Citywire nma kames capital jan 2013
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Transcript of Citywire nma kames capital jan 2013
Active bond managementYesterday’s technology?
January 2013Stephen Snowden Investment ManagerStephen Snowden – Investment Manager
Agenda1. The case for actively managed corporate bond funds
– versus index trackers
Agenda
– retail targeted bonds
2. Market view
3. The Fund
4. Q&A
2
Equities & bonds – important differencesEquities & bonds important differences
Equities Bonds
Trading mechanism Exchange CounterpartyTrading mechanism Exchange Counterparty
Pricing Exchange ?
Market size £1,774 bn £533 bn
So what does this mean?
,
1. Corporate pricing can be inconsistent and liquidity is lower
2. Corporate bonds are therefore less suitable to index tracking
Source: FTSE UK All-share Index market cap from FactSet as at 31 December 2012. iBoxx £ Non-Gilt Index from Barclays as at 31 December 2012
3
Liquidity – what the fund managers are sayingq y g y g
“daily volumes are on a par with where they were in 2007”Richard Woolnough, manager of the £6.5bn M&G Corporate Bond Fund, £5.8bn M&G Strategic Bond Fund & £10.7bn M&G Optimal Income Fundg p
Bond Vigilantes, 4 Dec 2012
“trading in the sterling corporate bond market is moreexpensive and difficult than before the financial crisis”expensive and difficult than before the financial crisis
Ian Spreadbury, manager of the £3.3bn Fidelity Moneybuilder Income FundInvestment Week, 4 Dec 2012
“anybody who says liquidity is not a problem is lying”Richard Hodges, manager of the £1.6bn Legal & General Dynamic Bond Fund
Independent on Sunday, 19 Aug 2012
“liquidity in the corporate bond market can be pretty patchy”
Paul Reed, manager of the £5.8bn Invesco Perpetual Corporate Bond Fund
4
Investment Week, 17 Dec 2012
Index -v- ActiveIndex v ActiveFallen Angels• In isolation a fallen angel is not a big issue for an index
t ki t b d f dtracking corporate bond fund
• The problem is when it is systemicSpanish & Italian corporate bonds 14.8% of theSpanish & Italian corporate bonds 14.8% of the
iBoxx € Non-Sovereign Index = €499bn
That is 2.3x the size of the European High Yield market
Th bl i h ll f th £ t b d• The problem is much smaller for the £ corporate bond market
Spanish & Italian corporate bonds 3.0% of the iBoxx £ Non Gilt Index = £16bniBoxx £ Non-Gilt Index = £16bn
• But the dislocation when it happens will be large
Source: iBoxx & BoA/Merrill Lynch
Are index tracking corporate bond funds a low risk option?
5
Index -v- ActiveIndex v Active
• Large single name risk
7 0% of the inde– 7.0% of the index
the creeping non-call• Large financial call risk
– 7.4% of the index
• Index trackers typically yield less
Source: Barclays, iBoxx & Lipper
Are index tracking corporate bond funds a low risk option?
6
Index -v- ActiveIndex v Active• Active funds have typically been
managed with less duration than th i d5 0
5.5
7 8
8.0
Gilt yields -v- Index interest rate risk
the index
• Gilt yields have fallen but interest rate risk of the index has 3.5
4.04.55.0
7 2
7.4
7.6
7.8
%
dura
tion
increased
• An interesting time in the interest rate cycle to increase duration1 5
2.02.53.0
6.6
6.8
7.0
7.2 %
Mod
ified
rate cycle to increase duration risk!1.0
1.56.4
6.6
Jun
08S
ep 0
8D
ec 0
8M
ar 0
9Ju
n 09
Sep
09
Dec
09
Mar
10
Jun
10S
ep 1
0D
ec 1
0M
ar 1
1Ju
n 11
Sep
11
Dec
11
Mar
12
Jun
12S
ep 1
2D
ec 1
2iBoxx £ Non-Gilts (LHS) 10 year gilt yield (RHS)
Source: Barclays, iBoxx & Bloomberg
Are index tracking corporate bond funds a low risk option?
7
Which index you follow can make a big difference.....Corporate bond pricing differentials
Which index you follow can make a big difference.....
