e-fundresearch: Mr Brian Hess, you are the fund manager of the Legg Mason Brandywine Global Fixed Income Fund (ISIN: IE00B19Z4J92). What is your role on the portfolio and how long have you been involved in the fund?
Hess: I am an Associate Portfolio Manager for the fund and also a Senior Research Analyst responsible for sovereign debt and currency analysis. I have been a member of the investment team that manages this fund for eight years.
e-fundresearch: Which benchmark do you adhere to?
Hess: This fund is benchmarked against the Citigroup World Government Bond Index (WGBI), which is an appropriate yardstick considering that the fund is a sovereign-only strategy and so is the WGBI, both with a strong emphasis on developed markets. While the WGBI is utilized for performance measurement purposes, it is important to keep in mind that Brandywine does not believe in “benchmark-hugging” because we disagree with the methodology employed in the construction of most global bond indices. As a result, our portfolios, including this fund, tend to look much different than the benchmark.
e-fundresearch: Are you also responsible for other funds at the moment?
Hess: No, I am not responsible for any other funds available to European investors at this time.
e-fundresearch: What is the total volume that you manage in all your funds?
Hess: $24.2bn in Global Fixed Income assets as of 31 December 2011
e-fundresearch: Regarding the performance: what performance did you achieve since the beginning of the year and in the years 2007-2011? Absolutely and relatively to the relevant benchmark?
Hess: Please see the attached performance composite disclosure for details.
e-fundresearch: How content are you with your own performance over the last few years and in 2011?
Hess: We are pleased with our performance since 2009 considering that we have generated solid positive total returns while at the same time beating our benchmark each year. That said, there is always room for improvement and there are certainly things that we could have done better. We are far from perfect, but one thing that we are particularly pleased with is the fact that we were able to deliver high single-digit returns to our clients in 2011, which was a challenging year characterized by a high degree of uncertainty and elevated levels of volatility.
e-fundresearch: How are you able to deliver added value for your investors with your performance?
Hess: At Brandywine we add value by combining macroeconomic research with a focus on finding undervalued bond markets and currencies around the world. We start by using qualitative macro-analysis to create themes along which we can build a portfolio. We then supplement that framework with a quantitative screening methodology that helps us to identify the most undervalued assets with which to capitalize on those themes. We profit for our clients through the income generated by the bonds that we own, through capital appreciation when we can identify undervalued bond markets likely to rally in price, and lastly since we tend to buy local-currency bonds and actively manage the currency component, we also generate returns by owning undervalued currencies that appreciate. In addition to this we are quite willing to look differently than the benchmark and that mindset allows us to focus our assets on the most attractive segments of the global bond universe. This means that out of the 25-30 countries in our investment universe, we are typically only invested in 12-15 of them at any given time. We then try to patiently rotate through the investment universe as valuations shift and the fundamentals evolve along with the various business cycles around the world. Lastly, we pride ourselves on being contrarian when we can identify a catalyst for mean reversion back towards fair value from a price extreme. We believe that a historical willingness to accept market risk when others are panicking and valuations are very inexpensive has been a key to our long-term record of outperformance.
e-fundresearch: How long have you been a fund manager?
Hess: I have only been a fund manager for a short time, but I have been on the investment team and closely connected to our portfolios for many years now, including most of the eight years that I have been at Brandywine.
e-fundresearch: What are your biggest successes and biggest disappointments in your career as fund manager?
Hess: My biggest disappointment was our performance in 2008 during the global financial crisis. We underperformed our benchmark because we held a very large underweight position in the Japanese yen at the same time that we were overweight a few commodity-linked and cyclical currencies that fell in price. We underestimated the magnitude of the financial crisis and that cost us dearly during the third quarter of 2008. Fortunately however, and I think we would consider this next point as our biggest accomplishment, rather than panicking towards the end of 2008 instead we maintained our positioning and even added to some of the more attractive assets that had cheapened considerably. By doing that we were able to have very strong years in 2009 and 2010 and more than make up for 2008. We also learned some valuable lessons from that experience.
e-fundresearch: What kind of capital market situation do we have at the moment? How do you act in this environment?
Hess: The current macroeconomic backdrop is primarily characterized by deleveraging forces in the developed world, which have resulted in weak growth from that cohort of the global economy. Emerging markets have generally shown strong economic growth since the financial crisis and global recession of 2008 ended, but the lack of robust participation from the developed world has made it more difficult to forecast asset prices. Volatility also seems to be higher than it has been in the past, which poses its own challenges. At Brandywine we believe this environment clearly calls for active management over indexing and that is probably one of the few generalizations that can be made about the current state of capital markets. We have been dealing with the uniqueness of this post-crisis environment by remaining mentally flexible and being willing to change our minds if the facts change, as they very quickly can these days. Otherwise however, our philosophy and process have not changed.
e-fundresearch: What are the special challenges in this environment?
Hess: Please see my response to the previous question, especially the point about volatility being higher, which can be a challenge for fund managers with longer holding periods who still need to report performance data quarterly. Such pressures can create pricing anomalies that we at Brandywine will seek to exploit.
e-fundresearch: What objectives do you have ‘till the end of the year and in the mid term for the upcoming 3 to 5 years?
Hess: Simply to continue earning a solid return for our clients and to keep beating our benchmarks. And it would be ideal to be able to do it with a limited amount of volatility.
e-fundresearch: Do you model yourself on someone? Any ideals?
Hess: I try to learn something from everyone I meet and I model myself after a composite of the best characteristics I have discovered in those people who I admire most. Wisdom often comes when you least expect it and oftentimes from people or places you least expect to deliver it. That’s part of what makes life so interesting.
e-fundresearch: What motivates you in your job?
Hess: The rewarding feeling of coming up with an idea about how to profit in the financial markets, putting that idea to work, and then receiving nearly immediate feedback as to whether it was a good one or not. Also, it is very exciting to meet with interesting clients and competitors and exchange ideas about the rapid evolution of the global economy and its financial markets. Lastly, I enjoy being able to make money for our clients and help them in their missions, whether it is a pension fund paying benefits to retirees or a charitable organization providing service to the community. Knowing that we can make a difference is very motivating.
e-fundresearch: What else do you want to achieve or do you have any further aims as a fund manager?
Hess: Professionally my goal is to always continue learning, to take the time to work with our clients and help them achieve their goals, and also to be grateful that I have the opportunity to work in such a great industry where I can pursue my passions and constantly be challenged.
e-fundresearch: What other profession would you have taken interest in, apart from becoming a fund manager?
Hess: I could see myself being a university professor and I think I would enjoy it. There are many similarities between the two professions. Both involve critical thinking, a love for research, the ability to write well, and an emphasis on public speaking. Also, both investors and professors regularly formulate theories and then test them. One distinction between the two roles, however, is that as a fund manager your theories are tested daily and the difference between being right and wrong can be very expensive!
e-fundresearch: Thank you for the interview!