First Pacific Advisors, LLC

Transcription

1 Presented by: Thomas H. Atteberry, CFA, Portfolio Manager Abhijeet Patwardhan, Portfolio Manager Joseph H. Choi, Research Analyst Prakash Gopinath, Research Analyst Julian Mann, Research Analyst/Trader Nazanin Pajoom, Data Analyst FPA New Income, Inc. FPNIX First Quarter 2016 Webcast Presentation

2 FPA New Income, Inc. Fund highlights Investment objective The Fund's primary investment objective is current income and long-term total return. Capital preservation is also a consideration. Highlights Short-term: seeks positive absolute returns in a 12-month period Long-term: seeks positive real returns (outperform inflation plus 100 basis points) over five-year period and competitive returns versus bond market universe Benchmark indifferent Downside protection (as of 3/31/16) Yield to Worst (%) Effective Duration (yrs) YTW/Duration FPA New Income Barclays US Aggregate Bond Index Barclays US Aggregate 1-3 Year Index Higher ratio equals less exposure to interest rate risk As of March 31, 2016, the SEC yield was 2.20%. This calculation begins with the Fund s dividend payments for the last 30 days, subtracts fund expenses and uses this number to estimate your returns for a year. The SEC yield is based on the price of the fund at the beginning of the month. The income yield stated here reflects prospective data and thus assumes payments collected by the fund may fluctuate. Source: FactSet, Barclays. Past performance is no guarantee of future returns. Value investing does not protect against loss of principal and there is no assurance that the Fund will meet its objective. The index performance is not representative of the FPA New Income fund. Please refer to slide 29 for fund performance. 2

3 Market comments Negative Interest Rates 3

4 Market comments negative interest rates Concept of negative interest rates Tax savings with hope that it turns into spending Make the cost of borrowing negative so that leverage increased to stimulate consumption Make the cost of interest expense at a government manageable as debt level increases Make it punitive for banks to hold excess reserves hoping will lend out those reserves Market reaction to increased use of tool Price of gold increases as characteristic of 0 yield on asset less important Households increase the hoarding of cash as 0 yield not a negative aspect Households increase the purchase of safes to hold cash at home Companies hold cash in vault for short term liquidity needs Savings percentage increases to offset lack of earnings on savings 4

5 Market comments negative interest rates 3/31/16 5

6 Market comments negative interest rates 6

7 Market comments negative interest rates Two-year sovereign yields Source: Bloomberg 7 % Yield

8 Market comments negative interest rates Ten-year sovereign yields Source: Bloomberg 8 % Yield

12 Market comments negative interest rates % Source: MacroStrategy Partnership The Milliman 100 Pension Funding Index projects the funded status for pension plans included in our study, reflecting the monthly impact of market returns and interest-rate changes on pension funded status, utilizing the actual reported asset values, liabilities, and asset allocations of the companies' pension plans. Discount rate is the rate used by pension plans and insurance companies for discounting their liabilities. 12

18 U.S. Treasury yields decreased in the first quarter Yield (%) Yield change (basis points) Source: Bloomberg 18

19 Oil drove returns in the first quarter West Texas Intermediate Crude Oil Price per Barrel $43 $41 $39 $37 $35 $33 $31 $29 $27 $25 Low point for oil price WTI Oil S&P 500 Barclays HY Index Barclays HY Energy Index Barclays HY Index excl. Energy Source: Bloomberg, Barclays Past performance is no guarantee of future results. 10% 5% 0% -5% -10% -15% -20% -25% Year-to-date Return 19

20 FPA New Income portfolio contribution to return Source: FactSet. Returns are gross of fees. Past performance is no guarantee of future results. Average Weight (%) Q Contribution to return (%) ABS Auto Subprime Auto Prime Other Credit Card CMO Non-Agency Agency CMBS Stripped Non-Agency Agency Mortgage Pass-Through Municipal Treasury Cash and equivalents MBS Stripped Corporate High Yield Bank Debt Corporate Bonds Total

