2012 10 07 swisscanto (lu) bond invest global high yield city wire italy final

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

2

© 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

3


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

4


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

5


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

6


Agenda





5. Appendix – The Case for Global High Yield

7


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

8


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

9


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

10


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

11


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)

12


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

13


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

14


• 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

15


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%

16


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

17


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

18


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;

19


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;

20


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

21


Agenda





5. Appendix – The Case for Global High Yield

22


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;

23


• 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

24


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)

25


26


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

27


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

28


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

29


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

30


Agenda





5. Appendix – The Case For Global High Yield

Swisscanto (CH) Institutional Bond Fund - Global High Yield I (Global High Yield Fund)

31


32


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%

33


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

34


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€

35


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,

36


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

37

© Swisscanto

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

38

© Swisscanto

39

© Swisscanto

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%)

40


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

41


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

42


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 (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%

44


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 (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 (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 (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


…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%


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


Source: Swisscanto


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


We Forecast Our Short Duration High Yield Fund Generating Total Returns of circa 8% p.a. (EUR hedged) During The Next 12 Months

50


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.

52


Agenda





5. Appendix – The Case For Global High Yield

53


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


….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


High-Yield versus Equities, Similar Returns at 50% Volatility

High-Yield offers an Attractive Risk Reward

Stabile Phase

56


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


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

58


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


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


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


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

62


• 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


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


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


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


And be Paid a Significant New Issue Premium

67


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%


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


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


Best Case: We Forecast Our Medium Duration High Yield Funds Total Returns of circa 8%-9% p.a. (CHF Hedged)

Source: Swisscanto


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


Bear Case: We Forecast +2% for the next 12 months September 2012 onwards

70


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


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

mailto:[email protected]

72


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.

2012 10 07 swisscanto (lu) bond invest global high yield city wire italy final

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Transcript of 2012 10 07 swisscanto (lu) bond invest global high yield city wire italy final