Insight Multi-Asset Bond Funds

Transcription

1 Insight Multi-Asset Bond Funds Citywire North Conference 03 September 2014 Prepared for professional clients only

2 Insight Investment team Adam Mossakowski Portfolio Manager, Fixed Income 2

3 Insight Investment Investment capabilities Overview Locations: London, New York, Sydney and Tokyo Established: 2002 Insight delivers innovative yet practical investment solutions tailored to meet investors changing needs. Insight s expertise, strength and depth of knowledge span the entire risk-return spectrum to offer clients complete flexibility; an essential tool in providing tailored client solutions. Investment scope: Liability driven investment Fixed income Currency management Absolute return Real assets Diversified growth Specialist equities Cash management Derivatives management 3

4 Insight Investment Assets under management Total assets under management: 361.3bn By investment area By client type 35.4bn 3.7bn 1.7bn 0.2bn 8.5bn 10.3bn 14.4bn 5.7bn 6.5bn 1.7bn 1.4bn 80.1bn 240.2bn 312.8bn Financial solutions Fixed income Pension Insurance Currency management Multi asset strategies Specialist equity Real assets Wholesale Financial institutions NFP: endowments / charities Sovereign wealth Corporate Local authorities As at 30 June Assets under management are represented by the value of cash securities and other economic exposure managed for clients. FX rates as per WM Reuters 4pm Spot Rates. 4

5 Insight Investment Our credentials Insight Investment assets under management¹ bn bn 273bn bn bn bn bn 73bn 75 55bn 46bn 50 26bn 31bn 32bn 36bn Q As at 30 June Assets under management are represented by the value of cash securities and other economic exposure managed for clients. ¹ Excludes previous parent introduced assets prior to

6 Insight Investment Our credentials Autonomous asset manager owned by BNY Mellon Reputation for excellence in: multi-asset and absolute return active fixed income liability risk management currency risk management 6

7 Insight Ranked top decile for institutional fixed income Greenwich Quality Index investments 2013 Number of consultants evaluating Manager B Manager D Manager O Manager L Median Manager P Manager N Manager J Manager S Manager A Manager U Manager C Insight Manager I Manager F Manager H Manager E Manager G Manager R Manager T Greenwich Quality Index Fixed Income Investments Source: Greenwich Associates 2013, UKIC FI-13 fixed Income investment. Results are based on interviews with 15 UK consultants evaluating fixed income managers. Greenwich Quality Index scores for each evaluator range from 1,000= Excellent to 0= Poor with a population mean of 500 7

8 Accessing Insight s multi-strategy capabilities Alpha and Beta delivery from a 19-strong Currency & Fixed Income Team Government bonds Government futures Inflation linked bonds Emerging market debt Adam Mossakowski Peter Bentley Insight Strategic Bond Fund Absolute Return Bond Fund Investment grade credit Asset Backed Securities Credit Default Swaps High yield Interest rate swaps CoCos Loans Currency Money market instruments Collateralised Loan Obligations Beta: strategic allocation between fixed income markets no equity risk Alpha: accessing best ideas from Insight s specialist teams 8

9 Delivering alpha Insight Bonds Plus Fund, historic performance contribution (bp) 1,200 1, Market Allocation Duration and yield curve IG Credit ABS HY and loans EMD FX 9

10 Summary: today s environment needs a different approach Risks/opportunities Asymmetric interest rate risk Concentrated market indices Sovereign credit risk Bank deleveraging A global grab for yield Potential olutions Absolute return bond investment Allow manager greater investment freedoms Long and short positions Coverage of all areas of bond market: diversification Expertise to seek out less crowded investments in the credit markets Non-traditional bond investment can still deliver positive returns 10

11 Insight fixed income offering Rising rate environment Rising inflation Stable rate environment Nominal duration Inflation exposure Underlying yield Neutral/Negative in a rising environment Negative Negative Positive 4 years 4.3% Absolute Return Bond Fund Insight Strategic Bond Fund Neutral Neutral / Negative Negative Positive 4 years 4.3% Neutral Neutral 1.7% Absolute Return Bond Fund Neutral Neutral Neutral 1.7% Source: Insight as at 30 June

