UNLOCKING VALUE IN EUROPEAN HIGH YIELD

Transcription

1 UNLOCKING VALUE IN EUROPEAN HIGH YIELD 26 March 2015 Mike Della Vedova T. Rowe Price European High Yield Portfolio Manager

2 About T. Rowe Price As of 31 December 2014 Figures Shown in Euros T. ROWE PRICE: A STRONG FIRM WITH DEEP RESOURCE Assets under management: EUR of which more than EUR 130 billion in Fixed Income Assets Over 75 years of dedicated investment management and related services within an independent, highly stable organisation and a culture that puts client interests first 5,870 employees and 454 investment professionals in 14 offices across the globe An experienced team of portfolio managers with an average firm tenure of 17 years Firm led by a 7 person Management Committee with an average tenure of 26 years Strong balance sheet with no long-term debt Fixed Income Investment Professionals High Yield Expertise Portfolio Managers 24 Portfolio Managers/Analysts 6 Associate Portfolio Managers 6 Credit Analysts 46 Quantitative Analysts 25 Economist 1 Traders 24 Trading Assistants and Analysts 11 Portfolio Specialists 7 Management 6 Solutions 2 Total Fixed Income Professionals 158 TOTAL FIRM ASSETS billion FIXED INCOME ASSETS OVER 130 billion HIGH YIELD ASSETS MORE THAN 20 billion 4 Senior Portfolio Managers US High Yield European High Yield 13 High Yield Analysts Bank Loans Global High Yield 5 High Yield and Bank Loan Traders 1 The combined assets under management of the T. Rowe Price group of companies in Euros. The T. Rowe Price group of companies includes T. Rowe Price Associates, Inc., T. Rowe Price International Ltd, T. Rowe Price Hong Kong Limited, T. Rowe Price Singapore Private Ltd., and T. Rowe Price (Canada), Inc. Assets under management are calculated in U.S. dollars and converted to Euros using an exchange rate determined by an independent third party. 2

3 T. Rowe Price Funds SICAV European High Yield Bond Fund As of 31 December 2014 MIKE DELLA VEDOVA Portfolio Manager 1 Benchmark Period to 28 Feb 2015 BoA Merrill Lynch European Currency High Yield Constrained Excluding Subordinated Financials Index Hedged to EUR 1 year 2 year 3 year Performance % Ranking Percentile Ranking 2 / 15 1 / 12 2 / 10 8 th 1 st 12 th 21 years of investment experience 5 years with T. Rowe Price Worked previously at: UBS (high yield structuring team) Muzinich (assistant portfolio manager) Category: European High Yield Bond Performance annualised, based on the I share class 1 Morningstar Ratings: 2015 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. As at 31 December Source for performance: Morningstar. Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of the investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges, taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures. Where the base currency of the fund differs to the share class currency, exchange rate movements may affect returns. The I Class of the fund is compared against Luxembourg and Ireland domiciled funds in its Morningstar sector, filtered by the field Institutional: Yes. If there is more than on institutional share class per fund, the following filters (shown in order of priority) will be applied to enable fair comparison against one share class per competitor fund: unhedged, highest maximum management fees, lowest minimum investment amount, highest share class size, highest net expense ratio, oldest performance start date, accumulation preferred, US dollar currency,. This filter should only be used as a guide. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results 3

4 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 European High Yield Has Come a Long Way As of 31 December 2014 HISTORICAL YIELD TO MATURITY AND RISK PREMIUM (%) Since December % Performance 74.88% 2010 Performance 14.26% 2011 Performance -2.48% 2012 Performance 27.21% 2013 Performance 10.06% 2014 Performance 5.48% % Yield to Maturity Option Adjusted Spread 0 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Source: BoA Merrill Lynch Euro High Yield Index. As at 31 December

5 And Not All Parts of the Market Offer Value Today As of 31 Dec 2014 Figures Shown in Euros EURO HIGH YIELD MARKET YIELD TO MATURITY (%) PER RATING Average Rating Yield to Maturity (%) Proportion of the Market (%) BB 3.2% 59.6% B 6.6% 33.5% CCC and Lower 12.8% 6.9% Index 5.0% 100% Source: BoA Merrill Lynch Euro High Yield Index. 5

