Swisscanto Asset Management Ltd.
Short Duration Global High Yield An Attractive Carry Strategy
Shahzada Omar Saeed, Head of High Yield CityWire Italy, 25th-26th October 2012
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Agenda
1. High Yield at Swisscanto
2. The Case for Short Duration Global High Yield
3. Investment Process
4. Product(s) and Performance
5. Appendix - The Case for Global High Yield
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Lead Manager's Profile
Shahzada Omar Saeed Head of High Yield Omar Saeed (1975), MBA in Financial Management, is the lead manager for the Swisscanto (CH) Institutional Bond Fund - Global High Yield I and Swisscanto (LU) Short Duration Global High Yield H CHF/EUR/USD B and J
Previously he worked for Western Asset Management Company in London as a High Yield Portfolio Manager, where he was responsible to co-manage euros800m in High Yield and leverage loan portfolios. He gained similar experience at Foreign & Colonial Asset Management where he was Deputy Manager for the Global High Yield retail fund. In addition Omar gained industry experience at Standard & Poor’s Rating Services in London. Omar received his MBA from Greenwich University, Pakistan Campus of Southeastern University, Washington D.C. in 1998 with Distinction in Financial Management. Joined Swisscanto: 2009 Professional experience: 13 years
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
F&C MaximumIncome Fund
(Apr 06-Apr 07)
Western AssetEuropean HighYield Portfolios
(internal)(Jun 07-Jul 09)
Western AssetEuropean
Leverage LoanFund (internal)(Oct 07-Jul 09)
Swisscanto (CH)InstitutionalGlobal High
YieldBond Fund(Jan 10 - to date)
Swisscanto (LU)Bond Invest ShortDuration GlobalHigh Yield Fund(Jan 11 - to date)
Consistent & Solid Track Record of Alpha Generation
950bps
1080bps
325bps 327bps
Before fees & expenses
462bps
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Swisscanto – High Yield Team
Roland Hausheer Senior Portfolio Manger Roland Hausheer, (1973), lic. oec. et lic. iur. HSG, is a Director and member of the Senior Management. As a senior portfolio manager within the high yield team he covers the airlines, energy and transportation sectors. Roland began his career in the financial industry as credit analyst at RMF Investment Management, Pfaeffikon (SZ) and London. Prior to that, Roland was part of the Global Proprietary Trading team at Credit Suisse, London and as Credit Analyst/Portfolio manager responsible for trading fundamental credit strategies in both high yield and investment grade names.
Joined Swisscanto: 2011 Professional experience: 10 years
Ju Lee, Ph.D Senior High Yield Portfolio Manger
Ju Lee (1970), Masters in finance and Ph.D at HEC Geneva, is a Director and for Swisscanto (CH) Insititutional Bond Fund-Global High Yield and Swisscanto (LU) Bond Invest Global High Yield. She covers sectors of chemicals, metals & mining, papers and building materials.
Prior joining Swisscanto, she was a senior financial analyst at Lombard Odier covering cyclical and defensive sectors. She also acquired a robust financial expertise at Capital Group Companies and Arthur Andersen as a research associate and auditor respectively. Various sectors covered are chemicals, utilities, E&P infrastructure, medical technology, auto & auto parts, beverages, insurance and media.
.Joined Swisscanto: 2012 Professional experience: 15 years
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High Yield at Swisscanto Now a Top Quartile High-Yield Manager By Assets In Europe
High Yield AuM’s more than tripled since January 2010 --- Committed & Growing Set of Investors
High Yield AUM ($m) at Swisscanto
$475.0
$290.0
$370.0
$0
$200
$400
$600
$800
$1'000
$1'200
$1'400
June 2007 June 2008 June 2009 June 2010 Aug 2012
Swisscanto (CH) Institutional Bond Fund - Global High Yield I
Swisscanto (LU) - Short Duration Global High Yield H
High Yield Investments in Credit/Absolute Return Funds
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© Swisscanto Asset Management AG
Agenda
1. High Yield at Swisscanto
2. The Case for Short Duration Global High Yield
3. Investment Process
4. Product(s) and Performance
5. Appendix – The Case for Global High Yield
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Case for Short Duration High Yield
Key Investment Highlights: • Significantly reduces exposure to interest rate risk;
• Significantly reduces volatility;
• The sub-asset class makes an excellent substitute vs equities;
• Significantly lowers credit risk;
• Forms a strong alternative vs the leverage loan asset class/funds;
Swisscanto is Currently the Only Provider for a Global High Yield Short Duration Fund
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Investment Rationale - Short Duration High Yield Currently Generates 55%-60% of Volatility, but Investors Realise 85% of the Regular High Yield
Short Duration High-Yield offers an Exceptional Risk Reward
Stabile Phase
X
Regular High Yield Generates 50% Volatility for Similar Returns as Equities
Short Duration High Yield Generates 60% Volatility for 85% of The Regular Yield – In Other Terms Short
Duration High Yield Generates a Quarter of Volatility for 85% of Historical Equities Returns
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Investment Rationale - Asset class performance during recent periods of market stress
Merril Lynch Benchmark Indices data as of the 30th September 2012
Benchmark Credit ratings
Benchmark Duration
Benchmark Spread
Benchmark Yield
Aug-Oct 2011
sell-off Systemic
crisis returns
March 2011 (Fukushima
, rising treasuires,
ME uprising)
May 2010 (European peripheral
crisis)
FY 2008 (peak of systemic
crisis)
SWC Glb High Yield (Q432)
SWC Global Short Duration high-yield (Q471)
Global IG (G0BC)
Sub Financial (Q510)
Global EM (IM00)
Equities (S&P 500)
B+
B+
A-
BBB-
BB-
n.a.
