SDCI guideline proposal March 7 2008 - SDCERSCredit Spread Monitor – 2008 2. Economics GDP Growth...

March 20, 2008

Presentation to

International Fixed Income Management

San Diego City Employees’ Retirement System

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R O G G E G L O B A L P A R T N E R S P L C

AUTHORISED AND R E G U L A T E D B Y

THE FINANCIAL SERVICES AUTHORITY

2

Contents

I. Widening the Opportunity Set

II. Global Credit Markets and Trends

III. Investment Process

IV. Investment Performance

AppendixSupplementary Global Credit SlidesIndustry ScorecardSector ViewsInvestment Professional Biographies

3

Widening the Opportunity Set

Widen the definition of Emerging Markets to increase the universe of investable securities and allow for changing markets

Reduce the minimum credit quality for corporate bonds in the portfolio from AA to BBB

Proposal to change San Diego City Employees’ Retirement System’s Guidelines

4


The JPM indices themselves become redundant over time (EMBI, EMBI+, ELMI are all old benchmarks that are still calculated but no longer managed)

The EMBIG/ELMI+ list excludes names that are promoted out of EMD –Korea - but are not (yet) included elsewhere; more countries will migrate as EM indeed emerges

It excludes names that have been dropped but will be readmitted – Thailand where capital controls will be changed by the new government

It excludes any new-to-the-market issuer including the ‘new frontier’ names coming into the market - Vietnam in the past, Ghana/Gabon issuing for the first time in 2007

SUGGESTION: Define EMD as all countries outside the MSCI list of developed markets, currently twenty three developed countries

Current guideline limits EM exposure to those names on the JP Morgan EMBI Global / ELMI+ indices. Inclusion in the benchmark ensures a minimum liquidity. But …

Emerging Market Debt

5

Credit spreads have widened and this represents a good opportunity to add exposure in the lower portion of the investment grade credit universe

Rogge has a strong process for investing in global investment grade credit

Widening the Opportunity SetGlobal Investment Grade Credit

6

Global Credit Outlook

Credit markets were severely pressured in H2 2007 as asset quality problems in the US sub-prime mortgage sector evolved into a more broad-based crisis of confidence affecting the structured credit, ABS and corporate debt markets on a global basis

Financial institutions’ credit spreads underperformed industrials and utilities as concerns over their risk exposures to problem assets eroded investor confidence, draining liquidity from the interbank market and sparking isolated cases of distress such as Northern Rock

Greater disclosure and transparency will be crucial as financial institutions seek to regain the trust of investors: this will not be easily won, especially as macroeconomic prospects for 2008 look increasingly challenging

With spread levels having already risen to historically wide levels, valuations look attractive; however, the macro fundamentals remain uncertain

Against that background, weak market conditions are likely to persist into H1 2008 before the building blocks of a recovery fall into place later in the year


7

The Universe of Global Credit


Lehman Global Aggregate Excluding Treasuries

Swedish Krona0.9%

Danish Krone0.3%

Japanese Yen6.2%

Other Asian Pac1.0%

Pounds Sterling5.5%

Canadian Dollar3.4%

United States Dollar56.5%

Others0.1%

Norwegian Krone0.0%

Euro26.2%

United States Dollar Euro Pounds Sterling Swedish Krona Danish KroneNorwegian Krone Japanese Yen Other Asian Pac Canadian Dollar Others

As of January 31, 2008

8

Spread Markets

Has risk been re-priced in credit markets?

Source: Bloomberg/Rogge

30

5070

90

110130

150

170190

210

230250

270

1990 1992 1994 1996 1998 2000 2002 2004 2006 200830

5070

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110130

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170190

210

230250

270USD CorpFinancial

basis points


9

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01January

1999

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2008

USD Corp Financial Industrial Utility

Global Corporate Credit Spread by Industry

Widening the Opportunity SetCredit Trends

10

Lehman US Corporate Index

19881989 1990

1991 199219931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008 (08/Feb)

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11

Global Credit Team

David GillardQuantitative Portfolio

ManagerPartner

David ButlerHead of Global Credit

ResearchPartner

Igor PikovskyHead of Risk Management

Partner

Annabel RudebeckSenior Global Credit

Analyst

Credit Quantitative DevelopmentCredit Risk Analysis

US UtilitiesUS FoodUS LodgingUS MiningUS Pharma

AutosGlobal BankingBrokerageInsuranceUtilitiesCredit StrategyCDS StructuresCash TradingReal Estate

