BREAKFAST SEMINAR Breaking with tradition: why yesterdays credit - - PowerPoint PPT Presentation

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HERMES CREDIT BREAKFAST SEMINAR

Breaking with tradition: why yesterday’s credit strategies need a fresh approach today

Fraser Lundie, CFA, Co-Head and Lead Credit Portfolio Manager 5 October 2017

Hermes Credit Capabilities

People

► Skilled, integrated team whose principal members have worked together since 2004

Process

► High-conviction credit selection from a truly global universe ► ESG considerations integrated into credit selection ► Fundamental analysis identifies optimal issuer and security selection

Performance

► A track record of outperformance through market cycles

Experience, conviction, skill

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Hermes Credit

Relative value – convexity

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Source: Barclays Point as at 4 August 2017.

Yield to maturity minus yield to worst (bp) Yield to maturity minus yield to worst (bp) per currency

20 40 60 80 100 Aug 09 Jan 10 Jun 10 Nov 10 Apr 11 Sep 11 Feb 12 Jul 12 Dec 12 May 13 Oct 13 Apr 14 Sep 14 Feb 15 Jul 15 Dec 15 May 16 Oct 16 Mar 17 Aug 17 Euro GBP USD

50 100 150 200 Aug 09 Jan 10 Jun 10 Dec 10 May 11 Oct 11 Apr 12 Sep 12 Feb 13 Aug 13 Jan 14 Jun 14 Dec 14 May 15 Nov 15 Apr 16 Sep 16 Mar 17 Aug 17 BB B CCC

Risk: Recovery rate deterioration

Source: J.P. Morgan as at 31 December 2016.

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Causes:

► Commodity supercycle unwind ► Distressed buyers gone missing ► Cov light post financial crisis ► Shareholder-friendly activity

Takeaways:

► Low quality credit to struggle ► Be wary of lower quality energy ► Be wary of European High Yield

Overall default rate for High Yield issues Recovery rates for senior unsecured debt

Fewer feasible opportunities in the low quality space

0% 2% 4% 6% 8% 10% 12% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10 20 30 40 50 60 70 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Hermes Credit Breakfast Seminar | Capabilities | October 2017 | BD00760 |

Risk: Shallow market

Liquidity has clustered in large capital structures amid booming issuance

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Source: Bloomberg as at 30 June 2017.

Liquidity now at 2003 levels. In a falling market, investors unwinding positions could suffer heavy losses

200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000 $10,000 $30,000 $50,000 $70,000 $90,000 $110,000 $130,000 $150,000 $170,000 $190,000 $210,000 $230,000 $250,000 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jul-04 Jan-05 Jul-05 Jan-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 May-14 Nov-14 May-15 Nov-15 May-16 Dec-16 Jun-17 Market Value (billions) Dealer Transactions (millions) Aggregate inventory US credit securities Market size Global HY (BAML Global Non-Fin High Yield Index)

1998

Opportunity: Global issuance

What about the rest of the world?

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Source: BofA Merrill Lynch, Global High Yield Index, as at 31 August 2017.

Large companies issue bonds in various markets and currencies, providing relative-value opportunities for global investors Exploit HY and IG investment opportunities in the US, Europe and rest of the world

3% 89% 8% Europe US Rest of the world

2017

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16% 56% 28% Europe US Rest of the world

Hermes Credit

EOS

Engagement specialists QESG Scores Proprietary quantitative ESG scores Responsibility Sets ESG policies and consults with investment teams on ESG integration1

Plethora of ESG resources under one roof

Supports dynamic ESG Integration

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► Responsibility team consults credit team

• n policy and integration

► Collaboration with EOS in engagement at

highest of management and board levels − Serves to deliver holistic returns − Allows for “real-time” ESG analysis

► Internal, proprietary QESG scores allows

for pricing of ESG risks

1Source: ESG research. For illustrative purposes only.

