Legg Mason’s Brandywine Shuns China for European Junk Bonds

Brandywine Global Investment Management LLC, a unit of Legg Mason Inc., is avoiding Chinese high-yield debt in favor of bonds from Europe, which economists bet will return to growth after five quarters of contraction.

About 35 percent of a global high-yield bond fund run by Brandywine is invested in Europe, according to Brian Kloss, a Philadelphia-based money manager at the company, which manages about $48 billion. The fund owns no debt from mainland China, he said during an interview today in Hong Kong, where the investment product isn’t available to retail clients.

“Europe is probably close to bottoming and that should tend to bode well for credit going forward,” Kloss said. The fund’s Asia holdings “will increase, but Europe will increase first,” he said.

European gross domestic product likely grew 0.06 percent from a year earlier in the three months through September, according to data compiled by Bloomberg. China is targeting 7.5 percent annual expansion this year, the slowest since 1990, as leaders try to rebalance the world’s No. 2 economy from being reliant on exports to being powered by domestic consumption.

Although Brandywine currently has a bias toward northern Europe and the U.K., it is starting to look at some of the region’s poorer-performing economies, Kloss said. The asset manager is considering investing in Portuguese sovereign bonds and already has some Italian assets, he said.

The investor is also “reconsidering” Indonesia after selling most of its holdings a few years ago. U.S. dollar-denominated notes from the country’s issuers gained 5.25 percent last month, the most in almost two years, JPMorgan Chase & Co. indexes show.

Brandywine, which was founded more than 25 years ago, allocates about 5 percent of its global high-yield debt fund to Asia, Kloss said. While the asset manager doesn’t own Chinese notes, it has exposure to the nation though Singaporean and Malaysian technology companies with operations in China.

“We want to see a more developed bond market, with more players being active in it so there’s better liquidity,” Kloss said on regional allocation. “If we can have more comfort in China, then I think we can have more comfort in taking the Asian exposure.”

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