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This is how we beat the Street: Fund manager

LM Brandywine Alternative Credit Fund is beating the Street, and its manager told CNBC that's because he knows where to look to find value.

In the last 12 months, the fund has been ahead of its benchmark, the Barclays U.S. Aggregate Bond Index, by more than 50 percent.

"We want to identify using our macro-research process here at Brandywine where there is a mispricing of assets. And today we're finding that mispricing in Europe," Brian Kloss said in an interview with "Closing Bell" on Wednesday.

Those holdings include Spanish and Portuguese residential-backed mortgage securities.

Traders on the floor of the New York Stock Exchange.
Getty Images
Traders on the floor of the New York Stock Exchange.

While the income is modest, he's looking at the total return.

"We're able to buy these securities at a very deep discounted price and you're going to end up with a current yield somewhere south of 3 percent at this point in time but a total return that's been north of 10.5 percent year to date," Kloss noted.

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While the asset class was associated with the last financial crisis, he thinks it's a good investment because of the discounted price.

"We're buying them as close to a recovery rate as you can and that's going to protect you on the downside," he said.

Kloss also noted that the leadership in Europe is working toward a recovery.

"It's going to be a long and slow slog through Europe, but Spain [and] Portugal they have taken the hard steps that you need to take," he said.

"As the economy heals, these markets actually start to recover and house prices start to appreciate and it's a self-fulfilling prophecy."

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To stay profitable, the fund changes its focus as conditions evolve. Kloss said he envisions a shift toward corporate credit in the United States, perhaps even Europe, within the next two years.

"It depends on where the valuations levels are," he said.

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