Summary: A dynamic approach to global credit

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► Convexity opportunities exist in longer dated debt. Our approach is to maintain the widest opportunity set

combined with duration management

► Lower quality credit to struggle. We have upped credit quality across our Multi Strategy and Global High

Yield Funds to reflect this view

► Despite claims to the contrary, our view is that debt market liquidity persists but is clustered within global,

large cap issuers. Security selection within the cap structures of such issuers is the key to unlocking value

► Debt markets are becoming ever more global. Investment strategies need to reflect the nature of the

markets in which they invest

► Our research shows that companies with strong ESG credentials trade at tighter spreads. Integrated ESG

analysis supports credit selection

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Disclaimer

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This document is for Professional Investors only. This document does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments; nor does it constitute an offer to purchase securities to any person in the United States or to any US Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to the investment objectives or financial needs of any

• recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment

matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability. Any opinions expressed may change. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Any investments overseas may be affected by currency exchange rates. Past performance is not a reliable indicator of future results and targets are not guaranteed. All figures, unless otherwise indicated, are sourced from Hermes. For more information please read any relevant Offering Documents or contact Hermes. UCITS funds: Further information on investment products and any associated risks can be found in the Fund’s Key Investor Information Document (“KIID”), the Prospectus, the articles of association and the annual and semi-annual reports. In the case of any inconsistency between the descriptions or terms in this document and the Prospectus, the Prospectus shall prevail. These documents are available free of charge at Hermes Investment Funds plc, Georges Court, 54-62 Townsend Street, Dublin 2, Ireland, www.hermes-investment.com. HIML is the investment manager and promoter of Hermes Investment Funds plc (“HIF”) - an open-ended investment company with variable capital and with segregated liability between its sub-funds - incorporated in Ireland. Authorised by the Central Bank of Ireland and recognised by the Financial Conduct Authority. The main entities operating under the name Hermes are: Hermes Investment Management Limited (“HIML”); Hermes Alternative Investment Management Limited (“HAIML”); Hermes European Equities Limited (“HEEL”); Hermes Real Estate Investment Management Limited (“HREIML”); Hermes Equity Ownership Limited (“HEOS”); Hermes GPE LLP (“Hermes GPE”); Hermes GPE (USA) Inc (“Hermes GPE USA”) and Hermes GPE (Singapore) Pte. Limited (“HGPE Singapore”). All are separately authorised and regulated by the Financial Conduct Authority except for HREIML, HEOS, Hermes GPE USA and HGPE Singapore. HIML currently carries

• n all regulated activities associated with HREIML. HIML, HEEL and Hermes GPE USA are all registered investment advisers with the United States Securities and Exchange Commission (“SEC”). HGPE Singapore is

regulated by the Monetary Authority of Singapore. Issued and approved by Hermes Investment Management Limited which is authorised and regulated by the Financial Conduct Authority. Registered address: Lloyds Chambers, 1 Portsoken Street, London E1 8HZ. Telephone calls may be recorded for training and monitoring purposes. Potential investors in the United Kingdom are advised that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

BD00760 | Hermes Credit Breakfast Seminar | Capabilities | October 2017 |

Hermes Investment Management

We are an asset manager with a difference. We believe that, while our primary purpose is to help savers and beneficiaries by providing world class active investment management and stewardship services, our role goes further. We believe we have a duty to deliver holistic returns – outcomes for our clients that go far beyond the financial – and consider the impact our decisions have on society, the environment and the wider world. Our goal is to help people invest better, retire better and create a better society for all.

Our investment solutions include:

Private markets Infrastructure, private debt, private equity, commercial and residential real estate High active share equities Asia, global emerging markets, Europe, US, global, and small and mid-cap Credit Absolute return, global high yield, multi strategy, global investment grade, real estate debt and direct lending Multi asset Multi asset inflation Stewardship Active engagement, advocacy, intelligent voting and sustainable development

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