Opportunistic Fixed Income Review November 20, 2019 All Data as of - - PowerPoint PPT Presentation

▶
opportunistic fixed income review
SMART_READER_LITE
LIVE PREVIEW

Opportunistic Fixed Income Review November 20, 2019 All Data as of - - PowerPoint PPT Presentation

Oct 05, 2022 169 likes •453 views

Opportunistic Fixed Income Review November 20, 2019 All Data as of September 30, 2019 Unless Otherwise Stated Investment Management Division Role in the Portfolio Attractive Absolute Returns Long-term returns that are competitive with

slide-1
SLIDE 1

Opportunistic Fixed Income Review

November 20, 2019

All Data as of September 30, 2019 Unless Otherwise Stated

slide-2
SLIDE 2

Investment Management Division

Role in the Portfolio

2

  • Long-term returns that are competitive with long-term public equities, after consideration
  • f lower downside risk, due to opportunistic investments, longer duration private

investments, restructurings, leverage, hedging, and trading skill

Attractive Absolute Returns

  • Achieve or exceed the return on the performance benchmark over a long period of time,

within reasonable risk parameters

Competitive Relative Returns

  • Enhance the diversification of the total fund relative to public equity and investment grade

fixed income

Diversification

  • Protect capital through credit-oriented investments and trading strategies that are designed

to minimize downside risk

Capital Preservation

  • The structure of certain fixed income assets may provide protection against the detrimental

effects of deflation

Deflation Protection

  • The asset class (N.C.G.S. § 147-69.2(b)(6c)) was approved for investment by the NC

General Assembly in June 2009.

Portfolio Launched June 2009

Source: Investment Policy Statement for North Carolina Retirement Systems, July 1, 2014

slide-3
SLIDE 3

Investment Management Division

Portfolio Components

3

Direct Lending Relative Value Convertible Arbitrage Long/Short Credit Structured Credit High Yield Bonds Traditional Corporate Credit Distressed Credit Special Situations Hedge Funds Bank Loans High Yield Bonds Post-Reorg Equity Distressed Credit Components Strategies / Types of Investments Whole Loans Derivatives Mezzanine Debt Real Estate Loans Structured Credit Event-Driven Dislocation

* Portfolio Components, Targets, and Maximums come from the Investment Policy Statement for North Carolina Retirement Systems, July 1, 2014

slide-4
SLIDE 4

Investment Management Division

Opportunistic Fixed Income

4

  • Currently under-weight vs. target by 1.4%
  • Additional capacity for more than $1.5B

Unaudited financials as of 9/30/19

Minimum Maximum Growth $47,049 46.00% 58.0% 37.0% 71.0%

  • 12.00%

($12,279) Public Equity 32,654 31.92% 42.0% 37.0% 47.0%

  • 10.08%

($10,307) Private Equity 5,460 5.34% 6.0% 0.0% 8.8%

  • 0.66%

($678) Non Core Real Estate 3,226 3.15% 3.0% 0.0% 8.0% 0.15% 158

Opportunistic Fixed Income 5,709 5.58% 7.0% 0.0% 7.50%

  • 1.42%

($1,452)

Rates & Liquidity 41,271 40.35% 29.0% 24.0% 42.0% 11.35% 11,607 IG Fixed Income & Cash 30,915 30.22% 28.0% 24.0% 32.0% 2.22% 2,274 Pension Cash 10,356 10.12% 1.0% 0.0% 10.0% 9.12% 9,333 Inflation Sensitive & Diversifiers 11,894 11.63% 11.0% 4.0% 16.0% 0.63% 642 Inflation Sensitive 6,106 5.97% 6.0% 2.0% 7.5%

  • 0.03%

($31) Core Real Estate 5,788 5.66% 5.0% 2.0% 10.0% 0.66% 673 Multi-Strategy 2,076 2.03% 2.0% 0.0% 4.0% 0.03% 30 Grand Total $102,290 100.00% Market Value ($MM) Relative $ (MM) Relative % Range % Target

slide-5
SLIDE 5

Investment Management Division

Portfolio History

5

Note: Fund count excludes liquidated investments.

Portfolio Market Value Timeline by Component Growth of Manager Relationships and Number of Funds

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

  • 1,000

2,000 3,000 4,000 5,000 6,000 7,000 $ Millions

Traditional Corporate Credit Distressed Credit Hedged Fixed Income Special Situations Opp FI % of Total Plan

2 3 5 5 5 5 6 6 6 8 8 8 9 13 15 16 17 18 19 19 20 21 22 23 26 27 27 28 28 28 28 28 28 29 29 30 37 37 37 37 38 37 37 35 35 35 36 36 2 2 2 2 2 2 2 2 2 3 3 3 4 8 10 11 12 13 14 14 15 15 16 16 17 18 18 19 20 20 19 19 19 19 19 20 20 20 20 20 21 21 21 20 20 20 20 20 5 10 15 20 25 30 35 40

# of Funds (by commitment) # of Managers

slide-6
SLIDE 6

Investment Management Division

Portfolio Performance

6

Calendar Year Performance Annualized Performance

Note: See slide 20 for details on the composition of the Opportunistic Fixed Income Benchmark.