12 Interest rates

13 Policy and rates The problem High(ish) inflation Near zero cash rates How do you protect real wealth? The grab for yield Need to take duration risk or credit risk or both The risks Policy makers want to normalise rates a lot of this is priced in, but can the economy take it? UK Rates 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% UK base rates UK gilt yields Source: Bloomberg 14

14 The path forwards How the grab for yield can still work in a rising rate environment 10.00% 9.00% Market expectations 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% BBB Breakeven Gilt Breakeven 0.00% UK Base Rate, and market expectations 5yr Gilt Yield 5yr BBB Yield Source: Bloomberg, March 2014 The breakeven partially protects bondholders 15

15 Credit market backdrop

16 Credit 14% 12% 10% 8% 6% 4% 2% 0% Moody's Trailing 12 Month Speculative Grade Default Rate (LHS) US GDP (inverted, no scale) US Fed; Loan Officer Survey (RHS) Expect a benign default environment Source: Bloomberg 17

17 Credit M&A and cash balances Deal volume (m) Q102 Q104 Q106 Q108 Q110 Q112 Q114 Cash balances, % assets 14% 13% 12% 11% 10% 9% 8% 7% 6% North America Western Europe North America Western Europe M&A activity is increasing, but corporates are very cash-rich Source: Bloomberg 18

18 Credit Summary Lending conditions favourable, and low overall yields keep financing costs down Corporates are cash-rich have been hording through the crisis years Corporate leverage is moderately increasing, but from a position of strength Risks Increase in covenant-lite new issuance Reckless M&A... but these are concerns for the future 3.0x 2.5x 2.0x 1.5x 1.0x Summary Grab-for-yield still ongoing Credit still attractive in the right areas 0.5x Total leverage - US Total leverage - Europe Net leverage - US Net leverage - Europe Source: Bloomberg, March

19 Investment Grade Credit 16% 14% 12% 10% 8% 6% 4% 2% 0% Moody's Trailing 12 Month Speculative Grade Default Rate (LHS) GBP Non-Govt Investment Grade, Spread over Govt (RHS) 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Investment Grade still has value, supportive fundamentals Source: Bloomberg, March

20 High Yield 25% 20% 15% 10% 5% 0% European High Yield, Spread over Govt (LHS) Moody's Trailing 12 Month Speculative Grade Default Rate (LHS) High Yield priced for perfection Source: Bloomberg, March

21 itraxx Indices X-Over itraxx CDS indices Indices that reference a basket of single-name credit default swaps (CDS) e.g. Senior Financials Subordinated Financials HiVol (high volatility names) X-Over (crossover) This index references 60 European BB or BBB/BB crossover split rated companies, e.g. Air France Fiat Lafarge Can be used to create negative exposure to High Yield investor buys protection High degree of correlation to physical market 1,800 1,600 1,400 1,200 1, itraxx European Crossover Index (bp) European BB High Yield, Spread (bp) Source: Bloomberg, March

22 High Yield Hedged stock selection Market Overall high yield market may be expensive, but there are still plenty of interesting stock selection opportunities worth exploiting Opportunity Issuers aggressively refinancing at lower yields bonds periodically trading to call price M&A causing additional volatility Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 itraxx Crossover Index Wind Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Tactic Continue to invest in fundamentally solid companies but hedge out market risk, e.g buy itraxx X-Over protection -50 Differential Source: Bloomberg, March

23 ABS

24 ABS Asset Backed Market Spreads have compressed from crisis-wides But still paid more spread than likerated corporate bonds And better asset-backing and recovery rates AAA ABS spreads over Libor (bp) 1,400 1,200 1, Ongoing potential for spread tightening ECB and QE of ABS assets Regulatory changes bp Feb 07 Jun 08 Oct 09 Mar 11 Jul 12 Dec 13 UK RMBS AAA 5y GBP Dutch RMBS AAA 5y EUR Insight long term fair value level UK Non-Conforming AAA 3y GBP Europe CMBS AAA 5y EUR Source: JP Morgan as at 30 June

25 ABS Collateralised Loan Obligations (CLOs) What are they Tranched security backed by underlying pool of loans, typically to SMEs Can invest in different tranches Market recently re-opened for new business Why own them Significant pick-up in spread versus similarly rated RMBS, CMBS and corporate bonds Trading too cheap given the robustness of the underlying fundamentals 35% 30% 25% 20% 15% 10% 5% 0% Loss 65% Rec BBB Averge Credit Support AAA Averge Credit Support BB Averge Credit Support Source: S&P/LSTA 26

