Legg Mason Profits Buying Greece’s Debt While Shorting Euro

Greek sovereign debt has been a perilous bet for managers
The Greek national flag flies at the foot of Acropolis hill in Athen. Photographer: Kostas Tsironis/Bloomberg

Legg Mason Inc. used a double-barrel approach of betting on Greek debt and against the euro to emerge from Europe’s April financial crisis with a profit.

Western Asset Management, the firm’s fixed-income unit, owned Greek debt entering April and, emboldened by its hedge against the single currency, bought more at the height of the crisis, said Chief Investment Officer Stephen Walsh. When the European Union announced an almost $1 trillion bailout on May 10 for members struggling to finance deficits, Western Asset sold most of its stake.

Greek sovereign debt has been a perilous bet for managers trying to measure the risk of European defaults. T. Rowe Price Group Inc., a Legg Mason rival that is also based in Baltimore, took a loss when it dumped its holdings from a fund that didn’t have the ability to sell currencies short. Funds from Pacific Investment Management Co. and Northern Trust Corp. have avoided or treaded lightly in Greek debt.

“We’re still pretty cautious, and that will keep us out of Greece and the rest of the European periphery,” Walsh said in a telephone interview from the Western Asset offices in Pasadena, California. “I wouldn’t believe this issue is over yet.”

Western Asset sold most of its Greek debt shortly after the bailout was announced, when bond prices surged and drove the yield on 10-year bonds down more than 4 percentage points.

“Any time there is that big a change in price it changes the risk-reward profile,” Walsh said.

Western Asset Fund

About $2.9 million of Western Asset’s Non-U.S. Opportunity Bond Portfolio was in Greek debt as of Dec. 31, or about 5.1 percent of the fund at the time, data compiled by Bloomberg show. The fund is part of about $25 billion Western Asset invests in global bonds, mainly for in institutional clients. Walsh said he added to the stake in January and February as well as in April. Greek bonds represent about 1.2 percent of the Barclays Capital Global Aggregate Bond Index.

Western Asset currently holds no sovereign or corporate debt from Italy, Spain or Portugal, and continues to bet against the single currency through shorting, Walsh said. The euro has dropped about 13 percent against the dollar this year.

A short seller borrows and immediately sells a security, hoping to profit by repurchasing it later at a lower price.

He declined to say how much Western Asset made with its euro and Greek debt trading strategy. The $65.9 million Non-U.S. Opportunity Bond Portfolio returned 4.7 percent this year through May 19, beating 89 percent of funds in Morningstar Inc.’s world bond fund category. The average fund in the category was little changed.

Not ‘Market Timers’

T. Rowe managers lost faith in Greek debt and sold an “overweight” position starting in late April, according to Christopher Rothery, who helps run the firm’s $4.26 billion International Bond Fund and $4.5 billion in similar institutional accounts.

The International Bond Fund, whose Greek position was valued at $77.5 million at the end of the first quarter, doesn’t attempt to hedge currency risks by short-selling, Rothery said.

“We’re not short-term market timers and our fund is used mainly for diversification purposes over a long time horizon,” he said in a phone interview from London.

T. Rowe Price’s International Bond Fund lost 5.2 percent this year, trailing 90 percent of competing funds.

The fund’s Greek debt as of March 31 included $17 million in a 20-year bond that matures in 2019. The security’s average price since its issue was 115.14 euro cents to the euro, Bloomberg data show. From April 23, when Greek Prime Minister George Papandreou asked for financial assistance from the EU and the International Monetary Fund, through May 12, its average price was down to 80.59 euro cents.

Pimco Funds

Pimco, the world’s second-largest manager of fixed-income funds, runs two versions of its Global Bond Fund, one hedged for currency fluctuations and the other non-hedged. The hedged portfolio, which held $1.13 million in Greek sovereign debt as of Dec. 31, or 0.6 percent of the fund, has gained 5.6 percent this year, beating 95 percent of funds in the category. The non-hedged version, which held $20 million in Greek debt, or 2.3 percent of the fund, has returned 1.2 percent, beating 65 percent.

Mark Porterfield, a Pimco spokesman, declined to comment on the fund’s Greek debt investments.

After cutting its losses in Greece, mostly before the bailout, T. Rowe Price responded to the European rescue package by purchasing more Spanish sovereign debt, figuring the danger of default had eased.

‘Threshold Market’

“Spain is probably the key threshold market,” Rothery said. “There’s a value play there now that a firewall has been created.”

European finance ministers announced a program of bond purchases, along with the loan package, in an effort to stop a sovereign-debt crisis that threatened to force euro-zone members Greece and Spain into default.

“The bailout is not a solution,” Rothery said. “But it gives the politicians time to do more about their deficits.”

T. Rowe Price has also cut back its exposure to the euro by buying other European currencies.

Rothery wouldn’t disclose specific figures for the fund or the institutional accounts. After the Spanish purchases, he said T. Rowe Price remains “underweight” in the country’s sovereign bonds relative to their 3.4 percent portion of the Barclays index. The fund held $39.5 million in Spanish debt as of March 31, according to data compiled by Bloomberg.

Wayne Bowers, head of international investments for Chicago-based Northern Trust Corp., said there is still a risk that Greece could “restructure” its debt.

“You could end up with something that wasn’t put in front of you when you bought,” he said. “It’s fair to assume we’re preferring core European sovereigns for several quarters.”

Northern Trust’s $45 million Global Fixed Income Fund held no Greek sovereign debt as of March 31. Bowers wouldn’t give details on the fund’s current holdings. The fund has lost 2.3 percent this year, trailing 74 percent of its category.

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