The Legg Mason Strategic Bond Fund increased by 0.45% on a net of fees basis over the first quarter. This compared to the 0.88% return of the IMA UK Other Bond sector.In terms of drivers to performance, the Fund's lower weighting to high yield generally relative to other funds in the UK Other Bond sector was the principal reason behind the Fund lagging its sector. UK corporate bonds also acted as a dampener on performance. However, in the Eurozone corporate bonds made a positive contribution, although the Fund's allocation to Financials had a negative impact, largely due to concerns about banks' exposure to subprime mortgage lending in the US.In terms of other drivers, the Fund's exposure to US Treasuries and US Treasury Inflation Protected Securities (TIPS) together with a small allocation to US mortgage-backed securities contributed positively to Fund performance. Finally, the Fund's exposure to emerging market debt, albeit very small, also contributed positively to performance.In terms of activity, during the quarter the manager started to reduce its exposure to high yield on valuation grounds, just prior to the market volatility at the end of February. Indeed, going forward the Fund's manager has decided to position the portfolio in higher quality sectors in order to improve its risk profile. Elsewhere, in March the manager took advantage of the sell-off in European Financials to add to its exposure in this area.
Looking ahead, in the UK the investment manager believes the BofE is in a poor position to tighten policy further than is already priced in by the markets and therefore continues to expect rate cuts within the next twelve months. Elsewhere, it remains overweight duration in the US as valuations in longer dated assets remain compelling relative to long-dated gilts and it thinks the US Federal Reserve has plenty of room to lower interest rates should the economy prove to be weaker than expected.