21 FPA New Income allocation changes As of December 31, 2015 ABS Credit Cards 5% Cash & Equivalents 7% ABS Equipment 6% Other 26% 15-Year Seasoned MBS 7% ABS Auto Subprime 20% Stripped Performing CMBS 12% Non- Performing ABS Credit MBS Cards 7% 5% 15-Year Seasoned MBS 6% Corporates Non- 9% Performing MBS 8% As of March 31, 2016 Treasury 4% ABS Auto Subprime 19% ABS Corporates Equipment 7% 8% Portfolio composition will change due to ongoing management of the Fund. References to specific securities or sectors should not be construed as recommendations by the Fund, its Advisor or Distributor. Other 23% Credit exposure (holdings rated less than AA ) decreased from 23% to 20% of the portfolio due to amortization, maturities and the sale of an existing position, offset by one new position and additions to an existing position. Stripped Performing CMBS 12% Cash & Equivalents 9% 21

22 Estimated quarterly principal cash flow for FPA New Income % Principal Cash Flow Source: FPA 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 13% 9.1% Cash & Equivalents 2016 = 41% 2017 = 42% 16% 12% 14% 8% 7% 13% 5% 5% 3/31/16-6/30/16 6/30/16-9/30/16 9/30/16-12/31/16 12/31/16-3/31/17 3/31/17-6/30/17 6/30/17-9/30/17 9/30/17-12/31/17 4% 2% 1% 12/31/17-3/31/18-6/30/18-9/30/18-12/31/18-3/31/18 6/30/18 9/30/18 12/31/18 3/31/19 22

23 Portfolio characteristics FPA New Income allocations as of March 31, 2016 Sector % Held (MV) Maturity (Years) Yield to Worst (%) Effective Duration (Years) Nominal Spread (Bps) Cash & equivalents 9.06% U.S. Government 4.21% Treasury 4.21% Credit 7.41% ,213 Corporate 7.41% ,213 Municipal 0.39% Securitized 78.93% Mortgage Pass-Through 4.46% Mortgage Backed (CMO) 15.91% ABS 40.45% CMBS 5.61% Stripped Mortgage-Backed 12.50% Total as of 3/31/ Total as of 12/31/ Source: FactSet See glossary of terms pages Portfolio composition will change due to ongoing management of the fund. References to individual securities are for informational purposes only and should not be construed as recommendations by the Fund, Advisor or Distributor. As of March 31, 2016, the SEC yield was 2.20%. This calculation begins with the Fund s dividend payments for the last 30 days, subtracts fund expenses and uses this number to estimate your returns for a year. The SEC yield is based on the price of the fund at the beginning of the month. The income yield stated here reflects prospective data and thus assumes payments collected by the fund may fluctuate. 23

24 Subprime auto lending standards have become more aggressive Source: Standard & Poor s 24

25 Subprime auto losses are increasing 25

26 Subprime auto ABS investment process is focused on downside protection In addition to credit support, bonds benefit from excess spread. FPNIX weighted average peak loss is approximately 22%. FPNIX weighted average credit support is approximately 53%. FPNIX weighted average loss coverage (credit support / peak loss) is approximately 3.2x. Sample Subprime Auto Asset-Backed Securitization (ABS) Credit FPA Tranche Original Balance S&P Rating Coupon WAL (yrs.) Enhancement Loss Coverage A1 $202,000,000 A % % 3.57x A2A / A2B 316,000,000 AAA 1.12% / L+0.75% % 2.09x A3 126,990,000 AAA 1.58% % 2.09x B 135,870,000 AA 1.96% % 1.64x C 163,910,000 A 2.74% % 1.09x D 114,680,000 BBB 3.65% % 0.71x E 62,330,000 BB+ 4.67% % 0.50x Total Bonds 1,121,780,000 Overcollateralization 124,651,922 Total Loan Balance 1,246,431,922 Reserves 24,928,638 Total Collateral $1,271,360,560 Notes: (a) Weighted average life (WAL) assumes 1.5 ABS. (b) Credit enhancement equals (i) sum of (a) all lower rated tranches, (b) overcollateralization and (c) reserve balance divided by (ii) total loan balance. (c) FPA loss coverage equals credit support divided by peak loss. Assumes 24% peak loss. Source: FPA 26