6 A Closer Look at B Rated Issuers As of 31 Dec 2014 Figures Shown in Euros EURO HIGH YIELD SINGLE B SECTOR BREAKDOWN Utility 2% Financial Services 2% Capital Goods 3% Healthcare 5% Leisure 4% Transportation 1% Others 2% Mizzen Bondco Automotive 18% Telecommunications 6% Consumer Goods 6% Services 13% Retail 6% Banking 9% Basic Industry 11% Media 12% Source: BoA Merrill Lynch Euro High Yield Index and T. Rowe Price. The securities identified and described above are intended to illustrate the security evaluation process of T. Rowe Price investment professionals and do not represent all of the securities analysed or purchased or sold for the SICAV sub-fund. No assumptions should be made that the securities analysed, or other securities analysed, purchased or sold, were or will be profitable. To further illustrate our security selection process, a complete list of securities in the SICAV sub-fund that were purchased or sold during the past year is available on request, subject to applicable law. 6

7 Focusing on First Time Issuers is Key EXISTING VS. NEW ISSUERS: TOTAL GROSS ISSUANCE in EUR billions, Fixed Rate and Floating Rate Type Issues Existing Issuers New Issuers % Total Issuance YTD2014 Fixed and Floating Rate Notes 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% TYPICAL FIRST TIME ISSUER New capital structures New joint ventures from existing companies Existing companies refinancing from bank loans Ability to pick interesting new issuers with attractive premium Source: Moody s and T. Rowe Price, as of 30 November 2014, figures shown in euros. 7

8 While Preference Should be Given to New Issues EURO HIGH YIELD MARKET Current market vs. new issues % Yield to Maturity of the Euro High Yield Index Yield to Worst of the Euro High Yield Index Yield to Worst at Launch from "B Rated" New Issues (Existing and First Time Issuers) 2 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 More premium to capture, better liquidity profile Sources: BoA Merrill Lynch and T. Rowe Price as of 31 December

9 Security Selection Goes Beyond Name Selection As of 30 Sep 2014 Choice of Maturity/ Duration Matters ESTIMATED CUMULATIVE PERFORMANCE As of 30 Sep 2014, over last 12 months (%) % In Euros 6 5 % Bond 2: Medium Duration 3.40% Bond 1: Short Duration Rating B3/B/B- 4 Unity 9.625% 01-Dec-19 Callable on 01-Dec % Bond 2: Medium Duration Rating B3/B/B- 2 1 Unity 9.50% 15-Mar-21 Callable 15-Mar-16 0 Bond 1: Short Duration Sources: BoA Merrill Lynch and T. Rowe Price The estimated cumulative performance is calculated using a pro-rata of the annual coupon applied to the number of days in the year the security received an official pricing. The securities identified and described above are intended to illustrate the security evaluation process of T. Rowe Price investment professionals and do not represent all of the securities analysed or purchased or sold for the SICAV sub-fund. No assumptions should be made that the securities analysed, or other securities analysed, purchased or sold, were or will be profitable. To further illustrate our security selection process, a complete list of securities in the SICAV sub-fund that were purchased or sold during the past year is available on request, subject to applicable law. Past performance is no guarantee to future results. 9

10 Security Selection Goes Beyond Name Selection As of 30 Sep 2014 Choice of Capital Structure Matters ESTIMATED CUMULATIVE PERFORMANCE As of 30 Sep 2014, over last 12 months (%) % 8 Bond 2: Sub. Debt In Swiss Francs Bond 1: Senior Debt Rating Ba3/BB-/BB SunCom 5.625% 31-Dec-17 Bond 2: Sub. Debt Rating B3/B/B- 7 % % 6.07% SunCom 8.75% 15-Mar Bond 1: Senior Debt Sources: BoA Merrill Lynch and T. Rowe Price The estimated cumulative performance is calculated using a pro-rata of the annual coupon applied to the number of days in the year the security received an official pricing The securities identified and described above are intended to illustrate the security evaluation process of T. Rowe Price investment professionals and do not represent all of the securities analysed or purchased or sold for the SICAV sub-fund. No assumptions should be made that the securities analysed, or other securities analysed, purchased or sold, were or will be profitable. To further illustrate our security selection process, a complete list of securities in the SICAV sub-fund that were purchased or sold during the past year is available on request, subject to applicable law. Past performance is no guarantee of future results. 10

11 Investment Process: T. Rowe Price s Unique Advantage Looking to uncover opportunities in outperforming, well run below investment-grade companies in good industries European High Yield US High Yield Input from teams creates sustainable outperformance Emerging Market Equity Utilising a uniquely wide range of global investment resources 11

12 Our Strength: Fundamental Bottom-Up Research Company Industry Valuation Technicals Quantitative analysis: includes financial performance, forecast modeling, scenario stresstesting, technical security analysis Qualitative analysis: includes company management, market environment, competitive and regulatory landscape Maintain broad overview of assigned industry Sector positioning largely a result of individual issuer conviction Assign value to company s assets and/or cash flows Security structure, including collateral evaluation and covenant analysis are paramount to the process Working alongside our traders completes relative value analysis, within a single issuer complex or across an industry and/or country Depending on market conditions, reacting to the new issue market can drive investment team activity, especially in European High Yield as new issuers access the market Identify companies positioned to improve their credit profile and run by astute management teams 12