26 ABS High yield vs Loans vs CLOs Rating Spread Average default rate Recovery rate BE spread Excess return HY Bonds BB- 360 bp 350 bp 25% 262 bp 98 bp HY Loans BB* 430 bp 310 bp 70% 93 bp 337 bp HY CLOs BB 600 bp 8 bp 0% 8 bp 592 bp In the High Yield space the pick-up in spread is very attractive Source: Barclays, Credit Suisse, Wells Fargo as at 31 December * Implied rating by Insight Investment 27

27 Financials contingent convertibles (CoCos)

28 A new bank capital structure Feature Covered Senior Tier 2 Tier 2 CoCo AT1 CoCo Seniority Own asset pool, then Senior Senior Maturity Hard bullet Hard bullet Subordinated to Senior Hard with earlier call/s Subordinated to Senior Hard with earlier call/s Coupon payment Mandatory Mandatory Mandatory Mandatory Subordinated to Tier 2 Perpetual with earlier call/s Optional (even if equity dividend is paid) CET1 write-down trigger None None None % % Loss absorption mechanism None None None Write-down on ratio trigger Write-down on ratio trigger Typical spread* 40bp 100bp 180bp 320bp 510bp 140bp more spread per annum 330bp more spread per annum Source: Insight Investment, *based on Barclays USD bonds, iboxx as at 15 June

29 CoCos Trading example Market Banks heavily incentivised to issue; Regulator desire Tax deductible coupons Improved Senior/Tier 2 ratings Barclays Subordinated 5yr CDS Barclays 7.625% 2022 Tier 2 CoCo Opportunity Banks periodically overpaying for certainty of execution when bringing new CoCos to the market Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 This also distorts secondary CoCo and vanilla bank debt market Differential Tactic 275 Exploit RV mispricings 225 but hedge some of the risk 175 Source: Bloomberg, Insight, June

30 Who has been buying CoCos? Change in ownership 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% RABO $17 (Nov-11) BACR $22 (Nov-12) KBC $23 (Jan-13) SG $18 (Sep-13) ACAFP $33 (Sep-13) CS $25 (Sep-13) POP $18 (Sep-13) SG $23 (Dec-13) BACR E20 (Dec-13) Asset managers Insurance/pension Hedge funds Private banks Banks Other Source: Barclays, JP Morgan, SocGen as at 31 December

31 CoCo summary Potentially flawed asset class Full coupon optionality removes structural seniority over shareholders No natural buyer base most bonds rated sub-investment grade, excluded from indices anyway But Strong pressure and incentive to issue 37bn of AT1 CoCos and 34bn of other CoCos printed thus far c. 85bn more to come Asset class is here to stay Periodic trading opportunities for now Source: Insight as at 31 July

32 BNY Mellon Absolute Return Bond Fund Current asset allocation and yield breakdown Asset allocation Government bonds Government futures IG Corporates HY Corporates CDS Interest rate swaps Loans Yield breakdown Asset class Yield over Euribor (%) Investment grade corporates (net long and short) 0.11 ABS 0.37 EMD (net long and short) 0.24 High yield (net long and short) 0.17 Loans 0.22 Money market instruments and governments 0.11 Total 1.16 ABS CRE Emerging Market Debt Fund Cash and money market instr. -50% 0% 50% 100% Past performance is not a guide to future performance. Source: Insight, data as at 30 June Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations 33

33 Insight Strategic Bond Fund Fund positioning Allocation Hedge Average Spread (bp) Average Hedge Spread (bp) Av. Rate Duration (years) Av. Spread Duration (years) Government bonds and rates 19.6% -77.4% High yield 24.4% -3.8% Investment grade non-financials 10.8% Financials 23.0% ABS 23.7% Emerging markets 13.5% -1.7% Overall Fund 115.0% -82.9% Average Yield (%) High Yield exposure is predominantly short dated 7% in CLOs 11% in Cocos Source: Insight as at 31 July