TelecomsGeneral RetailFood & BeveragesHotels & LeisureMedia & EntsTechnologyChemicalsEuro Media & EntsPulp & PaperCredit StrategyCDS StructuresCash Trading

Portfolio Management & ConstructionCredit StrategyCDS structuresCash and CDS Trading

Malie ConwayHead of Global Credit

Partner

John MakowskeGlobal Credit Analyst

Partner, USA

Jingxin DengGlobal Credit Analyst

TobaccoAero & DefenseBasic IndustriesEnergyUtilitiesCapital GoodsTransportation

Portfolio Management & ConstructionCDS structuresCash and CDS Trading

ABS

Chandra GopinathanGlobal Credit Analyst

Daniel DelaneyGlobal Credit Analyst


12

Step 1 –Relative Value

Step 2 –Sector Selection

Step 3 –Security Selection

Step 4 –Implementation

Issuer DueDiligence

SectorFundamentals

TechnicalConsiderations

Investment Grade Credit Process

Relative Value

Buy/Sell/Hold/ Monitor/Report

Model Filter

Economic Factors

Technical Factors

Interest Rates

Instruments:BondsFuturesSwaps

Relative ValueSector

PreferenceUniverseof Issuers

BusinessPosition

FinancialPosition


13

Credit Screening Process

Quantitative model, formally implemented in credit selection process

Run daily with weekly portfolio manager report

4 main factors:– Equity price movement– Equity price volatility– Company leverage– Company size

Proven worth in predicting events using sensible signals

A few examples of distressed issuers

Aug-07Jun-07CFC

Oct-07Jun-07Lennar

Oct-07Aug-07Centex

Jul-07Jun-06Boston Scientific

Mar-05Jan-05Delphi

Mar-05Jan-05Ford

Mar-05Oct-04GM

Nov-04May-04Bombardier

Jul-04Apr-04AT&T

Feb-03Mar-02Ahold

Oct-02Jul-02Household

Aug-02May-02El Paso

Sep-02Mar-02British Energy

Jun-02Jan-02Sprint

Apr-02Jan-02WorldCom

Oct-02Sep-01Ford

Dec-01Sep-01K-Mart

Feb-02Jul-01Qwest

Apr-02Jun-01ABB

Nov-01Jun-01Enron

Aug-01Feb-01Marconi

Sep-01Aug-00KPN

Dec-00Aug-00Lucent

Event DateModel Sell DateSecurity Name


14Source: Rogge Global Partners/Bloomberg

Northern Rock Model Signal

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Valu

e Si

gnal

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%

Solid line a measure of equity valueBars indicate magnitude of equity riskGraph illustrates progession of 2 of 4 factors in screening model

Yield difference betw een NRBS 5.785 2015 (callable Jan10) and UKT 5.75 2009

S ELLWATCH

Avoided price erosion and downgrade to “junk” status

CreditWatch signal

Credit Watch – Northern Rock


15

-100

0

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1Q99

2Q99

3Q99

4Q99

1Q00

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Rogge Active -overw eight

Lehman Index -passive overw eight

-80

-60

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2Q99

3Q99

4Q99

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2Q00

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Rogge

Lehman

Rogge Corporate Bonds - Credit Contribution (Alpha) to Global Bond Portfolios vs. Passive Allocation to Lehman Index**(bps)

As of 31/01/08 ** Lehman Brothers US & European Corps Index

Sources: Lehman Brothers, Rogge Global Partners

Rogge’s Global Credit contribution shown above represents a carveout of the non-government bond holdings in one of Rogge’s representative global unhedged accounts. For details of the carveout and composite construction and calculation, please contact Malie Conway, Rogge Global Partners Plc, on +44 (0)20 7842 8437 .

Cumulative Quarterly

P erformance (bps ): 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*Rog g e 21.99 -8.49 85.43 80.43 173.91 91.03 46.46 69.61 -68.78 -29.76

Lehman 10.15 -13.01 22.73 -46.46 104.95 43.24 -13.08 28.35 -112.46 -45.03


16

Performance and Risk Characteristics(as at 31-January-08 in USD terms; gross of fees)

Tracking Error 2.29%Sharpe Ratio 0.74 0.43Beta 1.02 1.00Risk Adj. Alpha 2.42% 0.00%R² 0.84 1.00Information Ratio 1.05 0.00

Rogge Index*

1999 0.4 0.12000 5.6 2.92001 8.1 4.42002 20.6 14.82003 18.4 14.32004 12.2 9.52005 -2.7 -3.62006 8.2 7.22007 7.5 6.72008 2.3 1.5Since Inception 8.6 6.2

(annualized)

Annualized Performance AttributionJanuary 1999 – January 2008

Global Credit

* Merrill Lynch Global Corporate Index(Jan99-Aug00)/Lehman Global Aggregate - Corporate Index (Sep00-present)For details of the performance construction and calculation, please contact John Makowske, Rogge Global Partners US, on 001 (203) 254 7254.

