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By Sumit Desai, CFA | 01-21-2015 10:00 AM

Western Asset: Tremendous Opportunities in High Yield

There are big opportunities in high-yield energy names if you identify the survivors amid the oil-price plunge, says Carl Eichstaedt, a 2014 Fixed-Income Manager of the Year.

Sumit Desai: Hi, I'm Sumit Desai, fixed-income analyst for Morningstar's manager research team. Joining me today are our 2014 Fixed-Income Fund Managers of the Year, Western Asset's Ken Leech and Carl Eichstaedt.

Gentlemen, thank you for joining me today.

Carl Eichstaedt: Thank you.

Ken Leech: Thank you.

Desai: First of all, congratulations on the award. It's quite an honor. Part of the reason that your team won this award was for your performance in 2014, which was largely driven by your views on interest rates and yield-curve positioning. Can you talk a little bit about what you saw at the beginning of the year that helped you position the portfolio as it was and helped the fund outperform?

Leech: Sure, Sumit. I would say that on behalf of our entire team--we have a very team-based culture at Western--we really appreciate the award and we appreciate the vote of confidence that Morningstar has shown.

I think from our perspective, in 2014, we felt that the inflation outlook in the United States was pretty subdued. More importantly, inflation around the world was actually very subdued, perhaps in a declining trend. So, our forecast for the U.S. economy was a little less robust than the Fed's. But that, in conjunction with the low inflation outlook, led us to believe that the pessimism, the number of rate hikes that the market was expecting, was unlikely to occur. And that allowed us to take a little longer duration position. I think even more importantly, when you look at the shape of the curve, we felt that it was the short-intermediate sector of the curve that had been the biggest beneficiary of [quantitative easing] and would be the biggest loser when QE was finished. So, that in fact meant that the curve would flatten. So, the flattening curve plus the longer interest-rate exposure proved very beneficial.

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