34 Insight's absolute return strategy credentials Insight s capabilities Established track record in institutional absolute return bond strategy (targets Libor+ 2%) extending back to 2006 Existing strategy: has delivered strong returns with limited drawdown in distressed markets buy rated by the major global investment consultants AUM: 4.4bn/ 5.2bn Absolute Return Bond Fund: Launched March 2012 Performance aim of cash (3 month Euribor) + 3% Daily liquidity, UCITS compliant Gold rated by S&P Capital IQ Insight institutional absolute return strategy performance (calendar year) 1 Insight institutional absolute return strategy performance 1 Past performance is not a guide to future performance. AUM figures are as at 31 December ¹ Insight institutional absolute return strategy launched 31 August Returns are gross of fees and in GBP to 28 February All returns over one year are annualised. This investment strategy shown is used to illustrate Insight's skills and experience, it is not an indication of how the BNY Mellon Absolute Return Bond Fund will perform. Performance numbers are provisional and subject to change. FX rates as per WM Reuters 4pm Spot Rates. % % YTD ¹ year 3 years (pa) 5 years (pa) Since inception (pa)¹

35 Appendix

36 Performance track records Selected UK bond capabilities Insight UK Corporate All Maturities Insight UK Government All Maturities % Insight Sterling Liquidity month 3 month 1 year 3 years (pa) 5 years (pa) Composite Benchmark Past performance is not a guide to future performance. These track records are shown to illustrate Insight s skill and experience and are not a representation of how the fund may perform. Returns data is gross of fees and in GBP to 31 January All returns over one year are annualised. The impact of management and performance fees can be material. Generally, investment management fees are charged based upon the size of the portfolio. Some portfolios also include fees based on investment performance. A fee schedule providing further detail is available on request from BNY Mellon Asset Management International Limited. Insight UK Corporate All Maturities Fund(Composite C0621) is gross of fees and in GBP to 28 February Benchmark: iboxx Non-Gilts index. Inception: November Insight UK Government All Maturities Fund. (Composite C0623) is gross of fees and in GBP to 28 February Benchmark: FTSE All Stocks Gilts index. Inception: November Sterling Liquidity Fund: benchmark: 7 Day GBP Libid, inception: 31 December 2002, currency: GBP.A copy of a fully compliant GIPS performance record for each composite is available in the Appendix. 37

37 Performance track records Selected specialist bond capabilities Libor plus (asset backed securities) Short duration high yield % YTD Since inception (pa) Composite Benchmark Bonds plus (global absolute return bonds) Absolute Insight Emerging Market Debt Fund Past performance is not a guide to future performance. These track records are shown to illustrate Insight s skill and experience. Returns data is gross of fees and in GBP to 31 January All returns over one year are annualised. The impact of management and performance fees can be material. Generally, investment management fees are charged based upon the size of the portfolio. Some portfolios also include fees based on investment performance. A fee schedule providing further detail is available on request from BNY Mellon Asset Management International Limited. Libor plus (ABS) (C0652): benchmark: 3m GBP Libor, inception: 31 December Short duration high yield (C0810): benchmark: 3m GBP Libid, inception: 30 November Bonds plus (C0041): benchmark: 3m GBP Libor, inception: 31 August Absolute Insight Emerging Market Debt Fund: benchmark: 3 Month GBP Libid, inception: 28 February 2007, performance shown is for GBP share class, base currency of the fund is USD. 38

38 Credit research resources Experienced in-house credit resources Shaheer Guirguis Head of Secured Finance (13 yrs) David Averre Head of Credit Analysis, Telecoms Media Technology (26 yrs) Duncan Westbrook Jeremy Deacon Charles-Henri Boivin Uli Gerhard Alex Moss Eleanor Price Lionel Trigalou Cathy Braganza Sector Sector Sector Sector Sector Sector Sector Sector ABS ABS Autos Oil and Gas Mining Food Banks Chemicals Structured credit Structured credit Capital goods Steel Leisure Insurance Energy Building Materials Real Estate Paper and Packaging Transport Finance companies 11 years 22 years 9 years 16 years 26 years 19 years 16 years 20 years Tristan Teoh Greg Newman Ranbir Lakhpuri David Herrington Robert Sawbridge Simon Cooke Anna Stevens Sunil Patel Sector Sector Sector Sector Sector Sector Sector Sector ABS Structured credit ABS Structured credit Loans Corporates Consumer non-cyclicals Telecoms Media Banks Insurance Utilities Technology Finance companies 8 years <1 year 13 years 3 years 6 years 3 years 7 years 6 years Year(s) of industry experience. As at April

