Repositioning Fixed Income: Deploy Fixed Income Assets to Potentially Achieve Return Objectives in Low Interest Rates
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1 FOR INVESTMENT PROFESSIONAL USE ONLY NOT FOR U.S. INVESTORS Repositioning Fixed Income: Deploy Fixed Income Assets to Potentially Achieve Return Objectives in Low Interest Rates October 16, 2014 City Wire Conference Keith Bachman, Head of US High Yield Aberdeen Asset Management In the United States, Aberdeen Asset Management (AAM) is the marketing name for the following affiliated, registered investment advisers: Aberdeen Asset Management Inc., Aberdeen Asset Managers Ltd, Aberdeen Asset Management Ltd and Aberdeen Asset Management Asia Ltd, each of which is wholly owned by Aberdeen Asset Management PLC. "Aberdeen" is a U.S. registered service mark of Aberdeen Asset Management PLC.
2 Aberdeen Asset Management Total assets under management $551.4bn Fixed Income 22% Property 6% We are a global company with: Offices in the world s major financial centers Deep on-the-ground experience Unique insight into country/corporate developments Well researched ideas Equities 33% Solutions 39% We have global expertise in: Fixed income Equity Property Alternatives Multi-asset solutions Providing tailored solutions to our clients in every location Source: Aberdeen Asset Management PLC, 30 Jun 14 Figures may appear not to add due to rounding 1
3 Fixed Income Assets under Management 30 Jun 14 $bn Fixed Income UK 45.8 EMD 13.0 US 11.9 Australian 10.4 Convertibles 1% LDI 1% Money Markets 15% High yield 7.4 Asia 4.0 European 3.9 Global 3.8 Liability driven investment 1.2 Global 3% European 3% Asia 3% High Yield 6% UK 38% Convertibles 0.6 Money market 18.4 Total Fixed Income AuM Australian 9% US 10% EMD 11% Source: Aberdeen Asset Management, 30 Jun 14 Figures may appear not to add due to rounding Excluding fixed income component of multi-asset mandates For illustrative purposes only 2
4 Fixed Income capabilities North America US Credit Charles Tan US Short Duration Stephen Cianci & Neil Moriarty Global Head of Fixed Income Brad Crombie EMEA High Yield Steve Logan Convertibles Thomas Perez US Core & Core Plus Stephen Cianci & Neil Moriarty TRB & TRB Plus Donald Quigley & Lynn Chen Global High Yield Greg Hopper US High Yield Keith Bachman Toronto Edinburgh London New York Paris Philadelphia Budapest Singapore Bangkok Kuala Lumpur LDI Neil Falconer Absolute Return James Carver Emerging Market Debt Brett Diment Global Macro Jozsef Szabó Money Markets Kam Poon São Paulo Sydney European Macro Graeme Caughey Asia Pacific Global Credit Oliver Boulind Asian Fixed Income Adam McCabe Common Investment Resources European Credit Wolfgang Kuhn Australian Fixed Income Nick Bishop Credit Research Macro Research Quantitative Risk Analysis Derivatives Trading Money Markets Andrew Dickinson Source: Aberdeen Asset Management, 26 Aug 14 For illustrative purposes only Over 160 fixed income investment professionals worldwide 3
5 Aberdeen Asset Management: The global fixed interest platform Risk Mitigation Return Seeking EMD Investor s return expectation LDI Opportunistic Investment grade, ABS, MBS, CMBS, structured credit Global Credit Core, Core Plus, TRB, TRB Plus High Yield LIBOR & Short Duration Investor s risk appetite Deep experience across the fixed income asset class for over 30 years 4
6 Fixed income: Investment process overview Risk management Risk management Research Relative value Portfolio construction Risk management Risk management Common process, common language teams share ideas effectively 5
7 US High Yield: Five principles Global reach Build portfolios bottom-up Use full opportunity set Team decisionmaking Robust risk management More resources; better placed and better informed to allocate capital Relative value assessment drives portfolio construction Diversified sources of alpha; non-benchmark opportunities Experienced team with complementary skills Fully embedded throughout our investment process Better informed decisions Portfolios built one bond at a time Opportunities drive issue selection One common goal No surprises! Source: Aberdeen Asset Management 30 Jun 14 6
8 US high yield: Outlook Aberdeen believes: Coupon + returns as yields/spreads tighten following the summer sell-off Global thirst for yield continues While some capital appreciation is likely, most of the markets return will come from coupon income Low sensitivity to rising interest rates Excess spread relative to default risk can be viewed as a cushion to rising interest rates Low default rates for (at least) the next two years Refinancing continues to push out most potentially problematic maturities The vast majority of issuers could weather a prolonged closure of the capital markets Source: BOA/Merrill Lynch, 30 Sep 14 For illustrative purposes only Yield & spread to worst ( ) Spread to worst Yield to worst 25% 20% 15% 10% 5% 0% Default rate ( ) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
9 5 Pullbacks in US High Yield Markets Since Early 2011 Drawdowns of greater than 150bps have been met with inflow-driven yield tightening 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% Yield to worst >150-bps Index decline 4.00% 03/01/2 03/03/2 03/02/2 03/04/2 03/05/2 03/06/2 03/07/2 03/08/2 03/09/2 03/10/2 03/11/2 03/12/2 03/01/2 03/03/2 03/02/2 03/04/2 03/05/2 03/06/2 03/07/2 03/08/2 03/09/2 03/10/2 03/11/2 03/12/2 03/01/2 03/03/2 03/02/2 03/04/2 03/05/2 03/06/2 03/07/2 03/08/2 03/09/2 03/10/2 03/11/2 03/12/2 03/01/2 03/03/2 03/02/2 03/04/2 03/05/2 03/06/2 03/07/2 03/08/2 03/09/2 Source: Aberdeen Asset Management, 30 Sep 14 For illustrative purposes only 8
