The BBH Limited Duration Fund Class I ("the Fund") returned 0.75% in November, and the Bloomberg Barclays U.S. 1-3 Year Treasury Bond Index returned 0.04%. Outperformance was due to the Fund’s positive performance in credit sectors, vs. an all-Treasury benchmark.
The 1-3 year part of the U.S. Treasury curve was unchanged in November. Returns in excess of Treasuries (excess returns) for 3-5 year Investment Grade (IG) and 0-5 year High Yield (HY) corporate bonds were 0.72% (IG) and 3.22% (HY) vs. total returns of 0.82% and 3.27%, 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.
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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.
Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.
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 security being structured in ways that give certain investors less credit risk protection than others.
Foreign investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.
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.
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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.
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Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. The BBH Limited Duration Fund was rated against the following numbers of U.S.-domiciled Ultrashort Bond category funds over the following time periods: 171 funds in the last three years, 130 funds in the last five years, and 61 funds in the last ten years. With respect to these Ultrashort Bond category funds, the overall BBH Limited Duration Fund (Class I & Class N), received a Morningstar Rating of 5 stars and 5 stars, respectively. Class I three-, five- and ten-year periods received ratings of 5 stars, 5 stars and 5 stars, respectively. Class N three-, five- and ten-year periods received ratings of 5 stars, 5 stars and 5 stars, respectively.
Not FDIC Insured No Bank Guarantee May Lose Money
IM-08822-2020-12-14 BBH003110 Exp. Date 01/31/2021