450
350
400
s (b
ps)
200
250
300
cred
it sp
read
s
100
150
00
8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 0
Jan
08Fe
b 08
Mar
08
Apr 0
8M
ay 0
8Ju
n 08
Jul 0
8Au
g 08
Sep
08O
ct 0
8N
ov 0
8D
ec 0
8Ja
n 09
Feb
09M
ar 0
9Ap
r 09
May
09
Jun
09Ju
l 09
Aug
09Se
p 09
Oct
09
Nov
09
Dec
09
Jan
10
Barclays Sterling Agg Ex Gilts iBoxx Sterling Non Gilts
Source: Barclays ,Markit and Bloomberg as at 31 January 2010
8
iBoxx Sterling Non-GiltsBank of America/Merrill Lynch Sterling Non-Gilts
Retail targeted corporate bondsRetail targeted corporate bonds
A good BypassBypassAheadAhead g
idea?AheadAhead
AlternativeAlternativeAlternative Alternative RouteRoute
9
Retail targeted corporate bonds
National Grid PLC 1.25% 2021(retail bond – index linked)
g p
National Grid PLC 4.1875% 2022(institutional bond – index linked)
• Regulatory protection – None
• Credit Rating
• Regulatory protection – Yes, from OFGEM
• Credit Rating g– Baa1
• Yield – RPI plus 1.25%
g– A3
• Yield – RPI plus 1.25% *
• Minimum investment – £100
• Minimum investment – £1,900 (approx) *
• Charges – Barclays bid/offer spread = 1.4%– 0.5% introduction fee– Possible nominee and or trustee fees
• Charges – Barclays bid/offer spread = 0.5%– Annual management fee
Source: Bloomberg. Barclays bid/offer spread as of 27th December 2012. *As of 13th September 2011, launch date of the retail bond. 10
Is cutting out the middle man such a good idea?
Retail targeted corporate bondsProvident Financial 7% 2017(retail bond)
Retail targeted corporate bondsProvident Financial 8% 2019(institutional bond)
• Seniority – Senior Unsecured
• Credit Rating
• Seniority – Senior Unsecured
• Credit Rating g– BBB
• Yield (as of 14th March 2012) – 7.0%
g– BBB
• Yield (as of 14th March 2012) – 8.3%
• Minimum investment – £100
• Minimum investment – £50,700 (approx)
• Total Return* – 12.6%
• Total Return* – 18.0%
Source: Bloomberg & Barclays. Total return calculated using Barclays offer prices. *Total return from 14 March 2012 to 31 December 2012
11
Is cutting out the middle man such a good idea?
There’s still a role for actively managed corporate bond funds
Retail targeted corporate bonds
There s still a role for actively managed corporate bond funds
Index trackers
You can’t have your cake and eat it
Not without their risks
12
Market viewMarket view
13
Bond bubble?Bond bubble?
14UK Gilt Yields 1729-2012
10
12
6
8
2
4
0
1729
1737
1745
1753
1761
1769
1777
1785
1793
1801
1809
1817
1825
1833
1841
1849
1857
1865
1873
1881
1889
1897
1905
1913
1921
1929
1937
1945
1953
1961
1969
1977
1985
1993
2001
2009
Source: MeasuringWorth December 2012
14
Why are Government bond yields so low?• Low economic growth backdrop
• “Lower for Longer” Central Bank Rates
Why are Government bond yields so low?
Lower for Longer Central Bank Rates
• Quantitative Easing
• Deleveragingg g
• Shrinking pool of “safe haven” assets
This does not make them a “good” long term investment...
...but they are a necessary evil
15
Government Bonds – not all are created equalq
16
European Yields
10
12
14
%
6
8
10
Yiel
d (s
.a.)
0
2
4
Jan
95
Jan
97
Jan
99
Jan
01
Jan
03
Jan
05
Jan
07
Jan
09
Jan
11
Portugal Spain Italy France Germany Ireland
Source: Bloomberg as at 30 November 2012
16
Portugal Spain Italy France Germany Ireland
Bond bubble?Bond bubble?