27 Question & Answer

28 CMO exposure Agency residential CMO 4.56% of portfolio Includes 15-year, 20-year, 30-year jumbo and relocation mortgages Principal is agency guaranteed Re-performing non-agency mortgages CMO 3.03% of the portfolio Backed by 30 year mortgages that were modified to a weighted average term of 34 years, such that the remaining term is now 26 years and a clean pay history of 95% for 12 months. Sequential pay structure Non-performing mortgage (NPL) CMO 7.04% of portfolio Backed by non-performing residential mortgages. Sequential pay structure LTV FICO GWAC Average Life Weighted Average 68% % 2.24 years Weighted Average LTV FICO GWAC Average Life Primary driver of value is real estate (in contrast to other CMOs which have a consumer credit component) Our bonds create the underlying properties at 45%-50% of current appraised value. Credit Support Supportadjusted LTV 74% % 2.83 years 49% 37% Source: Factset 28

29 Performance Average annual total returns (%)* As of Date: 3/31/16 QTD 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years 30 Years FPA New Income Barclays U.S. Agg Bond CPI Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. This data represents past performance and investors should understand that investment returns and principal values fluctuate, so that when you redeem your investment it may be worth more or less than its original cost. Current month-end performance data may be obtained via or by calling toll-free, *Performance shown is net of fees A redemption fee of 2% will be imposed on redemptions within 90 days. Expense ratio: 0.58% (per most recent prospectus) Calculated using Morningstar Direct 29

30 Performance Annual Performance (%) FPA New Income Barclays US Agg Bond CPI FPA New Income Barclays US Agg Bond CPI * Performance shown is net of fees A redemption fee of 2% will be imposed on redemptions within 90 days. Expense ratio: 0.58% (per most recent prospectus) Calculated using Morningstar Direct Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. This data represents past performance and investors should understand that investment returns and principal values fluctuate, so that when you redeem your investment it may be worth more or less than its original cost. Current month-end performance data may be obtained via or by calling toll-free, The CPI +100 Basis Points benchmark is created by adding 1% to the annual percentage change in the Consumer Price Index ( CPI ). This index reflects nonseasonably adjusted returns. The Consumer Price Index is an unmanaged index representing the rate of the inflation of the U.S. consumer prices as determined by the U.S. Department of Labor Statistics. There can be no guarantee that the CPI of other indexes will reflect the exact level of inflation at any given time. 30

31 Risk-adjusted returns A record of attractive risk-adjusted returns Sharpe Ratio Year 3 Years 5 Years 10 Years 20 Years FPA New Income Nontraditional Bond Funds Short-Term Bond Funds Sortino Ratio Year 3 Years 5 Years 10 Years 20 Years Intermediate-Term Bond Funds Barclays U.S. Aggregate Bond Index As of March 31, 2016 See glossary of terms pages Source: Morningstar Direct. Bond Fund categories as defined by Morningstar. Past performance is no guarantee of future results and the index performance is not representative of the FPA New Income fund. Please refer to slide 30 for fund performance. 31

32 Performance FPA New Income: growth of $10,000 since inception $110,000 $100,000 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10, FPA New Income Barclays US Aggregate Bond Index As of March 31, Inception date: July 11, 1984 Calculated using Morningstar Direct Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. This data represents past performance and investors should understand that investment returns and principal values fluctuate, so that when you redeem your investment it may be worth more or less than its original cost. Current month-end performance data may be obtained by calling toll-free, The chart illustrates the performance of a hypothetical $10,000 investment made in the fund on commencement of operations. Figures include reinvestment of capital gains and dividends, but do not reflect the effect of any applicable sales charges or redemption fees, which would lower these figures. This chart is not intended to imply any future performance of the fund

