for deleveraging. The company’s management team has a strong history of attaining its growth and deleveraging objectives. In addition to the strong fundamental profile, the loan came at compelling valuation terms, with a spread of +482 basis points. We were able to participate in the deal in a meaningful fashion and allocate to client portfolios.

Concluding remarks

Our team has been investing together for over a decade – multiple decades among our team’s portfolio managers. So, we have seen turns of the cycle. The catalyst for a turn is seldom obvious in advance. A few voices like Robert Shiller’s warned about the housing market before 2007, but the interconnected financial institution credit panic that falling home prices triggered was not widely anticipated. The scope of the pandemic clearly surprised investors in March 2020. We are reluctant to predict what will end the cycle, and when, only that we should be prepared for its end. Yield-seeking investors may need to exercise some patience.

We are pleased with the performance results generated for our clients during a time where we de-risked portfolios and selectively added credit positions. We believe that flexibility and patience will be rewarded over the long-term, as the bond market continues to evolve and offer opportunities to investors with such approaches. In the meantime, thank you for investing alongside us, and we look forward to our in-person discussions over the coming quarter.

  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)

0.41%

1.55%

2.49%

3.30%

2.51%

2.15%

4.60%

BBH Limited Duration Fixed Income Composite (net of fees)

0.34%

1.36%

2.68%

3.06%

2.29%

1.93%

4.39%

Bloomberg US 1-3 Year Treasury Bond Index

0.06%

-0.02%

0.03%

2.62%

1.62%

1.15%

3.94%

BBH Unconstrained Credit – Fixed Income Composite (gross of fees)

1.37%

6.44%

11.80%

6.51%

6.79%

N/A

4.71%

BBH Unconstrained Credit – Fixed Income Composite (net of fees)

1.27%

6.12%

11.36%

6.09%

6.37%

N/A

4.30%

Bloomberg US Aggregate Bond Index

0.05%

-1.55%

-0.90%

5.36%

2.94%

N/A

3.14%

BBH Structured Fixed Income Composite (gross of fees)

1.02%

4.49%

6.96%

5.02%

5.02%

N/A

4.96%

BBH Structured Fixed Income Composite (net of fees)

0.93%

4.22%

6.59%

4.66%

4.65%

N/A

4.60%

Bloomberg US ABS Index

0.05%

0.23%

0.59%

3.50%

2.37%

N/A

2.53%

BBH Intermediate Duration Fixed Income Composite (gross of fees)

0.05%

0.37%

1.78%

5.36%

3.23%

3.09%

6.15%

BBH Intermediate Duration Fixed Income Composite (net of fees)

-0.02%

0.19%

1.53%

5.10%

2.97%

2.83%

5.88%

Bloomberg Intermediate Gov/Credit Index

0.02%

-0.87%

-0.40%

4.63%

2.60%

2.52%

5.82%

BBH Municipal Fixed Income Composite (gross of fees)

-0.17%

0.31%

1.42%

4.64%

3.29%

3.39%

4.06%

BBH Municipal Fixed Income Composite (net of fees)

-0.23%

0.12%

1.17%

4.38%

3.03%

3.13%

3.80%

Bloomberg 1-10 Year Municipal Bond Index

-0.01%

0.35%

1.33%

3.93%

2.50%

2.72%

3.65%

BBH Core Fixed Income Composite (gross of fees)

0.69%

2.03%

5.01%

8.50%

6.47%

5.40%

6.87%

BBH Core Fixed Income Composite (net of fees)

0.63%

1.84%

4.75%

8.23%

6.21%

5.14%

6.60%

Bloomberg US Aggregate Bond Index

0.05%

-1.55%

-0.90%

5.36%

2.94%

3.01%

6.23%

BBH Inflation-Indexed Fixed Income Composite (gross of fees)

1.50%

3.50%

4.78%

7.40%

4.32%

3.28%

5.85%

BBH Inflation-Indexed Fixed Income Composite (net of fees)

1.46%

3.38%

4.71%

7.24%

4.16%

3.13%

5.70%

Bloomberg US TIPS Index

1.75%

3.51%

5.19%

7.44%

4.34%

3.12%

5.48%

Source:  BBH Analysis

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 Fixed Income Representative Account is managed with the same investment objectives, employs substantially the same investment philosophy as the strategy and is the account whose investment guidelines allow the greatest flexibility to express active management positions.

* Returns are not annualized

On 10/1/2020, the BBH Credit Value Composite was renamed the BBH Unconstrained Credit - Fixed Income Composite, the BBH U.S. TIPS Composite was renamed the BBH Inflation-Indexed Fixed Income Composite, and the BBH Intermediate Municipal Composite was renamed the BBH Municipal 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 Fixed Income Composite inception date is 1/1/1986, BBH Inflation-Indexed Securities Composite inception date is 4/1/1997.

Index Definitions

The BofA Merrill Lynch U.S. 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 U.S. 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 Barclays 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 U.S. 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 U.S. 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®” 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 Limited Duration Fund. 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. As of 10/1/2020, the Limited Duration Composite was renamed BBH Limited Duration Fixed Income.

The objective of our Unconstrained Credit – 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. As of 10/1/2020, the Credit Value Fixed Income Composite was renamed BBH Unconstrained Credit – Fixed Income.

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. As of 10/1/2020, the Intermediate Duration Fixed Income Composite was renamed BBH Intermediate Duration Fixed Income.

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. As of 10/1/2020, the Intermediate Municipal Composite was renamed BBH Municipal Fixed Income.

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. As of 10/1 2020, the Core Fixed Income Composite was renamed BBH Core Fixed Income.

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. As of 10/1/2020, the Treasury Inflation Protected Securities Composite was renamed BBH Inflation-Indexed Fixed Income.

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.

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.

Past performance does not guarantee future results

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.

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. 2021. All rights reserved. IM-10112-2021-10-15

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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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