U.S. High Yield Investment Report
Capital U.S. High-Yield 2% Issuer Capped Bond Index,
by 425 bps.
For instance, we are encouraged by the pace of new issu-
ance in the investment-grade market. Investment-grade
The following portfolio positioning impacted relative
credits issued over $250 billion in fixed-rate bonds in 1Q09.
performance for the period:
We are beginning to see evidence that the enthusiasm for
• Issue selection had a negative impact on relative investment-grade issuance is migrating to the high-yield
performance due in part to 6 of the top 10 overweights market. Currently, new issue transactions are running
underperforming and in part to underweights in 9 of 10% ahead of last year’s pace, albeit primarily in high B
the top 10 performing issuers. My best guess here is and BB rated credits. With respect to the aforementioned
“6 of the top 10 underweights outperforming”. proactive bond exchanges, it’s important to note that while
the agencies may officially account for such transactions
• Subsector allocation had a negative impact on relative
as defaults, recent market experience suggests that the
performance. The benefit of the fund’s overweight
price action resulting from successful exchanges is quite
to energy (11.27%) and an underweight to finan-
different than what we have observed with more traditional
cial institutions (-0.46%) was more than offset by
defaults. The simple reason for such market reception is that
underweights to media cable (16.65%) and consumer
these transactions are designed to fix the issuers’ balance
non-cyclicals (11.02%), as well as an overweight to
sheets while avoiding cumbersome and costly bankruptcy
processes. The market often values the lesser amount of
• Credit quality allocation had a decidedly negative exchanged bonds at a significant premium to the aggregate
impact on relative performance. The fund maintained value of unexchanged bonds. In many instances the new
an overweight to CCCs (4.78%) and an underweight securities gain collateral, increased coupon and structural
to BB rated issues (9.02%). guarantees as the result of a negotiated process, which
further enhances the new security’s market value. Our over-
• There were four issuers held in the Composite that
all view on the high yield market is predicated on our belief
defaulted during the period; Charter Communications,
that the economy will stabilize toward the end of 2Q09.
Idearc, Verasun Energy and Station Casinos. The net
impact of the defaults on relative return was neutral
Positioning within our portfolio remains aggressive when
to positive as we were marginally overweight Charter
judged on a ratings basis although we are positioned con-
(+20% in 1Q09) and roughly equal weight on Idearc,
servatively when viewed on a sector basis. Unfortunately,
Verasun Energy and Station Casinos.
our ratings bias has detracted from recent performance
Outlook as the highest quality bonds have performed the best.
Despite a solid +5.98% return year-to-date, we maintain our Through March 2009, the BB portion of the Barclays 2%
belief that the high-yield market currently presents investors Issuer Constrained Index returned 9.01% year-to-date
with a compelling risk-adjusted opportunity. With a yield while the CCC portion has returned 5.54%. Although
of 18.01% and a spread of 1,502 bps, high-yield valuations our rating positioning has not been beneficial, we remain
remain considerably cheaper than historical averages and confident that this strategy will ultimately prevail as the
close to the record levels we witnessed during 4Q08. We economy stabilizes. We will therefore continue to exploit
recognize that the pace of defaults is accelerating and that the yield pick-up anomaly by overweighting select CCCs
recoveries are expected to be far lower than previous cycles. and underweighting BBs. As the year progresses, we
Our expectation is that defaults will breach 10% this year expect investors’ risk aversion to decline and the market
and could even reach as high as 15%, driven in large part to improve, and expect lower-rated issues to significantly
by proactive bond exchanges that could get rolled up into outperform.
official default measures depending on the specifics of the
transaction. However, the combination of extreme valua- As mentioned above, while our ratings profile tends to
tions as well as improving technical trends in the market be on the more aggressive side, our industry positioning
should lead to longer-term positive performance. is designed to be somewhat defensive and provide a bit
Western Asset 2 1st Quarter 2009
(as of September 30, 2008)
US High Yield
Composite Inception Date: 2/1/94
Composite Creation Date: 2/1/94
No. of Mkt. Value Net Total Gross Total Lehman US HY % Firm Disper- Firm Assets
Accts (US$mil.) Return Return 2% Issuer Cap Assets sion (US$mil.)