4.1yrs
1.85 yrs
5.8 yrs
4.9 yrs
5.8 yrs
620 bps
525 bps
175 bps
760 bps
580 bps
7.20%
6.20%
2.80%
8.50%
6.90%
2.1%
(div yield)
-11.8%
-6.8%
-1.6%
-21%
-8.5%
-22%
-0.34%
+0.24%
-0.12%
+0.64%
+1.70%
-0.15%
(intra month
-6%)
-3.23%
-1.44%
-0.39%
-2.95%
-2.62%
-8.25%
(intra month -18%)
-28.6%
-13.1%
-4.9%
-25.7%
-19.0%
-39.1%
Only in a systemic crisis, investors are at risk of significant underperformance
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Source: J.P. Morgan; S&P/LCD
Investment Rationale – Short Duration High Yield versus Interest Rate Sensitive Asset Classes
High Yield serves as a strong hedge against rising treasury yields
Short Duration High Yield’s negative correlation to interest rates would be at least similar to leveraged loans
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Investment Rationale - Lower Credit Risk – A Case of Temporal Seniority
Despite MGM’s low credit ratings of B3/CCC+, this is not reflective of the group’s adequate liquidity profile to refinance its Short Term Obligations (We Hold the 10.375% May 2014 secured bonds)
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Investment Rationale - Short Duration Global High Yield vs Leverage Loans
Key data points as at 30th September 2012 Swisscanto Short Duration Global High Yield Benchmark
US Leverage Loans Index
Income 7.35% 4.25%
Yield 6.20% 5.9%
Final maturity <=2.0 years 4.9 years
Credit Spread Duration 1.9 yrs 3.75 yrs
Spread vs Treasury 520bps 550 bps
Leverage 3.8x 4.3x
Average issuer ratings BB- B
Average issue (Benchmark Credit Ratings) B+ B+
Interest Rate Risk low none (FRN structure)
Liquidity (bid/offer) 1.5pts 2.0pts
A. 12 mths Total return expectations (30.09.12) Approx 6.125% Approx 4.25%
B. Default rate consensus (for next 2 years) 3.0% 2.5%
C. Recovery rate 40% 70%
D. Default loss (B x (100%-C)) 1.8% 0.75%
Total return after default loss (A-D) Approx 4.375% approx 3.5%
Short Duration High-Yield offers a strong alternative to Leverage Loans
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Investment Rationale – High Yield Fundamentals In Far Better Shape, Despite an on-going EU Zone Recession
• Corporate balance sheets are in solid shape, cash to debt ratios well above average
• Cash levels can cover all debt maturities for 2012, however from H2 2013 - 2015 a maturity wall does exist in Europe
• Fundamental Picture amongst US High Yield Corporates remains solid
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• High Yield issuers credit quality still improving upgrades still outpacing downgrades • Stress levels in covenants are very low compared to prior recessions
Investment Rationale: High Yield Fundamentals in Far Better Shape, despite an on-going EU Zone Recession
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S&P, Moody’s and the market forecasts 2012 defaults approx 2%-2.5% & recoveries at 40%
Default Outlook: Swisscanto’s Conservative Outlook
Source: Swisscanto
Inverse Correlation of Defaults and Recoveries
1.5%
3.9% 4.0%
10.4%
18.2%
5.5%
1.4% 2.4%
0.7% 0.6%
7.3%
12.7%
0.7% 0% 2%
4% 6%
8% 10%
12% 14%
16% 18%
20%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 0%
10%
20%
30%
40%
50%
60%
Aggregate Default Rate (LHS) Aggregate recovery (RHS)
1.7%
4.0%
market estimates default Rates circa 2%-2.5% at recovery of 40%
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However Draghi's Inspired Rally Limits the Asset Classes Spread Tightening Potential
Swisscanto Forecasts Fair Value for Short Duration high yield market approx 500bps-550bps
What Swisscanto short duration global high yield customised benchmark spread implies for future default rates:
Actual Spread - Excess Spread* Default loss par- recovery rate Default Rate 525 bps - 250 bps = 275 bps / (100%-40%) = 4.6%
Lets assume conservatively a recovery rate of 35% and a 4% default rate, our spread forecast: Default Rate x par-recovery rate = Default loss + Excess Spread* Forecast
4.0% x (100% - 35%) = 260 bps + 250 bps = 510 bps
*as of 30th September 2012 *Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps (For Regular High Yield)
*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps (For Regular High Yield) *as of 30th September 2012
At present our strategy offers a spread carry of 660bps, hence significant tightening potential
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Does it? Can High Yield Tighten from Hereon? The old Cliché with a Twist…Don’t Fight the FED, Don’t Fight the ECB & Don’t Fight The Flow
So Long as Flows Remain Positive, Markets Will Continue to Overshoot
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But For How Long? ECB's Recent Proposals… Draghhing Along
Its not different this time: • ECB's proposals DO NOT help in Capital
Raising for Banks;
• Defacto will involve greater austerity and hence execution risks;
• Will not resolve the impaired credit lending transmission mechanism;
• Significant tail risks to Spain's credit ratings being downgraded to junk in the next 6 months;
• Probable Greek Exit in 2013;
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Spread Tightening Potential for Short Duration High-Yield Assessed From a Volatility Perspective
• With shorter business cycles and a prevailing debt crisis volatility likely to remain elevated for the medium term;
• We assume an average VIX level of mid-20's
over the coming years on an average basis;
• Taking into account Short Duration High Yield sub-asset class generating 55%-60% lower volatility than regular high-yield, minimum excess spread investors should be compensated for conservatively is circa 250bps range;
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Source: Swisscanto
Total Return Forecast for 12 months
Running income unhedged (September 30th 2012 onwards) 6.20% Swisscanto short duration HY benchmark Yield
Hedging costs + yield differential -0.25% Interest rate differential + hedging transaction costs of 12bps p.a.