6
Gilt yields
4
5
2
3%
0
1
0
Dec
02
Jun
03
Dec
03
Jun
04
Dec
04
Jun
05
Dec
05
Jun
06
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Dec
12
30yr 10yr 5yr
Source: Bloomberg 31 December 2012
17
30yr 10yr 5yr
It’s not just gilts that are yielding less these daysIt s not just gilts that are yielding less these days
20Credit Suisse High Yield Index - Yield to Worst
16
18
12
14%
8
10
6
8
986
987
988
988
989
990
991
992
993
994
995
996
997
998
999
999
000
001
002
003
004
005
006
007
008
009
010
010
011
012
Source: Credit Suisse & Bloomberg as at 31 December 2012
18
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20
It’s not just gilts that are yielding less these daysIt s not just gilts that are yielding less these days
18Global Emerging Market Sovereign Plus - Yield to Worst
14
16
10
12%
6
8
4
1991
1992
1993
1993
1994
1994
1995
1996
1996
1997
1997
1998
1998
1999
2000
2000
2001
2001
2002
2003
2003
2004
2004
2005
2005
2006
2007
2007
2008
2008
2009
2010
2010
2011
2011
2012
2012
Source: Bank of America Merrill Lynch as at 31 December 2012
19
1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
Credit Spreads - iBoxx £ Non-Gilt IndexCredit Spreads iBoxx £ Non Gilt Index
350
400
250
300
350
150
200bps
50
100
0
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
Dec
12
Source: Markit & Barclays as at 31 December 2012
20
Investment grade not running on empty just yetInvestment grade not running on empty just yet
21
Why the Kames Investment Grade Bond Fund? y
• Significant value in investment grade bonds
• Award winning fixed income team
• Fund size offers competitive advantage in illiq id marketEuan McNeilStephen Snowden in illiquid marketEuan McNeilStephen Snowden
Kames Investment Grade Bond Fund
Fund size £497m
Number of holdings 135
Morningstar OBSR Rating Silver
Source: Kames Capital as at 30 November 2012
22
Kames Investment Grade Bond Fund performancep
23Cumulative* vs median
18.60%
15.06%13
18
owth
3
8% g
ro
-2
ug 1
1
ep 1
1
Oct
11
ov 1
1
ec 1
1
an 1
2
eb 1
2
ar 1
2
pr 1
2
ay 1
2
un 1
2
Jul 1
2
ug 1
2
ep 1
2
Oct
12
ov 1
2
ec 1
2
Ranked 8th o t of 84
Au
Se O No
De Ja Fe M A Ma Ju J Au
Se O No
De
Kames Investment Grade Bond A Acc IMA £ Corporate Bond Sector
Source: Lipper as at 31 December 2012. NAV to NAV basis; net income re-invested. Total return; tax UK net; in GBP. A Acc. Past performance is not a guide to the future. *Performance shown since Stephen Snowden became joint manager September 2011
• Ranked 8th out of 84
23
Active asset allocation
22030
Investment Grade Bond - Asset Allocation
180
200
22242628
140
160
16182022
%
bps
100
120
8101214
1008
Jun
11
Jul 1
1
Aug
11
Sep
11
Oct
11
Nov
11
Dec
11
Jan
12
Feb
12
Mar
12
Apr
12
May
12
Jun
12
Jul 1
2
Aug
12
Sep
12
Oct
12
Nov
12
Dec
12
Cash & AAA Credit Spreads (iTraxx Europe)
Source: Kames Capital & Markit as at 31 December 2012
24
Cash & AAA Credit Spreads (iTraxx Europe)
Kames Investment Grade Bond Fund performance
• Investment grade portfolio
– Global investment remit
p
– Tactical gilts and restricted high yield
– Only taking bond risk
1 year 2 years 3 years 4 years 5 years
Fund 15.89% 21.26% 30.01% 58.95% 37.87%
Median 13.40% 18.78% 27.97% 47.17% 31.46%
Quartile 1 1 2 1 2
Outperformance 2.49% 2.48% 2.04% 11.78% 6.41%
Source: Lipper as at 31 December 2012. NAV to NAV basis, net income re-invested. Total return, tax UK net, in GBP. Past performance is not a guide to the future
25
AppendicesAppendices
26
Kames UK OEIC – building blocks or blend?g
Strategic BondStrategic Bond Fund
27% 28%
Investment Grade Bond
Fund
High Yield Bond Fund
9%9%
Source: Kames Capital as at 31 August 2012
27
Competitor ACompetitor A
IMA £ Strategic Bond offering
78%73%
IMA £ Corporate Bond offering
(2)
IMA £ Corporate Bond offering
(1)92%
(2)(1)
Source: Lipper as at 31 May 2012
28
Competitor BCompetitor B
IMA £ Strategic offering
IMA £ Corporate Bond offering
76%
Source: Lipper as at 31 July 2012
29
The challenge of managing corporate bond fundsg g g p