13 From Complete Credit Coverage to Final Portfolio Final Portfolio issuers covered by 10+ Analysts Security Selection 1-5 issuers issuers issuers 1-5 issuers New Deals, Security Pricing and Trading European IG issuers European High Yield issuers US High Yield issuers EM Corp 1-20 issuers Fundamental Research and Relative Value within Sectors Global Fixed Income Research Platform 77 Analysts Dedicated to Fixed Income Worldwide Our extensive global resources incorporate perspectives from our US & European High Yield, Investment Grade, Emerging Markets, Sovereign and Equity Teams 13

14 Summary The European High Yield market is attractive, offering interesting income and even limited potential for capital appreciation We believe that the best opportunities can be found in B rated companies, many of which come to the market for the first time and offer attractive premium Looking for value and liquidity by considering different maturities and capital structures is an important part of the performance To identify the best issuers requires an experienced and wide research platform, as well as the ability to be innovative when it comes to security selection 14

15 T. Rowe Price Funds SICAV European High Yield Bond Fund Investment Approach The strategy invests primarily in high yield corporate bonds denominated in European currencies. Portfolio Construction At least 80% of assets will be invested in securities denominated in European currencies mainly the euro and the pound. Up to 20% of assets may be invested outside of European currencies, including US dollar high yield and investment-grade corporate bonds. focuses on: Quantitative and qualitative fundamental research that drives an independent credit rating. Investment-grade exposure is limited to 20% of assets. Currency exposure is fully hedged back to the euro. Long-term potential for balance sheet and external rating improvements. Target excess return: basis points. Strict risk-management practices. Target tracking error: basis points. Benchmark BofA Merrill Lynch European Currency High Yield Constrained Excluding Subordinated Financials Index (Hedged to EUR) 15

16 Portfolio Characteristics As of 28 Feb 2015 Figures Shown in Euros Portfolio BofA Merrill Lynch European Currency High Yield Constrained Excluding Subordinated Financials Index Average Quality 1 B BB- Weighted Average Maturity 6.08 Years 4.28 Years Weighted Average Modified Duration Years 3.24 Years Current Yield % 5.66% Yield to Maturity % 4.42% Number of Issues Average Credit Quality is calculated by averaging the Moody s weighted average quality and the S&P weighted average quality (50/50 split), regardless of the % of the portfolio actually rated by each of these rating agencies. 2 Weighted Average Modified Duration is a measure of a bond s sensitivity to interest rates. 3 Current yield reflects the market-weighted average of coupon divided by price per security. 4 The calculation for yield to maturity includes coupon income and any capital gains or losses that would be realized by holding a bond to maturity. The timing of cash flows is considered, and it is assumed that coupon payments can be reinvested at an interest rate equal to the yield to maturity. Yield to maturity on an account is a weighted average of the yield to maturity on each bond held in the portfolio. Source: BofA Merrill Lynch. All yields will vary and are not guaranteed. 16

17 Portfolio Characteristics - Breakdown Credit Quality 1 As of 28 Feb 2015 Figures Shown in Euros % of Portfolio % of Index 2 BBB/BB & Above BB BB/B B B/CCC CCC & Below Not Rated 1.2 Equities Short-Term Sector % of Portfolio % of Index 2 Cable 16.0% 7.2% Wireless 10.8% 2.3% Healthcare 8.6% 3.9% Consumer Non-Cyclical 6.1% 3.7% Telecommunications 5.9% 9.5% Gaming 5.7% 1.7% Services 5.5% 8.5% Building Materials 4.2% 7.2% Chemicals 4.0% 2.1% Packaging 3.9% 2.1% Consumer Cyclical 3.4% 7.4% Capital Goods 3.3% 6.5% Broadcasting 3.3% 0.3% Energy 3.0% 0.9% Financial Services 2.9% 1.4% Insurance 2.8% 0.7% Automotive 2.5% 10.3% Real Estate 2.0% 0.5% Metals & Mining 1.7% 4.4% Media Services Publishing 0.9% 0.4% Transportation 0.7% 1.4% Technology & Electronics 0.7% 0.5% Forestry/Paper 0.5% 1.5% Banking 0.3% 7.9% Utility - 6.9% Country % of Portfolio % of Index 1 United Kingdom 29.5% 18.9% France 10.9% 15.0% Germany 10.5% 11.7% Italy 7.7% 13.4% Israel 6.3% 0.9% Poland 5.6% 1.2% Netherlands 5.0% 5.8% Luxembourg 4.4% 7.7% Switzerland 3.3% 1.0% Spain 2.7% 6.0% Czech Republic 2.7% 0.3% Sweden 2.0% 1.5% United States 1.8% 2.3% Panama 1.3% 0.1% Norway 1.0% 0.6% Jersey 1.0% - Mexico 0.9% 0.4% Serbia 0.9% 0.2% Denmark 0.6% - Ireland 0.5% 2.4% Portugal - 3.0% Austria - 1.3% Greece - 1.2% Finland - 0.9% Australia - 0.5% 1 Where Moody s ratings are unavailable, S&P ratings are used. 2 The BofA Merrill Lynch European Currency High Yield Constrained Excluding Subordinated Financials Index hedged to EUR T. Rowe Price uses a blend of the benchmark s Sector Level 3 and Sector Level 4 classifications with T. Rowe Price nomenclature. Sources: BofA Merrill Lynch, Moody s Investors Service and Standard & Poor s (S&P); split ratings (e.g., BB/B and B/CCC) are assigned when the Moody s and S&P ratings differ. T. Rowe Price does not evaluate these ratings but simply assigns them to the appropriate credit quality category as determined by the rating agency. T. Rowe Price uses the rating of the underlying investment vehicle for credit default swaps. Short-term holdings are not rated. Numbers may not total due to rounding. 17

