The BBH Income Fund Class I ("the Fund") returned 2.22% in November, and the Bloomberg Barclays U.S. Aggregate Index returned 0.98%. Outperformance vs. the benchmark was due to the Fund’s larger weighting in corporate bonds.
The yield in the 3-7year portion of the Treasury curve was nearly unchanged in November. Returns in excess of Treasuries (excess returns) for Investment Grade (IG) and High Yield (HY) corporate bonds were 2.33% (IG) and 3.82% (HY) vs. total returns of 2.79% and 3.96%, respectively. Total return for floating rate loans was 2.13%. Asset-backed securities (ABS) and non-agency commercial mortgage-backed securities (CMBS) returned 0.15% and 0.94%, respectively.
IG and HY corporate spreads have nearly recovered to pre-pandemic levels and HY corporate yields are nearing all-time lows. However, we were still able to add attractively priced positions to the Fund. Spreads for many non-traditional1 ABS subsectors continue to trade wide to pre-pandemic levels. The market took the withdrawal of Coronavirus Aid, Relief, and Economic Security (CARES) Act funding in stride due to positive news on vaccine development. Some of the hardest hit subsectors recovered, for example oil field services, refining, independent energy, midstream, and airlines.
Although we expect continued ratings downgrades in pandemic-affected sectors, we do not think 2020-2021 defaults will precipitate a financial crisis. ABS non-payment rates have improved across most subsectors, and servicers of CMBS loans have been accommodating with loan modifications and forbearances. We remain on the lookout for opportunities to invest in durable credits2 where spreads have not fully recovered.
1 Non-traditional ABS market includes more than 20 subsectors away from prime auto and card ABS, such as personal consumer loan ABS, equipment lease ABS, and cell tower ABS.
2 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.
Holdings are subject to change. Totals may not sum due to rounding.
Credit Quality letter ratings are provided by Standard and Poor's, Moody's and Fitch and are presented as the higher of the three ratings. When a security is not rated by Standard & Poor's, Moody's or Fitch, the highest credit ratings from DBRS and Kroll may be used. Credit ratings reflect the credit quality of the underlying issues in the portfolio and not of the portfolio itself. Issues with credit ratings of BBB or better are considered to be investment grade, with adequate capacity to meet financial commitments. Issues with credit ratings below BBB are considered speculative in nature and are vulnerable to the possibility of issuer failure or business interruption.
Effective duration is a measure of the portfolio’s return sensitivity to changes in interest rates.
Weighted Average Life of securities excludes US Treasury futures positions.
Yield to Maturity is the rate of return the portfolio would achieve if all purchased bonds and derivatives were held to maturity, assuming all coupon and principal payments are received as scheduled and reinvested at the same yield to maturity. This figure is subject to change and is not meant to represent the yield earned by any particular security. Yield to Maturity is before fee and expenses.
This material is not authorized for distribution unless accompanied or preceded by a current Fund prospectus.
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. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations.
Purchase and sale information provided should not be considered as a recommendation to purchase or sell a particular security and that there is no assurance, as of the date of publication, that the securities purchased remain in a fund's portfolio or that securities sold have not been repurchased.
Investors in the Fund should be able to withstand short-term fluctuations in the fixed income markets in return for potentially higher returns over the long term. The value of portfolios changes every day and can be affected by changes in interest rates, general market conditions and other political, social and economic developments.
The value of some bonds including asset-backed and mortgage-backed securities may be sensitive to changes in prevailing interest rates that can cause a decline in their prices. Mortgage related securities are subject to prepayment and extension risk. The Fund also invests 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 stock or bond investments.
Investing in the bond market is subject to certain risks including market, interest-rate, issuer, maturity, call, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed.
Foreign investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.
Below investment grade bonds, commonly known as junk bonds, are subject to a high level of credit and market risks and are considered speculative.
To the extent that the Fund experiences a large purchase or redemption on any business day, the Fund's performance may be adversely affected.
For more complete information, visit www.bbhfunds.com for a current Fund prospectus. You should consider the fund's investment objectives, risks, charges and expenses carefully before you invest. Information about these and other important subjects is in the fund's prospectus, which you should read carefully before investing.
Shares of the Fund are distributed by ALPS Distributors, Inc. and is located at 1290 Broadway, Suite 1000, Denver, CO 80203.
Brown Brothers Harriman & Co. ("BBH"), a New York limited partnership, was founded in 1818 and provides investment advice to registered mutual funds through a separately identifiable department (the "SID"). The SID is registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. BBH acts as the Fund Administrator and is located at 140 Broadway, New York, NY 10005.
Not FDIC Insured No Bank Guarantee May Lose Money
IM-08821-2020-12-14 BBH003109 Exp. Date 01/31/2021