250
70
80
Fund size up but market liquidity has disappeared
150
200
50
60
70
$ on
10030
40
billion£ bi
llio
0
50
0
10
20
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
IMA Corp Bond & Strat Bond AuM (£bn) LHS Corporate Bond Dealer Positions ($bn) RHS
Source: Federal Reserve Bank of New York and Investment Management Association as at January 2012
30
No longer able to rely on steady supply of new bond issuanceNo longer able to rely on steady supply of new bond issuance
70Net £ Investment Grade Corporate Bond Issuance
40
50
60
10
20
30
£bn
20
-10
0
10
-30
-20
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Barclays as at 31 December 2012
31
2 2 2 2 2 2 2 2 2 2 2
No longer able to rely on steady supply of new bond issuanceg y y pp y
400Net € Investment Grade Corporate Bond Issuance
200
300
100
200
€bn
-100
0
-200
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
32
Source: Barclays as at 31 December 2012
Why QE isn’t leading to inflationWhy QE isn t leading to inflation
120
UK Household debt to GDP
100
110
90
100
%
70
80
60
1-19
954-
1995
3-19
962-
1997
1-19
984-
1998
3-19
992-
2000
1-20
014-
2001
3-20
022-
2003
1-20
044-
2004
3-20
052-
2006
1-20
074-
2007
3-20
082-
2009
1-20
104-
2010
3-20
11Source: Haver Analytics. UK: Household & NPISHs Outstanding as a % of SA GDP (%) March 2012
33
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Gilt market bubble?Gilt market bubble?
25UK Real Yields: Long-dated Gilts - RPI
10
15
20
0
5
10
%
-10
-5
-20
-15
729
736
743
750
757
764
771
778
785
792
799
806
813
820
827
834
841
848
855
862
869
876
883
890
897
904
911
918
925
932
939
946
953
960
967
974
981
988
995
2002
2009
Source: MeasuringWorth as at 31 December 2012
34
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2
Hedged & wedgedHedged & wedged
220275
iBoxx £ Non-Gilt Index v Market iTraxx Europe Index
180
200
225
250
140
160
200
225
bps
100
120
150
175
2 2 2 2 2 2 2 2 2 2 2 2 2
May
11
Jun
11
Jul 1
1
Aug
11
Sep
11
Oct
11
Nov
11
Dec
11
Jan
12
Feb
12
Mar
12
Apr
12
May
12
May
12
Jun
12
Jul 1
2
Aug
12
Sep
12
Oct
12
Nov
12
Dec
12
Non gilt (LHS) European main (RHS)
Source: Markit, Bloomberg, iBoxx and Barclays as at 31 December 2012
35
Non-gilt (LHS) European main (RHS)
Important informationThis document is not intended for retail distribution and is directed only at investment professionals. It should not be distributed to, or relied upon by, private investors. The information in this document is based on our understanding of the current and historical positions of the markets. The views expressed should not be interpreted as recommendations or advice. All data in this presentation
p
is sourced to Kames Capital unless otherwise stated. The views expressed and information provided are accurate at the time ofwriting. Past performance is not a guide to future performance. The value of investments and the income from them may go down aswell as up and is not guaranteed.
Kames Capital is an AEGON Asset Management company and includes Kames Capital plc (Company Number SC113505) and Kames Capital Management Limited (Company Number SC212159). Both are registered in Scotland and have their registered office at Kames House, 3 Lochside Crescent, Edinburgh, EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Services Authority (FSA reference no: 144267). Kames Capital plc provides segregated and retail funds and is the Authorised C t Di t f K C it l ICVC O E d d I t t C K C it l M t Li it d idCorporate Director of Kames Capital ICVC, an Open Ended Investment Company. Kames Capital Management Limited provides investment management services to AEGON, which provides pooled funds, life and pension contracts. Kames Capital Management Limited is an appointed representative of Scottish Equitable plc (Company Number SC144517), an AEGON company, whose registered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (FSA reference no: 165548).
FP ID: 2013/15003
36