1998 1 $95 11.96% 12.40% 1.87% 0.19% -na- $49,701
1999 3 $224 14.62% 15.07% 2.39% 0.38% -na- $59,435
2000 7 $1,060 -5.73% -5.36% -5.86% 1.39% -na- $76,504
2001 6 $619 5.09% 5.51% 5.28% 0.66% -na- $94,186
2002 7 $601 -2.16% -1.77% -1.41% 0.54% -na- $112,087
2003 4 $457 23.99% 24.47% 28.97% 0.31% -na- $148,333
2004 2 $533 11.01% 11.45% 11.13% 0.27% -na- $197,837
2005 5 $1,152 3.18% 3.59% 2.75% 0.46% -na- $249,233
2006 16 $7,627 12.71% 13.16% 10.76% 1.49% -na- $510,172
2007 14 $7,425 1.37% 1.77% 2.26% 1.19% 0.64% $621,493
2Q 2008 16 $6,952 -1.58% -1.39% -1.08% 1.14% 0.31% $610,802
Description: Western Asset’s US High Yield composite includes portfolios that employ an actively
managed approach that is risk controlled and assimilates the Firm’s top-down macro-economic views with
credit analysts’ fundamental and relative value views regarding industry and issuer opportunities in an effort
to build and maintain a portfolio that generates superior risk-adjusted returns.
Objective: Exceed the benchmark return by 150 basis points annually over a 3- to 7-year period while
approximating benchmark risk.
Fee Schedule: 40 of 1% on first US$100 million, .20 of 1% on amounts over US$100 million. The
minimum separate account size for a US High Yield portfolio is US$25 million.
Base Currency: USD
Composite Minimum: US$20 million
Western Asset has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®).
1. For GIPS® purposes, the firm is defined as Western Asset, a fixed-income investment manager comprised of Western Asset Management Company, Western Asset Management
Company Limited, Western Asset Management Company Pte. Ltd., Western Asset Management Company Ltd and Western Asset Management Company Pty Ltd, with offices in
Pasadena, New York, London, Singapore, Tokyo and Melbourne. Each Western Asset company is a wholly owned subsidiary of Legg Mason, Inc. (“Legg Mason”), but operates
autonomously and Western Asset, as a firm, is held out to the public as a separate entity. Western Asset Management Company was founded in 1971.
In February 1996, Legg Mason, Inc. acquired Lehman Brothers Global Asset Management, Ltd. and renamed the acquired entity Western Asset Management Company Limited, at
which time it was incorporated into the definition of Western Asset. In September 2000, Western Asset established Western Asset Management Company (Asia) Pte. Ltd. in Singapore.
The Singapore office expanded in December 2003 when Legg Mason acquired Rothschild Asset Management (Singapore) Limited, thereby forming Western Asset Management
Company (Asia), a division of Legg Mason Asset Management (Asia) Pte Ltd (“LMAMA”). In October 2006, Legg Mason reorganized its Singapore operations, and LMAMA was
renamed Western Asset Management Company Pte. Ltd. (“Western Singapore”).
In December 2005, Legg Mason, Inc. acquired a substantial part of Citigroup’s worldwide asset management business. Citigroup’s North American fixed-income asset management
business was integrated into the legal entity Western Asset Management Company, and the fixed-income asset management business of Citigroup Asset Management Limited (“CAM
Ltd”), located in London, was integrated into Western Asset Management Company Limited. As part of the Citigroup acquisition, Western Asset opened Western Asset Management
Company Pty Ltd (“Western Australia”) located in Melbourne, Australia. The fixed-income asset management business of Citigroup Asset Management Australia Limited was integrated
into Western Australia. Similarly, the fixed-income asset management business of Citicorp Investment Bank (Singapore) Limited, and its affiliates in Singapore, were integrated into
Western Singapore. In 2006, the accounts from these Citigroup offices transitioned to Western Asset and were incorporated into the definition of the Firm. Consequently, the historical
composite performance records of accounts previously managed by Citigroup Asset Management meet the portability requirements set forth by GIPS®.
Western Asset’s retail separately managed account business was integrated into the Firm in January 2006. From January 2006 through March 2007, Western Asset portfolio
managers managed these portfolios as dual employees of ClearBridge Advisors, LLC and ClearBridge Asset Management Inc. (each a Western Asset affiliate). The portfolio managers
follow Western Asset’s investment process and have access to Western Asset’s investment resources, expertise and investment outlook. Previously, these portfolios were managed
by an unaffiliated business that was acquired by Legg Mason in December 2005 and subsequently integrated into Western Asset. Effective April 2007, Western Asset manages these
portfolios as sub-adviser to its affiliate, Legg Mason Private Portfolio Group, LLC.
