Fixed Income anything but! Presentation March 2014 Representing - - PowerPoint PPT Presentation
Fixed Income anything but! Presentation March 2014 Representing Schroders: David Burke National Account Manager Schroder Investment Management Australia Limited ABN 22 000 443 274 Australian Financial Services Licence 226473 Level 20
Schroder Investment Management Australia Limited ABN 22 000 443 274 Australian Financial Services Licence 226473 Level 20 Angel Place, 123 Pitt Street, Sydney NSW 2000
Representing Schroders: David Burke – National Account Manager
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This presentation is intended solely for the information of Wholesale Investors as defined under the Corporations Act by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). Investment in any of the Schroder Funds may be made on an application form in the Fund’s Product Disclosure Statement available from Schroders. This presentation does not contain and should not be taken as containing any financial product advice or financial product recommendations. You agree not to pass on any credit rating and/or related research to a party who is not a Wholesale Client. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this
any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this presentation or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this presentation or any other person. Returns shown are before tax and fees and all income is reinvested. You should note that past performance is not a reliable indicator of future performance. Opinions constitute our judgement at the time
internal only and are subject to change without notice. Total returns are calculated using exit price to exit price, after fees and expenses, and assuming reinvestment of income. Gross returns are calculated using exit price to exit price and are gross of fees and expenses. The repayment of capital and performance in any of the detailed funds are not guaranteed by Schroders or any company in the Schroders Group. Third party data including MSCI data, is owned by the applicable third party identified in the presentation and is provided for your internal use only. Such data may not be reproduced or re-disseminated and may not be used to create any financial instruments or products or any indices. Such data is provided without any warranties of any kind. Neither the third party data owner nor any other party involved in the publication of this document can be held liable for any error. The terms of the third party’s specific disclaimers, if any, are set forth in the Important Information section at www.schroders.com.au
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Schroders’ offices*
(Investment offices in orange)
Global funds under management: A$444.7 billion* Australian business funds under management: A$47.1 billion** Global fixed income funds under management: A$76.1 billion* Australian fixed income funds under management: A$6.9 billion**
* FUM pro forma as at 30 September 2013 **as at 31 January 2014.
Here for the long term
Bermuda Cayman Islands Mexico City New York Philadelphia Amsterdam Copenhagen Frankfurt Geneva Gibraltar Guernsey Jersey Luxembourg Madrid Milan Paris Rome Stockholm Zurich Beijing Hong Kong Jakarta Mumbai Seoul Shanghai Singapore Sydney Taipei Tokyo Buenos Aires São Paulo Santiago Dubai London Edinburgh Oxford Chester
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Simon Stevenson Head of Strategy / Fund Manager (Multi-Asset) (21yrs/6yrs)* Mihkel Kase Fund Manager, Fixed Income (Credit, Core-Plus) (19yrs/11yrs)* Stuart Gray Head of Credit Research / Fund Manager (Credit) (16yrs/2yr)*
Credit Research Simon Doyle Head of Australian Fixed Income & Multi Asset (26yrs/11yrs)*
Kellie Wood Fund Manager, Fixed Income (Core, Core Plus) (14yrs/7yrs)*
Fixed Income Portfolio Management Multi-Asset
Karen Chow Assistant Fund Manager (Core, Distribution) (4yrs/6yrs)* Peter Fullerton Senior Credit Analyst (14yrs/6yrs)* Alicia Low Senior Credit Analyst (15yrs/3yr)* Helen Mason Credit Analyst (3yr/8yrs)* David Zhou Investment Analyst, Multi- Asset (3yrs/1yr)* Stuart Dear Fund Manager, Fixed Income (Core, Core Plus) (16yrs/1yr)* Source: Schroders as of December 2013 *(years of industry experience / years with Schroders)
– Investment team of 11 in Australia – Average portfolio management team investment experience of 19 years – Part of a well resourced global fixed income team of over 160