Current Positive carry over benchmark +1.40% Typically averages 100 bps + benchmark
Running income EUR hedged 7.35%
Expected impact of change in 2yr treasury yields -0.20% Assume 2 year treasury/bunds yields rise a
further 10 bps (0.25% on wt average)
Expected impact of change in spreads +0.90% That is 50bps tightening of portfolio x duration of the benchmark (1.85 yrs) to 610 bps
Expected return before fees 8.00%
We Forecast Our Short Duration High Yield Fund Generating Total Returns of circa 8% p.a. (EUR hedged) During The Next 12 Months
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Agenda
1. High Yield at Swisscanto
2. The Case for Short Duration Global High Yield
3. Investment Process
4. Product(s) and Performance
5. Appendix – The Case for Global High Yield
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High Yield Investment Process – An Integrated Approach
Equal emphasis applied to Top Down and Bottom up Process
Portfolio Constructionapprox. 100 issuers
50%Credit
Analysis
50%Beta
Analysis
• High Yield Team are members & contributors to the Credit, Equity & Alternative Investment Tracks • Objective of these tracks is to gauge "Risk-off" & "Risk-on" nature of the market • Opinions and conclusion reached aren't necessarily binding, as nature of the asset class would demand a varying Portfolio Strategy implemented by Lead PM • Bottom up emphasis of 50% does not imply 50% time spent on bottom up process, almost 80% of time consumed by High Yield team is on stock selection & trade idea generation;
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• Apart from the Macro strategy, the high-yield team are contributors within the alpha tracks for the credit, sector, equity and alternative investments strategy(s)
• Pragmatic and systematic
Credit Beta
• In-depth Credit analysis
• Relative Value Analysis
• Challenged by co-manager, and sector specialist from Investment Grade side during daily and weekly reviews
• Decisions are immediately binding for HY portfolio & Investment grade PM’s holding High Yield bonds
• Systematic documentation
High Yield Investment Process – An integrated approach
Simple, Systematic and Replicable
Ratification
• Solid platform • Best execution via trading
desk
Execution
Bottom up Analysis & Portfolio
Construction
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High Yield Issuer Analysis An equal emphasis on bottom-up process
Experience managing leverage Reporting style – transparency, accessibility Quality and depth of experience
Free cash flow (FCF) generation (EBITDA – cash interest- taxes- working capital adjustments- capital expenditures-dividends; (FCF/Sales, FCF total debt), net debt to EBITDA, Interest cover ratios Liquidity and covenant analysis (average debt maturity, borrowing capacity, headroom within Covenants, bondholder protection Seniority of debt
Across capital structure, (loans, senior secured, senior sub, sub, holdco etc Compare value vs market and vs peers, convexity of the bond Analysing default probabilities via assessing Compensation per turn of leverage & implied equity cushion Fundamental rating (analog rating agencies) - Trading recommendations (over-/underweight).
In Depth & Traditional Credit Analysis
Relative competitive position Key profitability drivers Cyclicality of business
Calculate asset values based on total enterprise value (TEV) to EBITDA, its comparability with to public comparables, near term market transactions
Management
Company Analysis
Financial Profile
Asset Valuation
Relative Value Analysis
Portfolio Surveillance – Adequate Resources to Systematically Cover 130-140 Issuers
Global High Yield fund: 84 High Yield 13 Investment Grade Short Duration Global High Yield: 72 High Yield 10 Investment Grade Total High Yield Issuers: 96 Significant Overlap Total Investment Grade Issuers: 16 Significant Overlap Total Issuers: 112 HY and IG Issuers
Ju Lee: 35-40 HY issuers (Basic Industries, Capital Goods,
Commodities & Building Materials )
S.O. Saeed: 30 HY issuers (TMT, Cyclical Consumer & Services,
& Packaging)
Roland Hausheer: 35-40 Issuers (Energy, Airlines, Transportation, HY
Autos)
Investment Grade & Xover Coverage Stefan Eichenberger (autos): 5 (Xover Issuers) Blaise Roduit Pharma/Consumer Staple): 4 (Xover Issues) Jerome Benathan (Energy & Telecoms): 6 (IG/Xover Issuers) Daniel Bjork (IG Financials): 13 (IG/Xover Issuers) Total Issuer Coverage: 28 (25% of issuers)
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Investment Process: Sell discipline an Absolute Key
Relative Value Target
Revised credit opinion
• Valuation of bond, meets or exceeds our fair value target
• And/or the credit risk associated with holding a bond is no longer compensating for the expected returns ; − for e.g. entire CCC overweight sold on April 21st 2010 (5 days prior to the recent market sell-off relating to
soverign debt fears); − During May-July 2011 we built upto c19% cash and government bonds, anticipating a sell-off
• Analyst/PM changes his original premise that effects our fundamental valuation
We outperformed the benchmark 4 out of 6 times during periods of market stress
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Investment Process: Strong Sell Discipline Evidenced by Outperformance during times of Market Stress
Strong Investment Process Ensures Greater Consistency in Outperformance during Periods of "Risk-off"
+7bps -58bps
-47bps
+22bps
+96bps
* Before fees & expenses * Before fees & expenses
25.00%
26.00%
27.00%
28.00%
29.00%
30.00%
31.00%
Benchmark (CHF 100%hedged)
Swisscanto CH Inst GlobalHigh Yield Fund
Cumulative Outperformance
Alpha
+325bps
-4.00%
-3.50%
-3.00%
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
Feb 10 May 2010 Nov 10 Mar 2011 July-Oct2011
Apr-Jun12
Benchmark (CHF 100% hedged) Swisscanto CH Inst Global High Yield Fund
+15bps
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Investment Process: Consistent Implementation of Strategy Portfolio Positioning Since April 2012
Lowered duration, increased cash levels , improved credit ratings and increased allocations to secured bonds
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Portfolio Construction