In March 2007 the fixed-income asset management business of Citigroup Advisors Co., Ltd. was integrated into Western Asset Management Company Ltd (“Western Japan”)
located in Tokyo, Japan and subsequently became part of the Firm.
2. Western Asset Management Company, Western Asset Management Company Limited, Western Asset Management Company Pte. Ltd., and Western Asset Management Company
Ltd are registered investment advisors and are regulated by the Securities and Exchange Commission (“SEC”). Western Asset Management Company Limited is authorized and
regulated by the Financial Services Authority in the United Kingdom. Western Asset Management Company Pte. Ltd. is registered as an investment advisor in Singapore and regulated
by the Monetary Authority of Singapore. Western Asset Management Company Pty Ltd is regulated by the Australian Securities & Investments Commission and is the holder of
Australian Financial Services License 303160. Western Asset Management Company Ltd is a financial instruments dealer whose business is investment advisory or agency business
and investment management business with the registration number KLFB (FID) No. 427, and a member of JSIAA (membership number 011-01319).
3. The Firm has been verified for the period from January 1, 1993 to December 31, 2007.
4. Net investment results reflect the deduction of investment advisory fees, while the gross investment results do not. Actual returns will be reduced by advisory fees and any other
expenses that may be incurred in the management of an investment account. For each strategy shown, net performance results have been reduced by the amount of the highest fee
charged to any Western Asset client employing that particular strategy during the period under consideration. Actual fees may vary depending on, among other things, the applicable
fee schedule and portfolio size. Western Asset’s fees are available upon request and also may be found in Part II of Western’s Form ADV (only applicable to SEC registered entities).
5. Composite performance results are time-weighted net of trading commissions and other transaction costs including non-recoverable withholding taxes.
6. Investment fees have an effect on investment results. For example, assume that a client places $1,000,000 under Western’s management and the firm achieves a 10% compound
annual return on a gross basis over ten years. If an advisory fee of 0.325% of average assets under management for the ten years was charged and deducted from the gross returns,
the resulting compound return would be reduced from 10.0% per year to 9.6425% per year. The final dollar value of the account would be reduced from $2,593,742 to $2,510,668.
7. The portfolios in the composites are all actual, fee-paying and performance fee-paying, fully discretionary accounts managed by the Firm for at least one full month. Investment results
shown are for taxable and tax-exempt accounts and include the reinvestment of all earnings. Any possible tax liabilities incurred by the taxable accounts have not been reflected in the
8. Additional information regarding policies for calculating and reporting returns is available upon request.
9. The dispersion of annual returns is measured by the standard deviation of the asset-weighted portfolio returns represented within the composite. For each annual period, accounts with
less than 12 months of returns are not represented in the dispersion calculation. Periods with five or fewer accounts are not statistically representative and are not presented.
10. Futures and options may be used occasionally to hedge market exposure or in an effort to add incremental value to the portfolio. Generally, Western Asset does not use derivatives in
a manner that would result in the portfolios being leveraged. Where portfolio guidelines permit, futures and options are used from time to time to implement new portfolio strategies with
minimum cost to the portfolio. Multi-currency portfolios use forward foreign exchange transactions frequently to hedge currency risk.
11. For strategies starting mid-year, the return shown in the inception year is for the composite and index since inception.
12. All returns for strategies with inception prior to January 1, 1998 are available upon request.
13. All data shown is as of period-end.
14. Past investment results are not indicative of future investment results.
15. To receive a complete list and description of Western Asset’s composites and/or a presentation that complies with GIPS® standards, please contact Veronica A. Amici at 626•844•9535
This publication reflects current opinions of Western Asset Management and is for educational purposes only. Information contained herein, including data supplied by others, is
believed to be accurate, but cannot be guaranteed. Opinions represented are neither a recommendation nor an offer of securities and statements in this material should not be considered
investment advice. Employees and/or clients of Western Asset Management may have a position in the securities mentioned. This material may not be reproduced in any form without
For more information on Western Asset visit our website at www.westernasset.com.