10 Loans as a percentage of the overall leveraged finance market 50% US HY* 2nd Lien Loans Inst'l 1st Lien Loans 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Bank of America, Apr 14 Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index. For illustrative purposes only *As measured by the The Merrill Lynch/Bank of America US High Yield Master II Index 9
11 Compelling risk/return characteristics 25 year period to 30 Sep 13 10% S&P500 9% High Yield Bonds* Wilshire 5000 Russell % Investment Grade** DAX Annualised Return 7% 6% 5% LB Agg. Bond Index*** 5 Year Treasury 10 Year Treasury FTSE 100 Gold CAC 4% 3% US Inflation 2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% Annualised Volatility Source: Bloomberg, 30 Sep 13. Past performance is not an indication of future results Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. Individuals cannot invest directly in an index. For illustrative purposes only US treasuries are backed by the full faith and credit of the US government *As measured by the The Merrill Lynch/Bank of America US High Yield Master II Index, ** As measured by The J.P. Morgan European Monetary Union Index (EMU), ex Peripheral Bond Index. ***As measured by the Lehman Brothers Aggregate Bond Index Historically high returns 10
12 Global High Yield market Composition of Global High Yield market 2.5 US HY EU HY EM HY Canada HY Face Value, US $ bn Global High Yield market 2003 Global High Yield market 2014 US HY EU HY EM HY Canada HY US HY EU HY EM HY Canada HY Source: Aberdeen Asset Management and Bank of America, 31 Jul 14. For illustrative purposes only 11
13 High yield bonds provide some protection against rising yields Corporate bond average yield (by credit quality) 12% Risk premium Government yield Investment grade Sub investment grade / High yield 10% 8% Yield (%) 6% 80% 4% 2% 20% 30% 40% 50% 60% 70% 0% AAA AA A BBB BB B CCC Source: BofA Merrill Lynch( GBC1-4, HW10,20,30) as at 31 Dec 13 Based on government OAS as a % of YTM Standard & Poor s credit ratings are expressed as letter grades that range from AAA to D to communicate the agency s opinion of relative level of credit risk. Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. The investment grade category is a rating from AAA to BBB- Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index. For illustrative purposes only Bonds with a higher spread are typically less correlated to changes in government rates 12
14 Global High Yield: Diversification benefits 10 year correlations Global High Yield* US Treasuries Global Governments** Global Credit Emerging Debt*** Global Equities**** S&P 500 Global High Yield US Treasuries -22% Global Governments 22% 64% Global Credit 72% 33% 76% Emerging Debt 77% 28% 46% 80% Global Equities 82% -25% 23% 66% 65% S&P % -26% 14% 54% 57% 96% Source: JPM since Jan 2004, monthly returns Diversification does not ensure a profit or protect against a loss in a declining market. US treasuries are backed by the full faith and credit of the US Government *As measured by the BofA Merrill Lynch Global High Yield Constrained Index **As measured by The World Government Bond Index ***As measured by the J.P. Morgan EMBI Global Diversified Index ****As measured by the MSCI World Index 13
15 US high yield: Historic comparison Historic yields and spreads Spread to worst Yield to worst 25% 20% 15% 10% 5% 0% Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: BOA/Merrill Lynch, 30 Sep 14. For illustrative purposes only 14
16 US high yield: Default rate LTM Issuer Default Rate, Pct Source: BOA/Merrill Lynch, 30 Sep 14. For illustrative purposes only 15
17 US high yield: Fund flows Fund flows ($mns) Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Source: Lipper FMI, 30 Sep 14. Monthly data. For illustrative purposes only 16
18 US high yield: New issue volume ($mn) Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Source: BOA/Merrill Lynch, 30 Sep 14. Calendar years $million. For illustrative purposes only 17
19 US high yield: New issue volume ($mn) YTD '14 Source: BOA/Merrill Lynch, 30 Sep 14. Calendar years $million. For illustrative purposes only 18
20 US high yield: Maturity profile ( maturity wall ) Face value of debt maturing Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Sep-14 1,600,000 1,400,000 1,200,000 1,000, , , , , Source: BOA/Merrill Lynch, 30 Sep 14. For illustrative purposes only 19
21 Why invest in High Yield now: An asset class for slow growth environments Asset class performance in various growth environments Corporate Bonds Equity US High Yield US Treasury Index Favorable Environment for Credit Favorable Environment for Equities/Alternatives Total Return (% - average) <0 0 to 3 >3 Annual GDP Growth (%) Sources: BofA Merrill Lynch, Barclays Capital, Goldman Sachs, Bloomberg, Aberdeen Asset Management, Dec 12. Past performance is not indicative of future results Corporate Bonds (BofA Merrill Lynch US Corporate Master), Equity (S&P 500 Index) and Government (BofA Merrill Lynch US Treasury Master Index) based on annual data for the period 1/1/80 to 12/31/12; High Yield (BofA Merrill Lynch US High Yield Master II Index) data unavailable prior to 1987 Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index. For illustrative purposes only 20
22 Summary 1. Compelling argument Potentially attractive long term returns 2. Positive diversification benefits Supports broad asset allocation decision 3. Compelling return /risk characteristics High yield can offer long-term benefits 4. An alternative to equities Intensive credit research is key Aberdeen Your high yield bond provider 21