39 Important Information Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested. This is a financial promotion for Professional Clients and/or distributors only. This is not intended as investment advice. You should read the Prospectus and Key Investor Information Document (KIID) for each fund in which you want to invest. The Prospectus and KIID can be found at Any views and opinions expressed are those of the investment manager, unless otherwise noted. This document should not be published or distributed without authorisation from BNYMIM EMEA. Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations. Insight Strategic Bond Fund disclosures The Fund may not be registered for sale in all markets. The Fund is a sub-fund of BNY Mellon Investment Funds, an investment company with variable capital (ICVC) incorporated in England and Wales under registered number IC27 and authorised by the Financial Conduct Authority. BNY Mellon Fund Managers Limited (BNY MFM) is the Authorised Corporate Director. BNY Mellon Fund Managers Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No Authorised and regulated by the Financial Conduct Authority. The investment adviser of the Insight sub-funds is Insight Investment. ICVC investments should not be regarded as short-term and should normally be held for at least five years. There is no guarantee that the Fund will achieve its objective. This Fund invests in international markets which means it is exposed to changes in currency rates which could affect the value of the Fund. The Fund will use derivatives to generate returns as well as to reduce costs and/or the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment. Investments in bonds are affected by interest rates and inflation trends which may affect the value of the Fund. The Fund holds bonds with a low credit rating that have a greater risk of default. These investments may affect the value of the Fund. The Fund invests in emerging markets. These markets have additional risks due to less developed market practices. The Fund invests in asset-backed securities which means your investment is likely to be closely linked to changes in the value of the underlying assets on which the asset backed securities are based. The Fund takes its charges from the income of the Fund in the first instance. The impact of Fund charges may be material on the value of any income you receive from your investment. There is potential for capital erosion if insufficient income is generated by the Fund to cover these charges.a complete description of the risk factors is set out in the Prospectus in the section entitled "Risk Factors". performance aim generally take more risk to achieve this and so have a greater potential for the returns to be significantly different than expected. This Fund invests in international markets which means it is exposed to changes in currency rates which could affect the value of the Fund. Investments in bonds are affected by interest rates and inflation trends which may affect the value of the Fund. The Fund holds bonds with a low credit rating that have a greater risk of default. These investments may affect the value of the Fund. The Fund may invest in emerging markets. These markets have additional risks due to less developed market practices. The Fund may invest in structured products which means your investment return is likely to be closely linked to changes in the value of the underlying assets on which the structured products are based. The Fund takes its charges from the income of the Fund in the first instance. The impact of Fund charges may be material on the value of any income you receive from your investment. There is potential for capital erosion if insufficient income is generated by the Fund to cover these charges. The Fund will use derivatives to generate returns as well as to reduce costs and/or the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment. The Fund employs a long/short strategy through the use of derivatives. This strategy is substantially different from 'long only' funds and returns are likely to vary. With both long and synthetic (i.e. created through derivatives) short positions, it is unlikely to achieve the same capital growth as a long-only fund in a rising market but should not experience the same level of decline in a falling market. However, neither of these outcomes is guaranteed for the Fund. The share class uses techniques to try to reduce the effects of changes in the exchange rate between the share class currency and the base currency of the Fund. These techniques may not eliminate all the currency risk. This document is issued in the UK only by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No Authorised and regulated by the Financial Conduct Authority. BNY Mellon Investment Management EMEA Limited, BNY Mellon Investment Funds, BNY Mellon Fund Managers Limited, and any other BNY Mellon entity mentioned are all ultimately owned by The Bank of New York Mellon Corporation. BNY Mellon Absolute Return Bond Fund disclosure The Fund may not be registered for sale in all markets. The Fund is a sub-fund of BNY Mellon Global Funds, plc, an openended investment company with variable capital (ICVC), with segregated liability between sub-funds. Incorporated with limited liability under the laws of Ireland. It is authorised by the Central Bank of Ireland as a UCITS Fund. The Management Company is BNY Mellon Global Management Limited, approved and regulated by the Central Bank of Ireland. Registered address: 33 Sir John Rogerson s Quay, Dublin 2, Ireland. This investment should not be regarded as short-term and should normally be held for at least five years. The performance aim is not a guarantee, may not be achieved and a capital loss may occur. Funds which have a higher Issued as at 01/09/2014. CP (3M) 40