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– Fixed Income is held for defensive reasons: Liquidity; capital preservation; liability management; and to diversify ‘equity’ risk. – Fixed income is a broad asset class. Utilising this breadth can significantly improve risk / return outcomes. – We employ a top down approach to allocating risk – Combined with active stock selection and an effective implementation platform – Emphasis on downside risk. – Aim to outperform the UBS Composite Bond Index by 1-1.5%p.a. before fees over the medium term
Stock selection Risk management Alpha strategies Australian Bonds (UBS Composite Bond Index) Asset allocation
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Source: Datastream, UBS * UBS Composite Index as at 31 January 2014. May note add up to 100 due to rounding
Interest rate sensitivity has risen, but the reward for taking it has fallen Dominated by government issuance with limited credit exposure
2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 3.00 3.25 3.50 3.75 4.00 4.25
2007 2008 2009 2010 2011 2012 2013 2014
Yield (%) Duration (yrs)
UBS Composite Bond Index
Index Duration Index Yield
Cth Gov't , 39% Semi-Gov't, 30% Supra's & Gov't G'teed, 16% Corporates, 14%
UBS Composite Bond Index *
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Source: Datastream, Schroders
In 1994 bonds returned -4.7%, while Australian equities returned -8.8%
0% 4% 8% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1994: Bonds v Equities
Bonds 1994 ASX 200 Acc 1994
MoM Change (%)
2 4 6 8 10 12 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Australian 10 Yr Government Bond Yields
%
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Source: Datastream, Schroders
0% 5% 10% 15% 20% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ytd
UBS Composite Bond Index - Calendar Year Returns
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Source: Bloomberg
Just because yields are low, doesn’t mean they can’t go lower
1 2 3 4 5 6 7 8 9
Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Bond yield (%)
Japanese 10yr yield US 10yr yield, lagged 10yrs
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Source: Bloomberg
0% 5% 10% 15% 1 2 3 4 5 6 7 8 1 Year Return
Impact on bond returns of rising yields for different portfolio durations
1% fall in yields over 1 yr 0% change in yields over 1 yr 1% rise in yields over 1 yr 2% rise in yields over 1 yr 3% rise in yields over 1 yr
Source: Bloomberg/Schroders, Based on Australian CGS yield curve as at 31 January 2014 For SFIF and UBS Composite Bond Index , calculation is duration only and doesn't include offsets from other investments such as credit.
10yr Govt Bond SFIF 2yr Govt Bond UBS Composite
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Source: Datastream, Schroders. Nominal yields on 10 year government bonds.
Inflation expectations remain steady … real yields low
1 2 3 4 5
US
Inflation Expectations Real Yield
%
1 2 3 4 5 6 7 8 2000 2002 2004 2006 2008 2010 2012 2014 Nominal Yield
1 2 3 4 5
Australia
Inflation Expectations Real Yield
%
1 2 3 4 5 6 7 8 2000 2002 2004 2006 2008 2010 2012 2014 Nominal Yield
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Source: GFD, Schroders
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 1900 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009
US 10Y Bond Yield
1 2 3 4 5 2000 2002 2004 2006 2008 2010 2012 2014
Breakdown of US Yields
Inflation Expectations Real Yield
%
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Source: Datastream, Schroders
0.0 0.5 1.0 1.5 2.0 2000 2002 2004 2006 2008 2010 2012 2014
Yield Curve: Australian 10Y - 3Y
%
0.0 0.5 1.0 1.5 2.0 2.5 3.0 2000 2002 2004 2006 2008 2010 2012 2014
Spreads: Australian 10Y - US 10Y
%
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Source: Datastream
5 10 15 20 25 2000 2002 2004 2006 2008 2010 2012 2014
Merrill Lynch US High Yield Index - Yield v Spread
Yield Option Adjusted Spread % 2 4 6 8 10 2000 2002 2004 2006 2008 2010 2012 2014
Merrill Lynch Investment Grade Index - Yield v Spread
Yield Option Adjusted Spread %
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Source: OAS to LIBOR data sourced from City Velocity (Citi Fixed Income Index – AusBIG Index – Corporate Rating Category and US High Yield Market Index) over a 10 year period. Min and max range indications have been trimmed by 5% at both points to remove extremes. Rock Bottom Spread per Schroders calculation using average term of relevant City Velocity data set.
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Source: Datastream, Schroders.