2.3%

0.6%0.3%

1.1%

0.3%

0%

1%

2%

3%

CountrySelection

CurrencySelection

Duration/Yield CurveSelection

Sector/SecuritySelection

TotalExcessReturn

2.4%

0.6%0.4%

1.1%

0.3%

0%

1%

2%

3%

CountrySelection

CurrencySelection

Duration/Yield CurveSelection

Sector/SecuritySelection

TotalExcessReturn


17

Investment Grade Credit Process

1. Interest Rate MonitorDirection of RatesLong RatesShort RatesShape of Yield Curve

Dollar Euro Sterling

NeutralNeutralPositive

NeutralNeutralNeutral

NeutralNeutralNeutral

Neutral Neutral Neutral

3. Technical factorsHistorical PerspectiveVolatility of Swap SpreadsPrimary IssuanceLevel of DemandSeasonalityLiquidity

PositiveNegativeNegativeNeutralNeutralNeutral

PositiveNegativeNegativeNeutralNeutralNeutral

NeutralNegativeNegativeNeutralNeutralNeutral


Credit Spread Monitor – 2008

2. EconomicsGDP GrowthInflation Credit Quality TrendLevel of Corporate Leverage

NegativeNeutralNeutralNeutral




TOTAL NEUTRAL NEUTRAL NEUTRAL

18

Number of issuers necessary in each currency sub-sector to cover 66% of the benchmark

Impact Issuers

Source: Merrill Lynch

Number of issues

Number of issuers

Top 10 issuers representTop 20 issuers representTop 30 issuers representTop 40 issuers representTop 50 issuers representTop 60 issuers representTop 120 issuers represent

Global

1865

449

25.37%36.57%43.94%50.47%54.54%57.41%65.70%

Dollars Euro Yen Sterling

921 402 290 146

296 187 46 71

26.93% 26.60% 84.34% 49.03%36.95% 41.33% 63.95%48.70% 51.84% 74.56%55.57% 59.14%61.18% 65.73%66.02%

19

Industry Scorecard ExampleTelecommunications Q1 2008

Source: Rogge Global Partners

score: 1 2 3 4 5 6 7 8 9 10 Score

Market Composition fragmented / fragmenting 6 consolidated / ing 6

Barriers to Entry low / falling 4 high / rising 4

Exposure to Buyer Power high / rising 4 low /falling 4

Exposure to Supplier Power high / rising 8 low / falling 8

Exposure to Technological Change high / rising 4 low / falling 4

Growth Potential in decline 5 underlying growth 5

Propensity to Event Risk high / increasing 6 low / falling 6

Equity Performance underperform indices 6 outperform indices 6

Appetite for Leverage greater / rising 5 lesser / falling 5

Cash Flow weak /falling FCF 4 strong /rising FCF 4

Profit Margins low / falling 4 high / rising 4

Cyclicality downward 7 upward 7total 63

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Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

USD EUR GBP

Sector views: Telecoms

Industry Overview Q1 2008

European and North American incumbents continue to look to data (internet) offerings and mobile as higher margin fixed linerevenues dwindle

Wireless network income in Europe remains relatively stable but the market is mature and competitive, particularly in Germany. This is driving (expensive) acquisitive growth, with a focus on faster growing developing economies. Wireless penetration levels in the US are lower but fast reaching 100%

In the US, cable brings additional growth concerns for the smaller fixed line businesses (ILECs) but these are seeking to lower costs via M&A

Globally, margins remain high (for the near term) with cash flows enabling sizeable capital expenditures and also debt pay-down where necessary

Ratings are probably at a peak now, and the maximisation of shareholder value – M&A, increased dividends, large share backs – is likely to dominate, but rarely to the extent of losing investment grade in our opinion

Spreads remain relatively firm and are reasonable value on an RV basis, though near-term out-performance is unlikely as the supply calendar remains considerable and technology risks remain

Trading Ideas

Marketweight: France Telecom (A3/ A-) FT has faced considerable competition in its fixed line business due to early unbundling in France. However, free cash flow remains considerable and management remains focused on its credit profile. The French government stake brings further stability.