18 T. Rowe Price Funds SICAV European High Yield Bond Fund Performance Table As of 28 Feb 2015 Figures Shown in Euros Fund Size: 64.0 million Total European High Yield AUM: over 2 billion * Performance (NAV, total return in base currency) Annualised Since Inception Inception Date Last 3 Months Year To Date One Year (%) Three Years (%) Fund (%) Benchmark 1 (%) Class I 20 Sep % 3.54% 6.67% 11.46% 13.61% 12.64% Class A 20 Sep % 3.47% 6.08% 10.79% 12.92% 12.64% Class Q 11 Feb % 3.45% 6.61% % 6.46% Benchmark % 3.12% 5.76% 10.11% 1 The BofA Merrill Lynch European Currency High Yield Constrained Excluding Subordinated Financials Index Hedged to EUR *Dedicated portfolios as well as European high yield securities held in US and Global high yield portfolios. Please note that the Class Q and associated benchmark since-inception returns are cumulative rather than annualized Source for performance: T. Rowe Price. Fund performance is calculated using the offi cial net asset value with dividends reinvested, if any. The value of the investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges (up to a maximum of 5% for the A Class), taxes, and other locally applied costs have not been deducted, and, if applicable, they will reduce the performance fi gures. Please note that no management fees are charged to the Z, S, and J share classes. No administration agent fees are charged to the J Class. No expenses or any other fees are charged to the Z Class. Fee arrangements for the Z, S, and J share classes are made directly with the investment manager. Please see the prospectus for further information. Where the base currency of the fund differs from the share class currency, exchange rate movements may affect returns. Hedged share classes (denoted by h ) utilize investment techniques to mitigate currency risk between the underlying investment currency(ies) of the fund and the currency of the hedged share class. The costs of doing so will be charged to the share class, and there is no guarantee that such hedging will be effective. 18

19 Supplement: T. Rowe Price Research Platform As of 31 Dec

20 Default Rate in High Yield As of 31 December 2014 HIGH YIELD TRAILING 12-MONTH DEFAULT RATE (%) From December 1998 % 18% 16% Europe HY Default Rate US HY Default Rate Moody's Forecast Moody's Forecast 14% 12% 10% 8% 6% 4% 2% 0% EURO HIGH YIELD BOND Maturing by year US HIGH YIELD BOND Maturing by year billions Sources: Moody s, Credit Suisse and T. Rowe Price 20

21 Additional Information This marketing communication is directed at institutional investors only. It is not intended for distribution to retail investors in any jurisdiction. The Fund is a sub-fund of the T. Rowe Price Funds SICAV, a Luxembourg investment company with variable capital which qualifies as an undertaking for collective investment in transferable securities ( UCITS ). The Fund is offered on the basis of the Key Investor Information Document, the prospectus and the annual and semi-annual reports (together Fund Documents ). This document does not constitute investment advice - investors should ensure they understand the legal, regulatory and tax consequences of an investment in the Fund. Issued and approved by T. Rowe Price International Ltd ( TRPIL ), 60 Queen Victoria Street, London, EC4N 4TZ. TRPIL is authorised and regulated by the Financial Conduct Authority. T. ROWE PRICE, INVEST WITH CONFIDENCE and the Bighorn Sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc. in the United States, European Union, and other countries. This material is intended for use only in select countries. C1G9N1NLS / 2015-GL