33 Disclosure These slides are intended as supplemental material to the 1 st Quarter 2016 New Income audio presentation that is posted on our website fpafunds.com. We do want to make sure you understand that the views expressed on these slides and in the accompanying audio presentation are as of today, April 26 th, 2016 and are subject to change based on market and other conditions. These views may differ from other portfolio managers and analysts of the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. Any mention of individual securities or sectors should not be construed as a recommendation to purchase or sell such securities, and any information provided is not a sufficient basis upon which to make an investment decision. The information provided does not constitute, and should not be construed as, an offer or solicitation with respect to any securities, products or services discussed. Past performance is not a guarantee of future results. This data represents past performance and investors should understand that investment returns and principal values fluctuate, so that when you redeem your investment it may be worth more or less than its original cost. Performance has been calculated on a total return basis, which combines principal and dividend income changes for the periods shown. Principal changes are based on the difference between the beginning and closing net asset values for the period and assume reinvestment of all dividends and distributions paid. All applicable expenses such as advisory fees have been included in calculating performance. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the security examples discussed. Current month-end performance data may be obtained by calling toll-free, You should consider the Fund s investment objectives, risks, and charges and expenses carefully before you invest. The Prospectus details the Fund's objective and policies, sales charges, and other matters of interest to the prospective investor. Please read this Prospectus carefully before investing. The Prospectus may be obtained by visiting the website at by at crm@fpafunds.com, toll-free by calling or by contacting the Fund in writing. Statistics have been obtained from sources believed to be reliable, but the accuracy and completeness cannot be guaranteed. The Barclays Capital U.S. Aggregate Bond Index is an unmanaged index that is generally considered to be representative of U.S. bond market activity. Unlike the Fund, the index does not incur fees or expenses. The 1-3 year and Intermediate versions of the Index are shorter duration versions of the index. The Short Term Peer Group is the Morningstar Short Term Bond Peer group. The Barclays Capital Government/Credit Index is considered a measure of bond performance and is included as a broad-based comparison to the Fund s portfolio. The Barclays Capital Government/Credit Index is an unmanaged fixed income market value-weighted index that combines the Barclays Capital U.S. Government and Credit Indices, including U.S. government and agency securities. All issues are investment grade (Baa) or higher, with maturities of at least one year. You cannot invest directly in an index. Investments in mutual funds carry risks and investors may lose principal value. Capital markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. The Fund can purchase foreign securities, which are subject to interest rate, currency exchange rate, economic and political risks. The securities of smaller, less well-known companies can be more volatile than those of larger companies. Interest rate risk is when interest rates go up, the value of fixed income securities, such as bonds, typically go down and investors may lose principal value. Credit risk is the risk of loss of principle due to the issuer's failure to repay a loan. Generally, the lower the quality rating of a security, the greater the risk that the issuer will fail to pay interest fully and return principal in a timely manner. If an issuer defaults the security may lose some or all its value. The return of principal in a bond fund is not guaranteed. Bond funds have the same issuer, interest rate, inflation and credit risks that are associated with underlying bonds owned by the fund. Lower rated bonds, convertible securities and other types of debt obligations involve greater risks than higher rated bonds. Mortgage securities and collateralized mortgage obligations (CMOs) are subject to prepayment risk and the risk of default on the underlying mortgages or other assets; such derivatives may increase volatility. Convertible securities are generally not investment grade and are subject to greater credit risk than higher-rated investments. High yield securities can be volatile and subject to much higher instances of default. The Fund may experience increased costs, losses and delays in liquidating underlying securities should the seller of a repurchase agreement declare bankruptcy or default. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the security examples discussed. Any statistics have been obtained from sources believed to be reliable, but the accuracy and completeness cannot be guaranteed. The FPA Funds are distributed by UMB Distribution Services, LLC 33

