Five reasons to take a global approach to credits Based on research by Patrick Houweling, Jeroen van Zundert and Victor Verberk For professional investors 1
Contents Having a global credit universe means: 1. More selection opportunities 2. More relative value opportunities 3. More allocation opportunities 4. More diversification opportunities 5. More liquidity opportunities Implementation challenges can effectively be overcome Source: Robeco Five reasons to take a global approach to credits 2
1. Global universe offers more selection opportunities Expand the set of companies and bonds to invest in # Investment grade issuers > EUR-only universe comprises 490 companies and 2,000 bonds 309 490 > Including other currencies: 1,500 companies and 10,000 bonds > Including EM and government-related sectors: 260 2,100 companies and 15,000 bonds 1097 EUR GBP USD Others Source: Barclays Five reasons to take a global approach to credits 3
1. Global universe offers more selection opportunities (continued) Get better access to specific sectors Advance Auto Parts Autonation Autozone Bed Bath & Beyond > Railroads. EUR: 1 bond, globally 132 bonds Best Buy co CVS Corp Cenosud > Paper: 2 versus 52 Coach Costco wholesale Dollar General > Health insurance: 2 versus 84 The Home Depot Kohls corp Lowe’s Cos Macys > Midstream energy: 9 versus 358 Nike Nordstrom O’Reilly Automotive Staples > Retailers: 15 versus 220 Polo RalphLauren Tjx Cos Target Corp Under Armour Walgreen boots Wal-mart Source: Robeco, Barclays. These examples are for information purposes only and not intended to be an investment advice in any way Five reasons to take a global approach to credits 4
2. Global universe means more relative value opportunities Yields can be higher outside the euro area, also after hedging currency risk 10y interest rate at Dec 2016 3.00% 2.50% 2.00% 1.50% 1.99% 2.44% 1.00% 0.50% 0.24% 0.21% 0.45% 0.00% USD (in USD) USD (in EUR) EUR (in EUR) USD - EUR (in EUR) > USD-bond yields (2.44%) are very attractive compared to EUR-bond yields (0.21%) > FX hedge reduces the USD yield by 1.99% to 0.45% > USD-bond (in EUR) still 0.24% higher than EUR-bond yields Source: Barclays Five reasons to take a global approach to credits 5
2. Global universe means more relative value opportunities (continued) Difference can be very large yield difference USD-EUR 10-year government bonds (EUR hedged) 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% 2012 2013 2014 2015 2016 Source: Barclays Five reasons to take a global approach to credits 6
2. Global universe means more relative value opportunities (continued) Credit spreads can be higher outside of the euro area, even for the same issuer Two comparable Intesa bonds issued in EUR and USD 5.0 4.5 4.0 3.5 3.0 Jan-16 Apr-16 Jul-16 Oct-16 ISPIM 5.71 01/15/26 USD ISPIM 3.928 09/15/26 EUR Source: Bloomberg Five reasons to take a global approach to credits 7
3. Global universe means more allocation opportunities Active managers can allocate to regions or sectors that benefit from local economic circumstances Spreads of UK banks widened much more than European corporates 2.00 Brexit referendum 1.75 1.50 1.25 1.00 May-16 Jun-16 Jul-16 Aug-16 Euro Aggregate Corporates index GBP Banking index Source: Barclays. EUR-hedged credit spreads (%) of EUR corporate bond index and GBP Banking index Five reasons to take a global approach to credits 8
4. Global universe offers more diversification opportunities Low sector correlations to be found across regions Sector correlations for corporate bonds in different currencies > Low correlations mean better diversification 100% 80% > Better diversification means lower volatility 60% without harming return potential. 40% Example: 20% correlation pharmaceuticals in EUR vs USD: 54% 0% -20% -40% USD vs. EUR vs. USD vs. EUR GBP GBP minimum average maximum Source: Barclays. Sector return correlation between IG corporate bonds denominated in different currencies over the period 2012-2016. Five reasons to take a global approach to credits 9
5. Global universe means more liquidity opportunities More trading opportunities to implement views and reduce transaction costs. Number of axes (EUR versus Global) 2,500 2,000 1,500 1,000 500 0 30-Nov-16 1-Dec-16 2-Dec-16 5-Dec-16 6-Dec-16 EUR-only universe Global universe Source: Bloomberg. Number of axes in 7-10y senior BBB-rated non-financial corporate bonds Five reasons to take a global approach to credits 10
Three challenges that can be overcome 1. Investing outside of home region introduces currency risk > Currency volatility can have a major impact on returns > Currency risk can effectively be hedged with currency forwards 2. Investing outside of home region introduces additional interest rate risk > Interest rate risk can be hedged by using interest rate futures or swaps > It is possible to swap to home-market interest rate exposure 3. Investing outside of home region requires selection capacity & skill > Larger universe means more data to digest > This requires strong team of analysts and/or use of quantitative model Five reasons to take a global approach to credits 11
Key takeaways Having a global credit universe means: 1. More selection opportunities 2. More relative value opportunities 3. More allocation opportunities 4. More diversification opportunities 5. More liquidity opportunities Implementation challenges can effectively be overcome Source: Robeco Five reasons to take a global approach to credits 12
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