Legg Mason Western Asset Cnsrv Inc A (SSB0131AU) Report & Performance

The Western Asset Conservative Income Fund was down 0.30% (net of fees) during March, compared to the Bloomberg AusBond Bank Bill Index which was flat for the month. The negative absolute return was largely attributable to interest rate positioning, where a small long duration position underperformed as yields rose during the month. The Fund’s corporate and asset-backed allocations also underperformed as spreads widened during the period.

As the Australian economy continues to recover, supply-chain disruptions are likely to persist in the short term and to contribute to inflationary pressures, which have been compounded by commodity price reactions related to Russian hostilities in Ukraine. The significant removal of pandemic constraints and restrictions in order to minimise supply-chain disruption has been beneficial from an economic perspective. As central banks embark on policy normalisation, the more hawkish tilt from some, including the Fed, has seen momentum in the selloff carry yields above where we think central bank policy rates are likely to end up in the time frames expected—this also includes the RBA’s policy trajectory. Central banks will still have a keen eye on achievement of policy objectives and would be wary of overburdening consumers and businesses from rising rates as they progress through the cycle. We added to our duration position later in the month via the 10-year key rate as it approached 3% for the first time in nearly.

five years. If short-end expectations continue to move higher we may seek to add duration at the back end as markets would eventually be expected to price in policy error, leading to a flatter yield curve. As always, we will keep our interest-rate positioning nimble and seek to take advantage of volatility and yield-curve shape.

The Fund returned -0.04% (net of fees) during December, marginally underperforming the Bloomberg AusBond Bank Bill Index by 4bps. The small underperformance was largely attributable to the portfolio’s Asset Backed allocation, which detracted as spreads widened during the month. Over the last 12 months, the fund has returned 0.20% (net of fees) outperforming the benchmark by 17 bps.

The Western Asset Conservative Income Fund returned 0.03% during September and 0.02% for the quarter. Outperformance was largely attributable to the Funds interest rate strategies and asset backed allocations. Over the last 12 months, the fund has returned 0.62%, outperforming the benchmark by 0.58%

Some guarded optimism has emerged regarding the flattening of the global daily infection curve for Covid as vaccination rates reach levels that assist in curbing its spread and ameliorate its health impact for those infected. The approaching northern hemisphere winter will be somewhat of a litmus test regarding whether the worst is now behind us for this pandemic. Most economists agree that an economic contraction in Australia for 3Q21 is a given but it’s less clear for 4Q21 and is highly dependent on the success of the vaccination drive, which will determine how far into the fourth quarter lockdowns persist. One query is whether consumers, and indeed businesses, will have lost more wealth during the current lockdowns versus previously under various government Covid-reliefprograms that have since ended, and therefore whether the resurgence in consumer activity will be as strong once social restrictions are eventually removed.

This will make a difference regarding the extent of the economic bounce-back on the other side of the current outbreak, when the majority of the population is vaccinated. Notwithstanding taper of various central bank asset purchase programs either imminent or already underway, we expect both domestic and global monetary conditions to remain easy for some time as emergency settings are gradually removed, with a keen eye on achievement of policy objectives. We believe such conditions will continue to favour spread sectors, particularly corporate bonds, which have benefited from substantial support. In our opinion,these sectors should be the best performing fixed-income assets

The Legg Mason Western Asset Conservative Income Fund fell -0.03% during July. Over the last 12 months, the Fund has returned 0.71%, outperforming the benchmark by 0.66%. The corporate and asset backed allocations contributed positively during July, however, it was offset by interest rate strategies as yields fell.

The rise of the delta variant in the local community overshadowed some positive data that included the unemployment rate dropping to 4.9% with participation remaining near the record high, job advertisements dropped off but remained positive and CPI for 2Q21 was 0.8% quarter-over-quarter (QoQ), bringing the year-over-year (YoY) figure to 3.8% on base effects, which most observers viewed as transitory.

Corporate issuance was moderate with deals of various maturities from CNH Industrial Capital, Dexus Wholesale Property Fund and Edith Cowan University, each in modest size. Spreads were marginally wider for corporate and supranational, sovereign and agency (SSA) sectors and were marginally tighter for semi-government bonds, while covered bonds repriced tighter. Asset-backed deals were headlined by the A$3.5 billion PUMA deal from Macquarie which the largest nongovernment deal this year. Other deals included Bluestone Prime, Columbus Triton and Metro Finance. The Australian dollar was weaker in July as the Covid delta strain caused disruption to the economic recovery and the iron ore price dipped on lower projected Chinese demand. The currency lost 2%- 3% versus most the of the major currencies and its trade-weighted index depreciated 1.8%.

While the Federal Reserve (Fed) continued to talk up the transitory nature of current inflation the Federal Open Market Committee (FOMC) median dot plot showed the first rise in the fed funds rate in 2023, followed by another that same year. This lowered long-term inflation expectations, as it suggested the Fed was willing to move sooner to curb inflation than previously anticipated. The lower inflation expectations led to lower long-term bond yields, causing the yield curve to flatten substantially.

Domestically, June started with the city of Melbourne in the midst of a two-week lockdown and ended with Sydney, Brisbane and Perth all in snap lockdowns of their own. Sydney was the most concerning of these, with numbers of infections with the delta variant of the coronavirus still rising at the end of the month. This echoed a number of countries around the world that were dealing with the spread of this particularly virulent strain and also contributed to the rally in bonds. Australian economic data was generally strong, with the 1Q21 GDP release indicating activity in the economy had fully returned to pre-pandemic levels and was broadly based. This was followed by monthly labour data where jobs grew by 115,000 and the unemployment rate dropped to 5.1% from 5.5% previously

The Legg Mason Western Asset Conservative Income Fund returned 0.04% during May, outperforming the Bloomberg AusBond Bank Bill Index. Over the last 12 months, the Fund has returned 1.07%, outperforming the benchmark by 1.01%. Outperformance during May was primarily attributable to the Fund’s corporate and asset backed allocations as spreads marginally tightened during the month.