Underweight: Sprint (Baa3/BBB) The Sprint/Nextel merger continues to give cause for concern and WiMax capital expenditures will place ongoing demands on cash flow. Ratings have some time to run but the medium term outlook is challenging.

Option Adjusted Spreads

Source: Lehman Brothers

118.6bps

105.7bps

61.0bps

21

0

50

100

150

200

250

300


USD EUR GBP

Sector views: Consumer Non Cyclicals


With stable, steady cash flows and conservative balance sheets this sector has traditionally been a non-cyclical investor safe haven

Margin pressure does exist, from private label competition, but strong brands are generally very resilient. Food companies are having to battle with inflated input costs

With consumer markets generally well penetrated acquisitions remain commonplace as companies look externally for growth, especially in the beverage/ spirits area. These are generally credit neutral to negative, depending on financing

Cash returns to shareholders have increased markedly in recent quarters and ratings have been modestly impacted in a number of cases. Other boards remain more conservative however

Activist shareholders are pushing for greater shareholder returns in certain cases and in other cases they have tried to initiate M&A. Generally these moves would be credit negative

Trading Ideas

Marketweight: Procter & Gamble (Aa3/ AA-) Strong, steady business profile should weather any consumer downturn. Credit profile is conservative.

Underweight: Sara Lee (Baa1/ BBB+) The top line has improved but food costs continue to pressure profits. Management has yet to prove its restructuring plan a success. Spreads are very tight.



111.5bps

85.3bps

58.1bps

22

0

100

200

300

400


USD EUR GBP

Sector views: Finance Companies


Finance companies exposed to the US mortgage market have come under severe strain since the summer and it has got no better as the year has progressed. There remain ongoing asset quality challenges in the sector as the weak housing market and adjustable-rate mortgage resets will continue to pressure borrowers.

Lenders in the commercial real estate finance segment, such as iStar Financial, or in credit cards, such as Capital One, have also sold off in the last quarter of 2007 as evidence of pressures on the US consumer mounts.

While widening spreads in the consumer finance space may already have got ahead of the weakening fundamentals, we remain cautious on the sector. Apart from the asset quality challenges, finance companies retain a high reliance on wholesale funding markets but these have become much more selective in recent months while pricing is much less attractive. A tough few months ahead.

Trading Ideas

Underweight: ResCap (Ba3 neg / BB+ neg): a specialist subprime mortgage lender, owned by GMAC. Although now trading at distressed levels, we feel it is too early to take off the underweight here as house price dynamics in the US continue to deteriorate.



63.9bps

59.0bps

36.9bps

23

Global Credit

MALIE CONWAY, Partner, Head of Global Credit, Portfolio Management21 years experience analyzing international bond markets

A senior portfolio management team member at Rothschild Asset Mgmt, directly responsible for $6 billion in global, US and short term mandates

Assistant Vice President/Portfolio Manager at JP Morgan responsible for $4 billion in global, US and short term mandates

Trading assistant at W.I. Carr Ltd.

B.A. in Finance & Marketing (Honors), Southbank University, England

DAVID BUTLER, Partner, Head of Credit Research14 years financial experience

Senior Analyst, Fixed Income Credit Group at Natwest Markets

Served as lead analyst for Industrials, establishing credit ratings for corporate issues

Credit Analyst at Natwest Corporate Banking Services assessing lending risk of mid-to-large corporate clients

B.A. in History & French (Honors), University of Reading

24

JOHN MAKOWSKE, Partner, Global Credit Analyst24 years experience working with investment management organizations

Economic analyst for Bridgewater Associates

Vice President — Marketing Support Services for Fairfield Capital Associates

B.A. in Economics, University of Michigan; Graduate studies, New York University School of Business

ANNABEL RUDEBECK, Senior Global Credit Analyst8 years of global credit research experience, joined Rogge in 2004

Began her career at JP Morgan Securities in 1999 on the Graduate Training Programme

Credit Analyst in the London office covering industrial high-grade and cross-over credits.