34 Glossary of terms ABL Revolver (Asset Based Revolving Loan) is a business loan secured by collateral (assets). ABS (Asset Backed Securities): financial securities backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. Average Maturity: is a measure of maturity that takes into account the possibility that a bond might be called back to the issuer. For a portfolio of bonds, average maturity is the weighted average of the maturities of the underlying bonds. B is the second rating down from the highest non-investment grade rating, regarded as speculative. Barclays ABS Index is the ABS component of the U.S. Aggregate index. The index includes pass-through, bullet and controlled amortization structures. Barclays CMBS Index is the CMBS component of the Barclays U.S. Aggregate Index. Barclays MBS Index is an unmanaged index comprising 15- and 30-year fixed-rate securities backed by mortgage pools of Ginnie Mae, Freddie Mac and Fannie Mae. Barclays Treasury Index is the U.S. Treasury component of the U.S. Government index. Barclays U.S. Aggregate 1-3 Year Index is the 1-3 year component of the U.S. Aggregate Bond index.. Barclays U.S. Aggregate 3-5 Year Index is the 3-5 year component of the U.S. Aggregate Bond index. Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. BB is the next rating down from the highest non-investment grade rating, regarded as speculative. Bps (Basis Points): a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. CCC is the third rating down from the highest non-investment grade rating, regarded as highly speculative. CMBS (Commercial Mortgage Backed Security): a mortgage-backed security backed by commercial mortgages rather than residential mortgages. CMO (Collateralized Mortgage Obligation): a mortgage-backed, investment-grade bond that separates mortgage pools into different maturity classes. Coupon: The interest rate stated on a bond when it's issued. The coupon is typically paid semiannually. Consumer price index (CPI) is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living. CPI is a measure of the consumer price index (CPI) plus an additional 100 basis points CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodity trades. CSFB High Yield Index is designed to mirror the investible universe of the $US-denominated high yield debt market. Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. DTI (Debt-to-Income ratio): a personal finance measure that compares an individual's debt payments to the income he or she generates. EAFE Index is an index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia. This international index has been in existence for more than 30 years. EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization Effective Duration: the duration calculation for bonds with embedded options. Effective duration takes into account that expected cash flows will fluctuate as interest rates change. EPS: Earnings Per Share ETF (Exchange Traded Fund) is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. 34

35 Glossary of terms GNMA: Government National Mortgage Association Investment grade is a rating that indicates that a municipal or corporate bond has a relatively low risk of default. J.P. Morgan EMBI+ Index measures the total return performance of international government bonds issued by emerging market countries that are considered sovereign (issued in something other than local currency) and that meet specific liquidity and structural requirements. LTV (Loan-to-Value) ratio: a financial term used by commercial lenders to express the ratio of a loan underwritten to a value of an asset purchased. LTM: last twelve months Maturity: The period of time for which a financial instrument remains outstanding. Modified Duration: Modified duration follows the concept that interest rates and bond prices move in opposite directions. This formula is used to determine the effect that a 100-basis-point (1%) change in interest rates will have on the price of a bond. Mortgage Pass-Through: a security representing a direct interest in a pool of mortgage loans. MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) that is designed to measure equity market performance in global emerging markets. MV (Market Value) Nominal Spread: the spread, expressed in percent or basis points, that when added to the yield at one point on the Treasury yield curve equals the discount factor that will make a security s cash flows equal to its current market price. OAS (Option Adjusted Spread) is a measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is adjusted to take into account an embedded option. P&I: pertains to only those mortgage backed securities in the portfolio who s underlying bonds pay both principal and interest. RMBS (Residential Mortgage Backed Securities): mortgage-backed securities backed by residential mortgages. Russell 2000 Index measures the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. Sharpe Ratio measures risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. Sortino Ratio differentiates between good and bad volatility in the Sharpe ratio. This differentiation of upwards and downwards volatility allows the calculation to provide a risk-adjusted measure of a security or fund's performance without penalizing it for upward price changes. Turnover Ratio is the percentage of a mutual fund or other investment vehicle's holdings that have been "turned over" or replaced with other holdings in a given year. Russell 3000 Index: a market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of the entire U.S. stock market. More specifically, this index encompasses the 3,000 largest U.S.-traded stocks, in which the underlying companies are all incorporated in the U.S. S&P 500 Index: 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. Spread-to-Worst: the difference in overall returns between two different classes of securities, or returns from the same class, but different representative securities. Stripped Mortgage-Backed Securities: a trust comprised of mortgage-backed securities which are split into principal-only strips and interest-only strips. Weighted Average Life: the average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Yield-to-Maturity: the rate of return anticipated on a bond if held until the end of its lifetime. YTM is considered a long-term bond yield expressed as an annual rate. The YTM calculation takes into account the bond s current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupon payments are reinvested at the same rate as the bond s current yield. Yield-to-Worst: the lowest amount that an investor will make from a bond, computed by using the lower of the yield to maturity and the yield to call on every call date. 35