Emerging market debt could recover fastest, says Legg Mason

Credit markets have “overshot on the downside”, says Ian Edmonds, the manager of the £516m Legg Mason Global Multi Strategy Bond fund.

Highlighting the recent change in valuations, Edmonds has added higher quality, shorter maturity high yield credit, which he expects to be refinanced over the next few years.

“Given valuations, we had been more defensively positioned knowing we had plenty of beta within the fund and, in case conditions became more volatile, some hedges in place. But given the change in valuations over recent months we have adjusted those hedges – we think credit markets have overshot on the downside.”

Edmonds has indicated the portfolio is being shifted away from Europe to secure greater exposure to America and emerging markets.

The fund’s exposure to German and French banks has been scaled back, leaving holdings in the region concentrated largely in insurers.

Until a conclusive solution is reached in Europe, Edmonds will continue to selectively allocate to “investment grade corporates and only better quality high yield companies”.

Emerging market debt comprises more than 25% of the fund and, despite a pattern of outflows in the third quarter, Edmonds is confident this may be one of the first sectors to recover from the crisis.

“This is a sector that we are focusing on,” he says. “We have increased our target exposure to emerging markets corporates and started to address it, mainly through Latin American issuers.”

American banks constitute the portfolio’s financial exposure while 20% of the fund is in high-quality sovereigns such as US Treasuries and German bunds.