Transferred to JP Morgan New York office for 2 years, covering a portfolio of North American issuers

Returned to the London office in sales to increase exposure to portfolio management and trading

MA in Economics, University of Cambridge

Global Credit

25

JINGXIN DENG, Global Credit Analyst6 years financial experience, joined Rogge in 2005

Credit Analyst, Global Credit Research Team, Bank of China, London

Financial Analyst, Taiking Life Insurance Co. Ltd. Beijing, China

Equity Analyst, Shenyin & Wanguo Securities Co. Ltd. Beijing, China

MSc in Accounting and Finance, London School of Economics, London

MBA in Finance, Peking University BSc in Economics, Nankai Univ., China

CFA Level 1 Qualified

CHANDRA GOPINATHAN, Credit Analyst

9 years experience in the financial industry

Vice President, Structured Products Group, Morgan Stanley Intl & Co, London

Vice President, Structured Products Group, Wachovia Securities, New York

Associate, Structured Products, Wachovia Securities, New York

Associate Analyst, Structured Finance Group, Moody’s Corporation, New York

M.S. in Financial Engineering, Columbia University, New York

B.S. Electrical Engineering, Ranked 6th in University, University of Bombay, Mumbai

Global Credit

26

Global Credit

DANIEL DELANEY, Global Credit Analyst

6 years experience in the financial industry

Desk Assistant, Relative Value and Emerging Market Trading, BluecrestCapital

Equity Derivatives Sales, Halewood International Futures Ltd., London

Independent Financial Adviser, Chase De Vere Private Clients, Bath

BA (Hons) Economics with School Commendation, University of Exeter

Investment Management Certificate (IMC)

CII Financial Planning Certificates 1, 2 and 3

Passed CFA Level 3 exam, awaiting charter

27

Emerging Market DebtRICHARD GRAY , Partner, Head of Emerging Markets, Portfolio Management

22 years analyzing international bond markets; 13 years in emerging market debt research

VP Emerging Markets Research at Bank of America, responsible for European, Asia Pacific & Latin America bond and local currency coverage

Director, Emerging Markets Research at Nomura International

Director, International Bond Research at Union Bank of Switzerland

Royal Dutch Shell in UK and overseas

St. Catherine’s College, Oxford; PPE (Hons)

LUIGI VENTIMIGLIA, Portfolio Manager 9 years experience in the finance industry Investment Manager/Assistant Vice President, State Street Global Advisors (SSGA) UK Ltd, London Portfolio Dealer, Global Fixed Income Team, SSGA UK Ltd, LondonAuditor , State Street Global Advisors UK Ltd., London MSc Financial Economics, University of London Degree in Management and Engineering, University of BolognaInvestment Management Certificate (IMC) Admission to the Italian Register of Professional Engineers

28

Emerging Market Debt

JENS MOLLER-BUTCHER, Partner, Portfolio Technologist13 years experience in developing financial systems; joined Rogge in 1996

Systems Analyst at Amerada Hess responsible for portfolio and billing systems

BA(Hons) Computing and Management Science University of Kent, Canterbury, England

MPhil in Management Studies from Wolfson College, University of Cambridge

29

DisclaimerThis document has been issued and approved by Rogge Global Partners PLC, which is authorised and regulated by the Financial Services Authority. Rogge Global Partners PLC has a joint venture with Tokyo Marine Rogge Asset Management Limited which is also authorised and regulated by the Financial Services Authority.

This communication is directed only at Market Counterparties or Intermediate Customers, as defined in the Glossary of the Financial Services and Markets Act 2000. Any investment or investment activity to which this communication relates is only available to and will only be engaged in with such persons and any other persons who receive this communication should not rely on or act upon this communication.

This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Prospective investors must rely on their own examination of the legal, taxation, financial and other consequences of an investment in the funds, including the merits of investing and the risks involved. Prospective investors should not treat the contents of this document as advice relating to legal, taxation or investment matters. No action should be taken or omitted to be taken in reliance upon information in this document. Figures, unless otherwise indicated, are sourced from Rogge Global Partners PLC. Please also note that Past performance may not be indicative of future results.

This document may include a list of Rogge Global Partners PLC’s clients. Please note that inclusion on this list should not be construed as an endorsement of Rogge Global Partners PLC’s services. Should you wish to contact a client for reference purposes, please let Rogge Global Partners PLC know in advance.

Contact

Rogge’s registered offices are at Sion Hall, 56 Victoria Embankment, London, EC4Y 0DZ

Tel: +44 (0)20 7842 8420

Fax: +44 (0) 20 7842 8421

Email: [email protected]

SDCI guideline proposal March 7 2008 - SDCERSCredit Spread Monitor – 2008 2. Economics GDP Growth...

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