AUD remains overvalued … but rate differentials becoming less supportive
0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 2000 2002 2004 2006 2008 2010 2012 2014
Australian Dollar and Fair Value
AUD PPP
AUD/USD
1 2 3 4 5 6 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 2000 2002 2004 2006 2008 2010 2012 2014
Australian Dollar and Rate Differentials
AUD Short term interest rate differential (RHS)
AUD/USD %
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Source: Datastream, Schroders
90 92 94 96 98 100 102 104 106 108 2008 2009 2010 2011 2012 2013
Path of Economic Recovery
US Germany Eurozone Japan Spain Index 2007q4 = 100 Orange line is average path of real GDP after a non-financial crisis. Based on IMF study. “Normal" recovery
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Source: Datastream, Schroders
30 35 40 45 50 55 60 65 Feb 05 Feb 06 Feb 07 Feb 08 Feb 09 Feb 10 Feb 11 Feb 12 Feb 13
Manufacturing PMIs
Aus US 30 35 40 45 50 55 60 65 Feb 05 Feb 06 Feb 07 Feb 08 Feb 09 Feb 10 Feb 11 Feb 12 Feb 13
Non-Manufacturing PMIs
Aus US 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Feb 05 Feb 06 Feb 07 Feb 08 Feb 09 Feb 10 Feb 11 Feb 12 Feb 13
Unemployment Rate
Aus US
%
0.0 0.5 1.0 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13
Change in Unemployment Rate since Aussie low of 4.9% in Apr 11
Aus US
%
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Source: Datastream, Schroders.
2 4 6 8 10 12 2000 2002 2004 2006 2008 2010 2012 2014
Australian GDP Growth
Nominal Real
YoY%
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Source: Datastream, Bureau of Economic Analysis. Profits series is US Corporate Profits with Inventory Valuation Adjustment and Capital Consumption Adjustment .
Valuations overstated by cyclically high profits
0% 5% 10% 15% 20% 25% 3% 4% 5% 6% 7% 8% 9% 10% 11% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 US Corporate Profits After Tax (CPATAX) / US GDP (Inverted) Subsequent 4 yr annual profit growth (RHS) US Corp Profit after Tax / US GDP Subsequent 4Y Annual Profit Growth
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Bias to highly rated spread product over CGS, though we are beginning to allocate towards government as spreads tighten Valuations in semi government bonds still modestly attractive, fiscal metrics improving versus CGS Avoiding exposure to riskier European supras
Source: UBS Credit Delta
This is illustrative only and does not represent Schroders recommendation on these sectors
50 100 150 200 Oct 07 Oct 08 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13
Spread to Government Bond
Semi ¹ Supra ² Bank GG ³
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‒ Balance sheet repair is over, leverage is increasing from a low base. ‒ High global liquidity makes it relatively easy for companies to re-finance. ‒ Australian companies leverage remains below offshore markets. ‒ The search for yield is resulting in a decline in lending standards. ‒ Some deterioration in investor protection E.G. Hybrids. ‒ Investment grade valuations broadly are still rewarding investors but are less generous. Lower quality end of sub-investment grade are still expensive. Credit spreads are reasonable but volatility is increasing.
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Favoured sectors: – Infrastructure – Highly predictable revenue stream. – Major bank old style sub-debt – New structures are more like equity – US Banks – Capital structures vastly improved and exposed to a gradually improving economy. – Resources and Chemicals - Capital discipline, cost containment, debt reduction and sustainable growth, have to watch valuations. Sectors where risk is increasing: – REIT’s – Retail and Office fundamentals continue to deteriorate, stick to higher quality names. – Construction sector – Cost and margin pressures as miners reduce their costs. – RMBS – Increased property values, decreasing issue spreads.
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Source: Schroders All figures are as at 31 Jan 2014 BM: UBS Composite Bond Index
Sector Exposure Credit Quality
Number of positions = 648, YTM = 3.90%, Modified duration = 3.28 yrs
– Global outlook is slowly improving. Australian growth around trend. – Demanding structural valuations for bonds
– Remain short duration but short concentrated in the US. – Credit exposure reduced as spreads tightened. Volatility expected. – Within credit we favour “old-style” bank sub debt, quality infrastructure, resources and chemical sectors. – Semi-government bonds and RMBS are a hold. – Cash weight reduced to access term premium in steep yield curves.
