It is not common to find a sterling strategic bond fund with Russia, Mexico and Brazil among its top five currency exposures. Yet, the team behind the $7.9bn Legg Mason Western Asset Macro Opportunities Bond fund believe this is where the best opportunities are to be found. 
Outside of US dollars, the main currency exposures in the fund are the Russian rouble (8.6 per cent), Brazilian real (8.5 per cent) and Mexican peso (6.1 per cent).
These are all higher weightings than their sterling allocation which represents just 3.8 per cent of the portfolio.
But why so much emerging market debt?
Legg Mason Western Asset Macro Opportunities Bond fund invests in a range of fixed income securities and may have up to 50 per cent of the portfolio in emerging markets debt.
Prashant Chandran (pictured), portfolio manager at Legg Mason affiliate Western Asset, said emerging markets were one of three major themes in the portfolio, alongside central bank’s inflation targeting and a positive outlook for financials.
The theme emerged following a period of underperformance for the fund in 2018, when it was down by 6.82 per cent.
“It’s important to recognise that when your views are challenged [you should change what you do] … so we cut our US risk down by 15 per cent and at the same time were hunting for opportunities,” he said.
“And those new opportunities were more in emerging markets and so we took a positive view in countries that we like and a lot of the 2019 returns.”
Chandran added: “Within emerging markets you can see that most of the positioning… is pointed to the emerging market local sovereign or dollar sovereign [debt].”
Turning first to Brazil Chandran explained that, while the team behind Western Asset Macro Opportunities Bond fund aren’t fans of Brazilian rates as the central bank has made aggressive cuts, there are still opportunities to be found.
“Following three consecutive years of lacklustre growth averaging 1 per cent each, we expect GDP growth to rebound meaningfully to 2 per cent in 2020,” he explained.
This he said was largely owed to reforms enacted by Jair Bolsonaro’s administration: “whose market-friendly policies stand in stark contrast with previous administrations over the past 15 years”.
“More generally, Bolsonaro supports the free market and opposes state intervention; his approval ratings remain high at 48 per cent,” said the manager.
“Inflationary expectations are well-anchored, which helped enable the central bank to cut its policy rate to a record low.
He added: “While not immune to potential fallout emanating from the coronavirus outbreak, we expect domestic demand to gain traction especially in the second half of 2020.”
Moving on to Mexico, Chandran said its fundamental appeal rests in the economic integration it shares with its northern neighbour: the US.
“While the threat of trade wars had been a headwind for Mexico, US Democrats agreed last month to the terms of the US-Mexico-Canada Agreement that replaces NAFTA, paving the way for ratification by US Congress in 2020,” he said.
The deal has been in negotiation for the past year and having now been signed removes one layer of uncertainty surrounding Mexican assets, according to Chandran.
“President Andrés Manuel López Obrador [AMLO]won a strong mandate in 2018, with majorities in Congress for his Morena party,” he said.
“In office now for over a year, AMLO’s popularity remains high, reflecting the people’s overall satisfaction with his policies, despite a sluggish economy and persistent violence.
“From a valuation perspective, we believe Mexican assets offer total return potential.”
Out of favour as international sanctions hit the economy, Russia is also one of the largest exposures in the portfolio.
“Having emerged from its 2014-2015 recession on the back of stronger oil and metal prices, Russia’s sovereign balance sheet has recalibrated forcefully such that its credit ratings have reverted to investment-grade by early 2019,” said the manager.
“The improvement in both external and internal balances means that the country is better positioned to absorb unanticipated or exogenous shocks.
“Despite potential future sanctions remaining a headwind, we still find value in Russia debt given its resilient fundamentals and an expected re-rating back toward the BBB+ category.”
Chandran said the potential for a negative impact on the back of any future US trade sanctions would reduce external debt issuance but lead to better investor flows, particularly with foreign reserves of $550bn.
“Demonstrated prudence in policy management, notably central bank independence, helps anchor investor confidence,” he added.
Legg Mason Western Asset Macro Opportunities Bond aims to maximise total return while keeping volatility within a range of 10 per cent.
Since launch in 2014, the fund has made a total return of 39.08 per cent compared with a return of 28.19 per cent for the average IA Sterling Strategic Bond peer.
Performance of fund vs sector since launch
Source: FE Analytics
The five FE fundinfo Crown rated fund has an ongoing charges figure (OCF) of 1.23 per cent and a current yield of 7.67 per cent.