1.6% 6.2% 3.5% 6.1% 9.2% 1.7% 2.7% 1.6% 2.2% 1.2% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 1 Yr 3 Yr 5 Yr 7 Yr Since June 2009*

Opp FI Opp FI Benchmark

15.9% 2.2% 14.0% 16.6% 3.4%

  • 2.6%

7.1% 7.1% 5.7% 2.7% 9.5%

  • 4.0%

4.9% 5.3% 0.3%

  • 7.0%

14.0% 4.1%

  • 5.2%

5.9%

  • 10%
  • 5%

0% 5% 10% 15% 20% 25%

Opp FI Opp FI Benchmark

slide-7
SLIDE 7

Investment Management Division

Portfolio Performance

7

Portfolio Component Annualized Performance vs. Market Benchmarks

Note: See slide 20 for details on the composition of the Opportunistic Fixed Income Benchmark.

7.4% 9.7% 8.8% 13.4% 15.8% 2.6% 8.6% 6.4% 9.2% 11.6% 0.9% 6.4% 3.6% 6.3% 10.0%

  • 1.7%

3.8% 1.2% 3.7% n/a 6.3% 6.1% 5.4% 5.9% 9.4% 3.1% 4.7% 4.1% 4.4% 6.6% 1.0% 2.9% 0.4% 0.8% 3.2%

  • 0.7%

0.6% 0.0% 0.9% 1.0%

  • 4.0%
  • 2.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 1 Yr 3 Yr 5 Yr 7 Yr Since June 2009

OFI Special Situations OFI Distressed Credit OFI Trad Corp Credit OFI Hedged Fixed Income ICE BofAML US High Yield Index Credit Suisse Leveraged Loan Index HFRX Relative Value Arbitrage Index HFRX ED: Distressed Restructuring Index

slide-8
SLIDE 8

Investment Management Division

Level 1, 9.8% Level 2, 32.5% Level 3, 22.2% Level 4, 35.4%

Portfolio Characteristics

8

Note: Information is based on market value, as of June 30, 2019 *Level 1 Liquidity = T+3; Level 2 = T+3 to 12 Months; Level 3 = 12 to 24 Months; Level 4 = Greater than 24 Months

Allocation by Strategy Liquidity by Level* Capital Structure Allocation by Geography

Traditional Corporate Credit 16.3% Distressed Credit 5.9% Hedged Fixed Income 47.5% Special Situations 30.3%

Senior, 56.0% Junior, 28.4% Convertibles, 1.7% Equity, 13.9% 85.2% 10.9% 0.8% 0.4% 1.3% 0.7% 0.8% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% North America Europe Asia (ex - Japan) Japan South America Australia/New Zealand Other

slide-9
SLIDE 9

Investment Management Division

Portfolio Characteristics

9

Allocation by GICS Sector

As of June 30, 2019

*Holdings that cannot be classified into any one particular sector, as self-reported by the investment manager, may include CMBS, RMBS, ABS, or CLOs

6.4% 4.5% 7.6% 11.8% 4.0% 5.3% 19.5% 6.4% 7.2% 2.1% 2.0% 5.4% 17.9% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

slide-10
SLIDE 10

Investment Management Division

Private Credit

  • Senior, secured private loans

continue to perform well

  • Insulated from public market

volatility, so far

10

Credit Market Update

Structured Credit

  • Market has been firm for

CMBS, RMBS, and ABS

  • CLO debt and equity

performing well but with more dispersion between quality Bonds

  • Higher quality HY spreads

continue to be historically tight

  • Dispersion between CCC

spreads and higher quality bonds Loans

  • Outflows from mutual funds

and ETFs have been offset by CLO new issuance

  • Starting to see some cracks –

creating opportunities

slide-11
SLIDE 11

Investment Management Division

High Yield Credit Spreads

11

Source: BofA Merrill Lynch (accessed via Bloomberg).

  • Seeing dispersion between low (CCC) and higher quality bond spreads
  • CCCs are slowly reaching the prior wides seen in Q4’18

500 1000 1500 2000 2500 1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 10/1/2012 1/1/2013 4/1/2013 7/1/2013 10/1/2013 1/1/2014 4/1/2014 7/1/2014 10/1/2014 1/1/2015 4/1/2015 7/1/2015 10/1/2015 1/1/2016 4/1/2016 7/1/2016 10/1/2016 1/1/2017 4/1/2017 7/1/2017 10/1/2017 1/1/2018 4/1/2018 7/1/2018 10/1/2018 1/1/2019 4/1/2019 7/1/2019

Below Investment Grade Spreads Since 2010

BAML ICE HY OAS BAML ICE CCC + Below OAS Avg HY Spread (since 2010) Avg CCC/below Spread (since 2010)

slide-12
SLIDE 12

Investment Management Division

In Focus - Loans

  • Leveraged debt market (bonds and loans) has doubled in size since 2009
  • Leveraged loan market is more than $1T in size, comparable to the HY

Market

  • Almost 80% of Leveraged Loans are covenant lite

12

slide-13
SLIDE 13

Investment Management Division

In Focus - Loans

  • While IG and high yield flows have been steady YTD, loans have seen

significant outflows from ETFs and mutual funds.