• Optimal diversification – we target issuers concentration at about 100 issuers (+/- 10) with High Yield accounting for 85 names (+/- 10) with the remainder comprising of top 15 (+/- 5) picks in the investment grade space
• Allocate 5%-7% of portfolio for tactical capital structure and relative value arbitrage trades on a monthly basis
• Consistent implementation of the macro- and credit-strategy
• Neutral positioning of currencies
• Efficient implementation through state-of-the-art tools
• Cost-efficient execution of trades through own execution desk
Optimal Diversification, Consistent and Efficient Implementation
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Agenda
1. High Yield at Swisscanto
2. The Case for Short Duration Global High Yield
3. Investment Process
4. Product(s) and Performance
5. Appendix – The Case For Global High Yield
Swisscanto (CH) Institutional Bond Fund - Global High Yield I (Global High Yield Fund)
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Swisscanto (CH) Institutional Bond Fund - Global High Yield I Product Strategy
• Actively managed and well-diversified multi-currency global high-yield bond fund • No Leverage • Fully hedged in CHF • Benchmark: Customized Global High Yield Benchmark: 66.67% Merril Lynch
European currency 2% constrained , excluding financials + 33.33% Merril Lynch US HY 2% constrained, excluding financials
• Merrill Lynch Global Corp. hedged in CHF (Q432) from 01.02.2010 • Minimum average ratings allowed : B-/B3 • Min. 85% invested in high yield bonds (non-sovereign and non-government issuers) • Maximal bond weight: Weight in the benchmark index + max 3.0% (max 1% if
rated CCC and below) • ISIN:CH0030955865 • Tracking Error ex ante <3%-4%
• Benchmark: Customized Global High Yield Benchmark: 66.67% Merril Lynch European currency 2% constrained, excluding financials + 33.33% Merril Lynch US HY 2% constrained, excluding financials
• Merrill Lynch Global High Yield hedged in CHF (Q432) from 01.02.2010 • Actively managed and well-diversified multi-currency Global High Yield bond fund
• Minimum average ratings allowed : B-/B3
• Min. 85% invested in High Yield bonds (non-sovereign and non-government issuers)
• Maximal bond weight:
Weight in the benchmark index + max 3.0% (max 1% if rated CCC and below)
• Tracking Error ex ante <3%-4%
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Performance – Remains Comfortably Top Decile (in local currency terms) versus peers
Minimum 10.7% is the cumulative
differential in interest rates & hedging costs
b/w CHF & USD
Implying Our Returns Ahead of
Lipper leader
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© Swisscanto Asset Management AG
Performance –Performance vs Relevant European Peers (in LC terms), Since Takeover
Minimum 3.0% Cumulative
interest rate & hedging cost difference b/w CHF & EUR
& GBP
Implying we Rank #2
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
01.0
2.20
10
01.0
4.20
10
01.0
6.20
10
01.0
8.20
10
01.1
0.20
10
01.1
2.20
10
01.0
2.20
11
01.0
4.20
11
01.0
6.20
11
01.0
8.20
11
01.1
0.20
11
01.1
2.20
11
01.0
2.20
12
01.0
4.20
12
01.0
6.20
12
01.0
8.20
12
High Yield - Total Return Profile
SWISSCANTO CH INS BD-GL HY-J ALLIANZ EURO HIGH YIELD-C ABERDEEN GL-SL EURO HY BD-A2 PICTET-EUR HIGH YIELD-P
UBS LUX BOND FUND-EU HI YD-P BLUEBAY-HIGH YIELD BOND-B€ NEWTON GLBL HI YLD BD-£-INC F&C MAXIMUM INCOME BD-1-INC
ING L RENTA-GL HI YLD-PC€H HSBC GIF-EURO H/Y BOND-IC ROBECO HIGH YLD BD-E€ KAMES HIGH YIELD GLOBL BD-A€
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Swisscanto (CH) Institutional Bond Fund - Global High Yield I Consistent Investment Style and Strategy
• Better than benchmark credit ratings in our fund: Fund BB- vs Benchmark B+
• Shorter duration than the benchmark, 0.4yrs-0.5yrs, allowing to reduce volatility & retain pull to par feature
• Retain a greater security and recovery profile for our fund. The benchmark consists of 30% secured bonds, we maintain circa 41% secured bonds (exceeding our 35%-40% targeted range)
• Retain NO active exposure to toxic & illiquid high yield rated financial tier-1 securities
• Retain a running yield of approx 50bps-75bps above the benchmark coupon of 7.65% we plan to maintain this level, implying a cumulative income of approx 8.5% on a cumulative basis (unhedged);
• Strong Information ratio of >0.5 (before costs)
Higher Quality, Higher Carry, High Security & Yet Market Beating Performance
7th October, 2012 Key Portfolio Statistics Global High Yield Benchmark Cash 7.30% 0.00% Investment Grade 8.10% 0.00% BB 27.80% 49.00% B 44.50% 37.50% CCC+/CCC 12.30% 13.50% Average Credit ratings BB- B+ Average Duration Maturity 3.53yrs 4.17yrs Average Yield to Maturity 8.20% 7.20% Par weighted coupon 8.22% 7.67% Secured bonds 40.70% 31.50% Cumulative Performance** 30.11% 26.86% Tracking ex-Post (ex-ante) 2.25% (1.1%) **since internal implementation of new benchmark internally 1st feb 2010 & before costs, fees,
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Swisscanto (CH) Institutional Bond Fund - Global High Yield I Key Sector Positioning
• Emphasis still primarily based upon issuer selection and bottom-up analysis
• Overweight TMT, Transport, Consumer & Services cyclical, Paper & Packaging, Building Materials & IG subordinated (Tier-1, UT2, LT2) financials with short calls (<=2 years)
• Retain underweight Energy & Utilities, Basic Industries, Real Estate, Housing & construction sectors
• Current emerging markets exposure (on a commercial basis) of approx 20%, (main exposures to South Africa, Latin America, Russia, China/HK,)
Paper & Forestry; 4.7% Investment Grade
Financials; 5.0%
Chemicals; 3.3%
Utilities; 1.7%
Healthcare; 5.2%
Real Estate; 0.0%
Automotive; 3.9%
Energy; 4.6%
Cyclical services; 8.5%
Consumer Staples; 4.7%
Telecoms; 15.5%
Media; 2.8%
Technology; 2.5%
Transport; 6.9%
Machinery; 2.7%
Building Materials; 8.0%
Packaging; 2.5%
Metals & Mining; 1.9%
Aerospace & Defense; 1.5%
Retailers; 6.6%
Sector Breakdown
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Swisscanto (CH) Institutional Bond Fund - Global High Yield I Key Data
Name Swisscanto (CH) Institutional Bond Fund - Global High Yield I
Currencies CHF (global portfolio all currencies are hedged)
Tranches I (Institutional)
Security number 3095586
ISIN CH0030955865
Domicile Switzerland
Distribution Distributing
Registration CH
All-in fee 0.80% p.a.