20.2% 4.5% 28.3% 13.1% 5.6% 26.9% 1.4% 0.0% 39.5% 30.2% 16.1% 0.3% 13.9% 0.0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Cash & Equivalents Government Semis Sov/ Supra Mortgage Corporate Hybrid Schroder Fixed Income Fund UBSA Composite Bond Index 41.7% 17.2% 8.9% 10.9% 1.0% 20.2% 71.3% 21.3% 5.3% 2.1% 0.0% 0.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% AAA AA A BBB Below BBB Cash and Equivalents Schroder Fixed Income Fund UBSA Composite Bond Index
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Source: Schroders
(2.00) (1.50) (1.00) (0.50)
1.00 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13
Schroder Fixed Income Fund relative duration position by currency to UBS Composite Bond Index
AUD USD EUR Others Total Relative Position 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Schroder Fixed Income Fund sector exposure^
Government Semi-Government Supranational / Sovereign Corporates Hybrids Collateralized Cash & Equivalent Other
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0% 2% 4% 6% 8% 10% 12% 14% 16% 2007 2008 2009 2010 2011 2012 2013 2014 CYTD
Calendar year return
Schroder Fixed Income Fund^ UBS Composite Bond Index Cash*
Source: Datastream, Schroders ^Schroder Fixed income Fund Institutional Class (pre-fee) *UBS Bank Bill Index Past performance is not a reliable indicator of future performance.
– Solid performance vs. benchmark over last year. – Main contributors were: – Short duration (as sovereign yields rose) – Long credit (as credit spreads tightened) – Volatility has increased. Expect lower monthly returns and greater volatility ahead. – Performance outcomes consistent with stated performance objectives: – Focus on positive absolute returns – Minimised downside risk – Lower volatility than benchmark
Sep 05 Jan 14 Sep 05 Jan 14
3% 4% 5% 6% 7% 8% 9% 10% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Rolling 3 year return (% p.a.) Standard deviation of rolling 3 year returns (% p.a.)
3 Year Performance (Return vs. Risk)
Schroder Fixed Income Fund^ UBS Composite Bond Index
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As at 31 January 2014
Source: Schroders. Schroder Fixed Income Fund Wholesale Class post–fee returns (annualised if over 12 months) displayed above *inception date: 25 Feb 2004 Past performance is not a reliable indicator of future performance.
Proven through the cycle performance Target excess return of 1% -1.5%p.a. (pre-fee) over rolling 3 year periods
Alpha
+0.04% +0.23% +0.05% +0.91% +0.32%
1.56% 3.56% 7.06% 6.55% 6.64% 1.52% 3.33% 7.01% 5.64% 6.32% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 3 Months 1 Year 3 Years 5 Years Since Inception Schroder Fixed Income Fund UBSA Composite Bond Index
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Source: Schroders, Bloomberg, as of January 2014 All returns are gross of fees. Past performance is not a reliable indicator of future performance. ^Inception date of Schroder Fixed Income Fund Institutional Class: 30 Sept 2002
5 10 15 20 25
Active monthly return frequency distribution in up markets since inception^
2 4 6 8 10 12
Active return frequency distribution in down markets since inception^
Schroder Fixed Income Fund (Institutional Class) UBS Composite Bond All Maturities Index UBS Bank Bill Index ASX 200 Accumulation Index Since Inception (30 Sept 2002) Annualised Return 7.15% 6.10% 5.12% 9.69% Annualised Volatility 2.34% 2.81% 0.39% 13.16% Annualised Sharpe Ratio 0.87 0.35 0.35 % of Positive Months 79% 72% 100% 65% Maximum Drawdown
0.00%
Best Month 2.49% 3.10% 0.71% 7.98% Worst Month
0.21%
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– Pure investment management – Size and experience of Schroders’ global network – Breadth of local and global investment capabilities – Proven through the cycle investment process – Multiple sources of alpha drivers to deliver on
– Focus on managing risk, especially downside risk
Past performance is not a reliable indicator of future performance
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