13

Source: JP Morgan

slide-14
SLIDE 14

Investment Management Division

In Focus - Loans

  • Flows/technical dynamics have created some dislocation in the loan market
  • The percentage of bonds trading below 80 and 90 cents on the dollar is now

higher than we saw in Q4’18, which creates an attractive buying opportunity

  • $130B in notional value in loans trading below 90

14

slide-15
SLIDE 15

Investment Management Division

Late Cycle Investment Considerations

  • 1. Remain disciplined – continue to focus on higher quality, senior secured,

larger issues that may be more defensive in the event of a credit market disruption

  • 2. Take advantage of structural dislocations and mis-pricings while being
  • pportunistic in restructurings
  • 3. Continue to explore the creation of additional investment capacity and

prepare for the next large scale investment opportunity

  • Working with existing and new managers to add capacity to capitalize on a

structural credit dislocation or distressed cycle

  • Capital call features to drawdown capital using market triggers (i.e. spreads, default

rates, and price levels)

15

slide-16
SLIDE 16

Investment Management Division

Forward Looking Opportunity Set

16

More Attractive Less Attractive

  • Dislocation Mandate
  • Opportunistically buy

corporate credit when market triggers are breached

  • On a select basis:
  • Loans – higher quality,

trading off due to technical issues

  • Larger issuers
  • High Quality
  • Senior/Secured
  • Strong

fundamentals

  • Middle market lending
  • Select restructurings
  • Energy debt
  • US High Yield
  • Large issuer

distressed

  • Regular way loans –

“loan beta”

  • Covenant-lite,

broadly syndicated loans

slide-17
SLIDE 17

Investment Management Division

Appendix

17

slide-18
SLIDE 18

Investment Management Division

Portfolio Components

18

Portfolio Component* Target* 9/30/19 +/- Maximum* Traditional Corporate Credit 15% 16% +1% 50% Distressed Credit 25% 6%

  • 19%

50% Hedged Fixed Income 45% 48% +3% 75% Special Situations 15% 30% +15% 75%

Note: See slide 19 for details on the composition of the Opportunistic Fixed Income Benchmark.

slide-19
SLIDE 19

Investment Management Division

Portfolio Benchmark

15% 15% 20% 50% Credit Suisse Leveraged Loan Index BOAML US High Yield Index HFRX Relative Value Arbitrage HFRX Distressed

19

Note: The BOAML US High Yield Index is from BofA Merrill Lynch and is used with permission. See disclaimer on slide 27.

slide-20
SLIDE 20

Investment Management Division

Portfolio Characteristics

20

Account Type by Count Account Type by Market Value

Commingled, 24 Separately Managed, 12

Commingled,

39.4% Separately Managed, 60.6%

slide-21
SLIDE 21

Investment Management Division

High Yield Bond and Loan Default Rates

21

Note: Data as of 9/30/2019.

slide-22
SLIDE 22

Investment Management Division

High Yield Bond and Loan Recovery Rates

22

Note: Data as of 9/30/2019.

slide-23
SLIDE 23

Investment Management Division

High Yield Bond and Loan Issuance

23

Note: Data as of 9/30/2019. Values are in billions of U.S. Dollars.

slide-24
SLIDE 24

Investment Management Division

High Yield Bond and Loan Fund Flows

24

High Yield Loans

slide-25
SLIDE 25

Investment Management Division

`Covenant-Lite Loan` New Issue Volume

25

Note: Data as of 9/30/2019. Values are in billions of U.S. Dollars.

slide-26
SLIDE 26

Investment Management Division

Notes:

All data presented are based on currently available information at time of publication and may be revised subsequently. The Opportunistic Fixed Income Benchmark is comprised of 50% HFRX Distressed Securities Index; 20% HFRX Relative Value Index; 15% Credit Suisse Leveraged Loan Index; and 15% BOAML US High Yield Index. The BOAML US High Yield Index is from BofA Merrill Lynch and is used with permission. See disclaimer on slide 28. The Opportunistic Fixed Income asset class (N.C.G.S. § 147-69.2(b)(6c)) was created by the General Assembly in June 2009. It included some investments that were previously authorized under other provisions of G.S. § 147-69.2.

26

slide-27
SLIDE 27

Investment Management Division

Disclaimer

BOFA MERRILL LYNCH IS LICENSING THE BOFA MERRILL LYNCH INDICES “AS IS,” MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE SUITABILITY, QUALITY, ACCURACY, TIMELINESS, AND/OR COMPLETENESS OF THE BOFAML INDICES OR ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM, ASSUMES NO LIABILITY IN CONNECTION WITH THEIR USE, AND DOES NOT SPONSOR, ENDORSE, OR RECOMMEND THE DEPARTMENT OF STATE TREASURER, OR ANY OF ITS PRODUCTS OR SERVICES.

27