The Evolution of High- Yield Bonds into a Vital Asset Class

Transcription

1 The Evolution of High- Yield Bonds into a Vital Asset Class High-yield bonds have turned into a legitimate asset class that is larger, better established and less risky than in years past. Understand. Act.

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3 The Evolution of High-Yield Bonds into a Vital Asset Class Content 4 What Are High-Yield Bonds? 5 High-Yield Bonds, Past and Present 7 Benefits of High-Yield Investing 8 High-Yield Outlook 10 How High-Yield Bonds Fit into an Asset Allocation Strategy Imprint Allianz Global Investors Europe GmbH Mainzer Landstraße Frankfurt am Main Global Capital Markets & Thematic Research Hans-Jörg Naumer (hjn) Dennis Nacken (dn) Stefan Scheurer (st) Data origin if not otherwise noted: Thomson Reuters Datastream 3

4 The Evolution of High-Yield Bonds into a Vital Asset Class The Evolution of High-Yield Bonds into a Vital Asset Class With high-quality bond yields near all-time lows, investors have been pouring into high-yield bonds at a record pace. Although this has fueled concerns about an overheated highyield market, Allianz Global Investors believes investors would be better served by thinking of high-yield bonds as more of a strategic allocation for the long term than a tactical allocation for today. High-yield bonds have turned into a legitimate asset class that is larger, better established and less risky than in years past, providing evergreen benefits that make them a sound addition to most diversified portfolios. In addition, the current environment is still attractive for high-yield bonds as a whole and active managers with rigorous credit research processes can help investors best maximize the risk / return potential of this important asset class. In comparison to other asset classes, yields of high-yield bonds make them attractive to today s investors. 1 Strategic Insights, as of 12 / 31 / 12. High-yield bonds have become a favored investment vehicle in recent years, and with good reason. They offer significant income potential in a low-yield environment where short-term interest rates are expected to remain near zero through at least Consider: High-yield bond yields were 6.28 % on 12 / 31 / High-yield bonds can potentially be one of the few sources of upper-range singledigit returns. In 2012, high-yield bond funds have seen $36.3 billion in inflows. In fact, new inflows into high-yield bond funds in the past 3.5 years have exceeded those for the prior 20 years combined. 1 We believe that just because an asset class is attractive and doing well doesn t mean it s overvalued. For example, as we will show later in this paper, high-yield companies generally have quality earnings and Chart historically low default rates; these qualities may be worth a premium to some investors. So what role should high-yield bonds play in a diversified portfolio? For those answers, it may help to begin with an overview and history of high-yield bonds, and an exploration of how they ve evolved. What Are High-Yield Bonds? High-yield bonds and investment-grade bonds are the two segments of bond debt, known collectively as corporate bonds, that are issued by public and private companies to access credit markets and raise capital. Investment-grade bonds are issued by the most creditworthy issuers. They have ratings of between AAA and BBB (or the equivalent) and their interest rates are slightly higher than those of government bonds. High-yield bonds are issued by lesscreditworthy companies, as determined by 4