Swisscanto (LU) Bond Invest Short Duration Global High Yield H CHF/EUR/USD B and J
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Swisscanto (LU) Short Duration Global High Yield H Key Investment Guidelines Name Swisscanto (LU) Bond Invest Global High Yield H (Short Duration)
Portfolio Final Maturity 3 years – 4years (Current 2.3years)
Total Single Positions Max 10% > 4 years
Portfolio (credit) spread duration Benchmark 1.9years +/- 0.5years and <2.5 years
Portfolio Instruments Fixed & Floating rate notes + CDS
Target Issuers Minimum 70 issuers
Reference Index 50% Merril Lynch US HY (1-3 year) + 50% Merril Lynch EU HY (1-3 year), ex-financials
Current Yield to Maturity 7.6% (dynamic)
Average Credit Ratings Strictly maintained minimum BB- (Benchmark B+) Per Issuer BB & B max 5% Per Issuer >CCC max 2.5%
Secured Bonds Exposure >30% of portfolio
Sectors Max weight per sector 20% Max weight Financials 10% (incl: Max weight subordinated financials 5%)
Risk Tracking error ex ante >3%-4% ex-post (4%-5%)
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Swisscanto (LU) Short Duration Global High Yield H Consistent Investment Style & Strategy 7th October, 2012 Key Portfolio Statistics Short Duration High Yield Fund Benchmark Cash (CDS adjusted) (+8.30%) 0.00% Investment Grade 7.00% 0.00% BB 28.00% 56.20% B 48.30% 31.00% CCC 8.40% 12.80% Average Credit Ratings BB- B+ Credit Spread Duration (Maturity) 1.86yrs 1.89yrs Average Yield to Maturity 7.60% 6.20% Secured bonds 41.0% 20.80% EU High Yield 39.0% 50.0% US High Yield 61.0% 50.0% Total Positions 115 275 Cumulative Performance* 12.39% 9.13% CHF J *H initiated 31st January 2011 before fees, hedging costs
Higher Quality, Higher Carry & High Security Yet Market Beating Performance
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© Swisscanto Asset Management AG
Swisscanto (LU) Short Duration Global High Yield H Pull to Par Effect – "Hard-Wired" Commitment to Lower Credit Spread Duration to 1.5yrs from 1.8yrs by YE 2012
Pull to Par effect to become very strong in the next 6 months;
Investors entering in the strategy now, are effectively entering the sweet-spot of the portfolio --- >80% of portfolio will have a duration less than 2 years over the next 2 quarters;
Volatility in the fund is likely to decrease further and the highest yield amongst peers of 7.6% will allow superior risk adjusted returns;
Focus is to maintain our superior track record of ZERO defaults and ZERO near defaults;
Investors Taking Exposure Now Are Entering The Sweet Spot of the Portfolio
*As at October 7th 2012
29.1%
28.8%
17.2%
9.7%
15.2% Credit Spread Duration <1year (incl Cash/CDS)
Credit Spread Duration 1-2years
Credit Spread Duration 2-2.5 years
Credit Spread Duration 2.5-3 years
Credit Spread Duration >3years
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Swisscanto (LU) Short Duration Global High Yield H Sector Diversification -
Key Highlights:
Portfolio consists of 86 issuers, diversified in 15 sectors;
51% of sector positioning is defensive;
Financial subordinated issues exposure
well below the max 5% limit;
No sector exposure beyond 20%
Financials - Subordinated; 3.00%
Financials - Senior ; 1.80%
Real Estate; 0.80%
Paper & Forestry; 4.20%
Chemcials; 2.40%
Metals & Minings;
2.70%
Packaging; 0.25%
Building Materials; 8.30%
Machiney; 2.00%
Auto; 6.60%
Pharma/HealthCare; 13.60%
Retailers; 5.30%
Consumer Staples; 3.10%
Energy & Utilities; 5.90%
Telecom/Media; 12.70%
Transport; 8.80%
Cyclical Services; 10.25%
Cash (CDS adjusted); 8.30%
43
© Swisscanto Asset Management AG
Swisscanto (LU) Short Duration Global High Yield H Global Strategy & Expertise Allows For us to Efficiently Invest Across Geographic Areas;
US High Yield 57%
EU High Yield 43%
US High
Yield ; 45%
EU High Yield; 55%
Sovereign related stress & recession in peripheral Europe = underweight EU
Geographic Strategy at Launch (31st January 2011)
Geographic Strategy (Dec 2011 – March 2012)
Geographic Strategy at Present (May – September 30th 2012)
Prior to LTRO1 program implementation, on the 19th December 2011, we cut our entire overweight in US HY and moved overweight in EU HY
Since April 2012 , tight valuations and profit taking on EU short duration high-yield positions , move back to underweight EU
US High
Yield ; 61%
EU High Yield; 39%
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© Swisscanto Asset Management AG
Swisscanto (LU) Short Duration Global High Yield H Performance vs Peers Present at Launch
Maintain zero exposure in GIP, , significant underweight in peripheral Europe (companies earnings range 15%-28% on domestic regions), zero defaults & zero near defaults in our portfolio Relative underperformance during stress period purely due to differences in product & geographic area of focus (peers are focusing on >B and 100% US HY short duration benchmarks;