23 Disclaimer Important: The above is strictly for private circulation and information purposes only and should not be considered as an offer, or solicitation, to deal in any of the investments mentioned herein. Aberdeen Asset Management ( AAM ) does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials. Past performance is not necessarily a guide to the future. Any research or analysis used in the preparation of this document has been procured by AAM or its affiliates for their own use and may have been acted on for their own purpose. The results thus obtained are made available only coincidentally and the information is not guaranteed as to its accuracy. Some of the information in this document may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment. Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither AAM nor any of its agents have given any consideration to nor have they made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or group of persons. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document. The information herein including any expressions of opinion or forecast have been obtained from or is based upon sources believed by AAM to be reliable but is not guaranteed as to accuracy or completeness. The information is given without obligation and on the understanding that any person who acts upon it or otherwise changes his position in reliance there on does so entirely at his or her own risk. AAM reserves the right to make changes and corrections to its opinions expressed in this document at any time, without notice. Any unauthorized disclosure, use or dissemination, either whole or partial, of this document is prohibited and this document is not to be reproduced, copied, made available to others. Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging market countries. Concentrating investments in the European region subjects the Fund to more volatility and greater risk of loss than more geographically diverse funds. Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase). Additionally, high-yield securities may face additional risks, including economic growth; inflation; liquidity; supply; and externally generated shocks (stress factors emanating from outside the U.S. market). The Merrill Lynch/Bank of America US High Yield Master II Index tracks the performance of U.S. dollar-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have a below-investment-grade rating and an investment-grade rated country of risk. In addition, qualifying securities must have at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of $100 million. Defaulted securities and securities eligible for the dividends-received deduction are excluded from the Index. The Barclays Capital U.S. Aggregate Bond Index is an index of U.S. dollar denominated, investment-grade U.S. corporate government and mortgage-backed securities. The S&P 500 Index is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. 22
24 Disclaimer The Wilshire 5000 Index includes all publicly traded stocks headquartered in the U.S. and holds over 7,000 stocks. The DAX is a stock index that represents 30 of the largest and most liquid German companies that trade on the Frankfurt Exchange. The prices used to calculate the DAX Index come through Xetra, an electronic trading system. A free-float methodology is used to calculate the index weightings along with a measure of average trading volume. The Lehman Brothers Aggregate Bond Index is a benchmark index made up of the Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Asset-Backed Securities Index, including securities that are of investment-grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million The FTSE 100 Index, also called FTSE 100, FTSE, or, informally, the footsie /ˈfʊtsiː/, is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. It is one of the most widely used stock indices and is seen as a gauge of business prosperity for business regulated by UK company law. The index is maintained by the FTSE Group, a subsidiary of the London Stock Exchange Group. The World Government Bond Index (WGBI) measures the performance of fixed-rate, local currency, investment grade sovereign bonds. The WGBI is a widely used benchmark that currently comprises sovereign debt from over 20 countries, denominated in a variety of currencies, and has more than 25 years of history available. The Morgan Stanley Capital International World (MSCI World) Index is a free float-adjusted, market capitalization-weighted index that is designed to measure the performance of companies domiciled in various countries. The index is unmanaged and have been provided for informational purposes only. No fees or expenses are reflected. Individuals cannot invest directly in an index. The S&P 500 Index is a market capitalization-weighted index that includes 500 leading companies in leading industries of the U.S. economy. Focusing on the large-cap segment of the market, the S&P 500 Index covers approximately 80% of available U.S. market capitalization. Index is unmanaged and no fees or expenses are reflected. Individuals cannot invest directly in an index. Past performance does not guarantee future results. Aberdeen Asset Management (AAM) offers a variety of products and services intended solely for investors from certain countries or regions. Your country of legal residence will determine the products or services that are available to you. Nothing in this document should be considered a solicitation or offering for sale of any investment product or service to any person in any jurisdiction where such solicitation or offer would be unlawful. The information contained herein is intended to be of general interest only and does not constitute legal or tax advice and should not be considered as an offer, or solicitation, to deal in the shares of any securities or financial instruments. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information provided and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment. Not for US investors For Professional Use Only. Not for Public Distribution 2014, Aberdeen Asset Management Inc. aberdeen-asset.us 23
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