-10%
-5%
0%
5%
10%
15%
14.0
2.20
11
14.0
4.20
11
14.0
6.20
11
14.0
8.20
11
14.1
0.20
11
14.1
2.20
11
14.0
2.20
12
14.0
4.20
12
14.0
6.20
12
14.0
8.20
12
Swisscanto Short Duration High Yield vs Peers (Euro (Inst) Tranche)
SWISSCANTO LU BD-GL H/Y-H€J AXA IM FIIS-US SH DUR HY-EH€ MUZINICH SHORT DUR HG YD-H€A PETERCAM L-BONDS EUR HY ST-F UBS LUX-SH DUR H/Y $-€HPA WFA SHRT TRM HI YLD-INV
45
© Swisscanto Asset Management AG
Swisscanto (LU) Short Duration Global High Yield H Superior Alpha Generation versus Peers
Substantiates our Superior Alpha Generation Capacity versus Competitors Globally 100% of our investments reported earnings better than and/or in line earnings results during
Q1 2012, showcasing our superior stock selection capacity
* Before Fees & Expenses
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
US HY (BB-B) 1-3 year 2% Cap (EUR H) EU High Yield (ex financial) 2% Cap (EURH)
Swisscanto Short Duration HYBenchmark (ex-financial) 2% cap (EUR H)
Swisscanto Global HY Short DurationFUND (EUR J Tranche H)
+318bps vs BM
46
© Swisscanto Asset Management AG
Swisscanto (LU) Short Duration Global High Yield H Quality of Excess Performance
Information ratio as per tracking error ex-post is circa 0.50
Tracking error ex-post within stipulated >3%-<4% range
* Before Fees & Expenses
Tracking Error Decomposition ex-ante* ex-post** Tracking Error 1.1 3.77 Forex 8% Duration 17% Spread 75% * Migration to Risk Metrics IV effective 1st October 2012 ** valid till 30.09.2012 since inception
47
© Swisscanto Asset Management AG
Swisscanto (LU) Bond Invest Short Duration Global High Yield H Performance vs More Recent & European Short Duration Peers
-10%
-5%
0%
5%
10%
15%
09.0
3.20
11
09.0
5.20
11
09.0
7.20
11
09.0
9.20
11
09.1
1.20
11
09.0
1.20
12
09.0
3.20
12
09.0
5.20
12
09.0
7.20
12
09.0
9.20
12
Swisscanto Short Duration High Yield vs Nordea Short Duration High Yield
SWISSCANTO LU BD-GL H/Y-H€J NORDEA 1 LOW DUR US HY-HBI€
-15%
-10%
-5%
0%
5%
10%
15%
29.0
7.20
11
29.0
9.20
11
29.1
1.20
11
29.0
1.20
12
29.0
3.20
12
29.0
5.20
12
29.0
7.20
12
29.0
9.20
12
Swisscanto Short Duration High Yield vs WLB Short Duration (Euro (Inst) Tranche)
SWISSCANTO LU BD-GL H/Y-H€J WESTLB-EUR CRED SH DUR-RF-B
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
01.0
2.20
12
01.0
4.20
12
01.0
6.20
12
01.0
8.20
12
01.1
0.20
12
Swisscanto Short Duration High Yield vs Pictet EUR Short Term (Euro (Inst) Tranche)
SWISSCANTO LU BD-GL H/Y-H€J PICTET-EUR SHRTRM HI YLD-P
-10%
-5%
0%
5%
10%
15%
20%
19.0
8.20
11
19.1
0.20
11
19.1
2.20
11
19.0
2.20
12
19.0
4.20
12
19.0
6.20
12
19.0
8.20
12
Swisscanto Short Duration High Yield vs Axa EUR Short Duration High-Yield
SWISSCANTO LU BD-GL H/Y-H€J AXA IM FIIS-EUR SH DUR H-B€I
48
© Swisscanto Asset Management AG
…Spread tightening assessed
Swisscanto Forecasts Fair Value for Short Duration high yield market approx 500bps-550bps
What Swisscanto short duration global high yield customised benchmark spread implies for future default rates:
Actual Spread - Excess Spread* Default loss par- recovery rate Default Rate 525 bps - 250 bps = 275 bps / (100%-40%) = 4.6%
Lets assume conservatively a recovery rate of 35% and a 4% default rate, our spread forecast: Default Rate x par-recovery rate = Default loss + Excess Spread* Forecast
4.0% x (100% - 35%) = 260 bps + 250 bps = 510 bps
*as of 30th September 2012 *Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps (For Regular High Yield)
*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps (For Regular High Yield) *as of 30th September 2012
At present our strategy offers a spread carry of 660bps, hence significant tightening potential
49
© Swisscanto Asset Management AG
Source: Swisscanto
Total Return Forecast for 12 months
Running income unhedged (September 30th 2012 onwards) 6.20% Swisscanto short duration HY benchmark Yield
Hedging costs + yield differential -0.25% Interest rate differential + hedging transaction costs of 12bps p.a.
Current Positive carry over benchmark +1.40% Typically averages 100 bps + benchmark
Running income EUR hedged 7.35%
Expected impact of change in 2yr treasury yields -0.20% Assume 2 year treasury/bunds yields rise a
further 10 bps (0.25% on wt average)
Expected impact of change in spreads +0.90% That is 50bps tightening of portfolio x duration of the benchmark (1.85 yrs) to 610 bps
Expected return before fees 8.00%
We Forecast Our Short Duration High Yield Fund Generating Total Returns of circa 8% p.a. (EUR hedged) During The Next 12 Months
50
© Swisscanto Asset Management AG
Why Swisscanto High Yield?
• Swisscanto has transformed into a Top Quartile High Yield Manager in Europe AUM wise and Top Quartile Globally Performance wise;
• Experienced Manager with a strong track record of consistent alpha generation --- lead manager's solid track record of generating only 1 default and 1 near default in 13 years;
• A well diversified portfolio a result of a implementing a strong investment process;
• Portfolio Strategy geared towards consistently maintaining higher quality, higher carry, higher security bias, and still generate higher returns than its benchmark;
An Unrivalled Investment Philosphy and Product Strategy at Present
51
© Swisscanto
Swisscanto (LU) Short Duration Global High Yield H Key Data
Name Swisscanto (LU) Bond Invest Global High Yield H
Currencies CHF / EUR / USD (global portfolio all currencies are hedged)
Tranches B (Retail) J (Institutional)
Security number H CHF B: 11963041 H CHF J: 12353466 H EUR B: 11963062 H EUR J: 12353467 H USD B: 12353464 H USD J: 12353468
ISIN H CHF B: LU0556184884 H CHF J: LU0582724935 H EUR B: LU0556185345 H EUR J: LU0582725072 H EUR A: LU0830970272 H EUR I :LU0830970603 H USD B: LU0582725312 H USD J: LU0582725403
Domicile Luxemburg
Distribution Reinvesting
Registration CH, FL, D, A, LUX
All-in fee B-Tranche: 1.30% p.a. / J-Tranche: 0.80% p.a.
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© Swisscanto Asset Management AG
Agenda
1. High Yield at Swisscanto
2. The Case for Short Duration Global High Yield
3. Investment Process
4. Product(s) and Performance
5. Appendix – The Case For Global High Yield
53
© Swisscanto Asset Management AG
High Yield versus Equities
Source: Barclays, J.P. Morgan, S&P/LCD
6 Market Crisis and 27 years on, High Yield asset class has experienced 5 negative returns only
9.7
25.6
17.4
5.0
12.5
0.8
-9.6
46.2
15.7 17.1
-1.0
19.2
11.4 12.8
1.9 2.4
-5.9
5.3
-1.4
29.0
11.1
2.7
11.9
1.9
15.1
3.0
Even after big gains, returns historically remain healthy in subsequent years
Stabile Phase Stabile Phase Stabile Phase
84‘ 85‘ 86‘ 87‘ 89‘ 91‘ 93‘ 92‘ 00‘ 98‘ 97‘ 96‘ 95‘ 94‘ 04‘ 03‘ 02‘ 01‘ 99‘ 90‘ 05‘ 06‘ 07‘ 08‘ 10‘ 88‘ 09‘
Stabile Phase
10.5%
11'‘
54
© Swisscanto Asset Management AG
….and returns have been generated with significantly lower volatility
An efficient portfolio should have consistently higher allocations to the High Yield asset class
Realized returns
Standard Deviation (Risk) 0.0 22.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0
-7.0
8.0
-6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
GOBC CHF hedged HPIC1 CHF hedged
JCNF CHF hedged
Cust Aktien Schweiz
Hedged MSCI North America Hdg USD
Hedged MSCI UK GBP Hedged MSCI EMU EUR
Hedged Russell 2000 TR USD
Cust High Yield SW BM
At 35% exposure to Swisscanto’s customised High Yield benchmark allows credit only or credit/equity portfolios to maximize the sharpe ratio of the fund and boost weighted total returns by 50bps
100% Global Investment Grade
JCNF is US HY HPIC1 is EUR HY
Source: Swisscanto
55
© Swisscanto Asset Management AG
High-Yield versus Equities, Similar Returns at 50% Volatility
High-Yield offers an Attractive Risk Reward
Stabile Phase
56
© Swisscanto Asset Management AG
Source: J.P. Morgan; S&P/LCD
High Yield versus Interest Rate Sensitive Products
High Yield Serves as a Hedge against Rising Treasury yields
57
© Swisscanto Asset Management AG
High Yield versus Investment Grade
High Yield performs well versus Investment Grade in a rising rate environment
12 months ending 10 Year Treasury yield move High Yield bonds total returns (CHF hedged)
Investment-grade bonds total returns (CHF hedged)
Sep 87
Feb 89
Dec 1994
Dec 1999
May 2004
Jun 06
Sep 10- Apr 2011
220 bps
117 bps
204 bps
179 bps
130 bps
120 bps
approx 90bps
3.93%
6.87%
-0.19%
-1.58%
11.65%
2.80%
5.35%
-3.74%
0.97%
-2.74%
-5.67%
1.49%
-4.80%
-1.05%
High Yield has Consistently Outperformed Investment Grade Over the Past 6 cycles of Treasury Yield Increases
Source: Swisscanto, Bloomberg, Merril Lynch
during the past 25 years High Yield has out-performed investment grade bonds in each treasury rate hike cycle by 630bps on a CHF hedged basis
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© Swisscanto Asset Management AG
Lending Standards a Primary Indicator for Default Outlook Looser Lending Conditions to Keep a Lid on Default Rates
Central Banks Globally via Respective Liquidity Programs to Aid Lending Standards Continue to Improve & Corporate Defaults Remain Low
-40
-20
0
20
40
60
80
100
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
99 00 01 02 03 04 05 06 07 08 09 10 11 12
US_Spec Europe_Spec C&I Loans, Large and Medium (RHA)
Default Rates (%) Net Tightening to Large/Medium
Corporates
59
© Swisscanto Asset Management AG
Outlook for Recoveries – Strong Correlation to ISM Index
Global ISM Data to Remain Soft or sub 50 Level Corresponding to Recovery Values Ranging 35%-40%
0
10
20
30
40
50
60
70
30
35
40
45
50
55
60
65
Jun 97 Jun 99 Jun 01 Jun 03 Jun 05 Jun 07 Jun 09 Jun 11
ISM Manufacturing (LHS)
Recovery Rate (%) (Lagged 6m, RHS)
10
20
30
40
50
60
70
30 35 40 45 50 55 60 65
Rec
over
y R
ate
(%)
ISM Manufacturing
60
© Swisscanto Asset Management AG
Source: Swisscanto
Resulting in greater protection and significantly higher and sustainable recovery rates through a default cycle
..recoveries to be further aided as corporates offer new issuances increasingly with better security packages
12% 20% 23% 26.7% 30.4% 33% 34.5%
0%
20%
40%
60%
80%
100%
120%
avg b/w 1982-2007
2008 2009 2010 2011 2012E 2013E
Unsecured Bonds Secured Bonds
$335bn $400bn $450bn
61
© Swisscanto Asset Management AG
High Yield Fundamentals In Far Better Shape, Despite an on-going EU Zone Recession
• Corporate balance sheets are in solid shape, cash to debt ratios well above average
• Cash levels can cover all debt maturities for 2012, however from H2 2013 - 2015 a maturity wall does exist in Europe
• Fundamental Picture amongst US High Yield Corporates remains solid
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© Swisscanto Asset Management AG
• High Yield issuers credit quality still improving upgrades still outpacing downgrades • Stress levels in covenants are very low compared to prior recessions
High Yield Fundamentals in Far Better Shape, despite an on-going EU Zone Recession
63
© Swisscanto Asset Management AG
Post 2009, Where do High Yield Primary Issues Stand From a Credit Quality Perspective?
High Yield issuer leverage 25% lower and proportion of CCC’s 50% lower than peak for new issues
64
© Swisscanto Asset Management AG
From a Structural Perspective?
• New issuance has secured bonds 2x higher than 2006 providing downside protection;
• Defaults will be low as excessive LBO style lending experienced during 2004-2007 did not take place since 2009, i.e. four times lower
65
© Swisscanto Asset Management AG
Expect More of the Same Over the Next 2 years
Above average primary issuance required between 2012-2013 to fund the maturity wall between 2013-2015
European Leverage Finance Market is estimated to generate yearly cash flows
(coupons & redemptions) of approx. e20bn not enough to
cover itself the refinancing needs b/w H2 2013 – H1 2016
US Leverage Finance Market no longer has a "Maturity wall"
but rather a "hump in 2014" plus yearly cash flows
(coupons + redemptions = est $120bn) more than adequate
66
© Swisscanto Asset Management AG
And be Paid a Significant New Issue Premium
67
© Swisscanto Asset Management AG
However Draghi's Inspired Rally Limits the Asset Classes Spread Tightening Potential
Swisscanto forecasts fair value for high yield spread to range between 600bps-650bps
What today’s Swisscanto global high yield customised benchmark spread implies for future default rates:
Actual Spread - Excess Spread* Default loss par- recovery rate Default Rate 620bps - 375 bps = 245 bps / (100%-40%) = 4.1%
Lets assume conservatively a recovery rate of 35% and a 4% default rate, our spread forecast: Default Rate x par-recovery rate = Default loss + Excess Spread* Forecast
4.0% x (100% - 35%) = 260 bps + 375 bps = 635 bps
*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps
*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps * Forecasts as of 30th September 2012
Our fund generates a spread carry of 720bps, reflecting a significant tightening opportunity
* Forecasts as of 30th September 2012
68
© Swisscanto Asset Management AG
A Sustainable Volatility Premia Has to Sustainably Compensate Investors
• With shorter business cycles and a prevailing debt crisis volatility likely to remain elevated for the medium term;
• We assume a VIX level average mid 20's
over the coming years on an average basis;
• Therefore, minimum excess spread investors should be compensated for should range average 350bps-420bps (2x the 26 yr historical average or 14bps of excess spread per unit of VIX)
69
© Swisscanto Asset Management AG
Best Case: We Forecast Our Medium Duration High Yield Funds Total Returns of circa 8%-9% p.a. (CHF Hedged)
Source: Swisscanto
Total Return Forecast for 12 months
Running income unhedged (September 30th, 2012 onwards) 7.20% Swisscanto customised benchmark yield
Hedging costs + yield differential -0.30% Interest rate differential + hedging transaction costs of 12 bps
Positive carry +1.00% To approximate 100 bps + BM
Running income CHF hedged 7.90%
Expected impact of change in 5-7yr treasury yields -1.60% Assume 7year bunds/US treasuries rise a further
40bps to 1.5% US treasuries
Expected impact of change in spreads +1.75% That is 50bps tightening x duration of the benchmark (3.5 yrs) to 670 bps
Expected return before fees 8.10%
Bear Case: We Forecast +2% for the next 12 months September 2012 onwards
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© Swisscanto Asset Management AG
Should High Yield be Ignored?
We call for an allocation of approximately 10% to High Yield (medium and short)
Increasing allocations by institutional & private wealth managers at the expense of govt bonds, investment grade bonds
32%
European + US High Yield (ex-financials)
8%
56%
4%
EUR + US Investment Grade
European + US Leverage loans
EUR + US Treasuries
Increasing convergence between Leverage Loans & High Yield asset classes
71
© Swisscanto Asset Management AG
Contacts
Account Management
Shahzada Omar Saeed Head of High Yield Director Waisenhausstrasse 2 CH – 8021 Zurich +41 58 344 49 11 [email protected]
Portfolio Management
72
© Swisscanto Asset Management AG
Disclaimer
This documentation is exclusively determinated for use through qualified representatives of Swisscanto. Any other use or duplication is strictly prohibited. The documentation must in no way be used as promotion material for public distribution or provided to third parts, neither direct nor indirect, without previous written approval from Swisscanto Asset Management Ltd. The representative is alone responsible for the use of the information contained in this document, particularly towards investors but also towards Swisscanto. The past performance does not represent an indicator for the evolution to come and does not constitute a guarantee for any future results. The content was researched and assembled meticulously. However, Swisscanto Asset Management Ltd. can not guarantee the accuracy, integrity or actuality of the contained data. The relative sales prospectus and annual report represent the only binding data source for the acquisition of Swisscanto investment funds. If you need further information, please send your written request to Swisscanto Asset Management Ltd., Waisenhausstrasse 2, 8021 Zurich.
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