5 the widely accepted evaluations of several major ratings agencies. They have ratings of less than BBB (or the equivalent) and their interest rates are considerably higher than those of government bonds to make them more attractive to potential investors. The creditworthiness of a corporate bond issuer is rated by ratings agencies such as Standard & Poor s, Moody s and Fitch (see Chart 1). Their ratings are designed to precisely reflect levels of credit risk the risk that an issuer may default on payments. Ratings are reviewed at least once a year and can be maintained, upgraded, downgraded or placed under review with positive or negative implications, pending completion of an additional study. The spread of high-yield bonds the yield differential between high-yield bonds and government bonds is primarily dependent on the creditworthiness of the issuer. Experienced high-yield bond investors look for securities whose creditworthiness is likely to improve i. e., upgrade candidates. An improvement in an issuer s creditworthiness warrants a lower spread, which tends to result in a lower overall interest rate and an increase in the value of the securities. Conversely, it is important to avoid bonds whose creditworthiness will deteriorate: A drop in creditworthiness warrants an increase in the spread, which tends to result in a higher overall interest rate and an automatic decline in the value of the securities. High-Yield Bonds, Past and Present While high-yield bonds are portfolio staples for many investors, they can also be underutilized or ignored by others. This may be at least in part due to some commonly held misperceptions about an asset class that has changed significantly in recent decades. Chart 1: A full spectrum of corporate bond choices An overview of ratings issued by the primary ratings agencies, showing varying levels of creditworthiness in the corporate-debt market. Moody s Standard & Poor s Fitch Investment Grade Speculative Grade / High Yield Long Term Short Term Long Term Short Term Long Term Short Term Aaa Prime-1 AAA AAA F1+ Aa1 Prime-1 AA+ AA+ F1+ A-1 Aa2 Prime-1 AA AA F1+ Aa3 Prime-1 AA AA F1+ A1 Prime-1 A+ A+ F1+ or F1 A-1 A2 Prime-1 or Prime-2 A A F1 A3 Prime-1 or Prime-2 A A F1 or F2 A-2 Baa1 Prime-2 BBB+ BBB+ F2 Baa2 Prime-2 or Prime-3 BBB BBB F2 or F3 A-3 Baa3 Prime-3 BBB BBB F3 Ba1 BB+ BB+ B Ba2 BB BB B Ba3 BB BB B B B1 B+ B+ B B2 B B B B3 Not Prime B B B Caa1 CCC+ CCC C Caa2 CCC CC C Caa3 CCC C C C Ca CC RD / D RD / D C C Sources: Standard & Poor s, Moody s and Fitch. Long-term ratings are opinions of the relative credit risk of fixed-income obligations with an original maturity of one year or more. Short-term ratings are opinions of the ability of issuers to honor short-term financial obligations (those within the next 13 months). It reflects the inherent importance of liquidity and nearterm concerns within the assessment of the longer-term credit profile. 5

6 The Evolution of High-Yield Bonds into a Vital Asset Class Upgrade candidates are those high-yield issuers whose creditworthiness is likely to improve, often leading to an increase in value. High-yield bonds have changed significantly since the 1980s. Today, domestic high-yield bonds represent a robust, diversified and mature asset class. Yesterday: An immature market. A brief boom. Before 1977, almost all high-yield bonds (known as junk bonds ) were fallen angels bonds issued by firms that originally had investment-grade ratings but had since been downgraded, which indicated a heightened possibility of default. In 1977, however, new-issue high-yield bonds were introduced to the marketplace, and the asset class soon began to boom. The new market was in large part created by investment bank Drexel Burnham Lambert and its star trader, Michael Milken, who offered a new way for many firms considered bad investments and starved of capital by banks to gain access to credit. In the 1980s, Drexel s legal difficulties and other scandals severely tarnished the reputation of high-yield bonds, and the high-yield market dried up in the face of rising interest rates, rising defaults and a new regulatory environment. Today: A mature market for a new environment In the last few decades, the environment for high-yield bonds has changed dramatically. US high-yield bond gross issuance was only $150 billion in 1990 but by 2012, it was over $1.3 trillion. 40 % of all outstanding corporate bonds are now high yield. Chart 2:The US high-yield bond market is the largest The US has $1,144 billion of the $1,525 billion global high-yield bond market, providing the widest opportunity set for investors. Emerging Markets High Yield 7 % Euro High Yield 18 % US High Yield 75 % Source: BofA Merrill Lynch as of 12 / 31 / 12. US high yield is represented by the BofA Merrill Lynch High Yield Master II Index, euro high yield by the BofA Merrill Lynch Euro High Yield Index and emerging markets high yield by the BofA Merrill Lynch Global Emerging Market Credit Index. Past performance is no guarantee of future results. The US makes up the largest portion of the global high-yield corporate bond market (see Chart 2). Domestic high-yield issues represent a well-diversified universe (see Chart 3). Unlike in previous years when high-yield bonds were concentrated in certain sectors, no single industry dominates the high-yield universe today. Companies today rarely use proceeds for takeovers or new investments relative to history; instead, they re refinancing balance sheets and reducing borrowing costs, which reduces the risk of default. Chart 3: The high-yield bond universe is well diversified The wide range of sectors in the US high-yield bond market helps investors diversify their bond allocations. Reas Estate 0,9 % Insurance 0,7 % Utilities 4,4 % Automotive 2,2 % Financials Services 4,4 % Consumer Non-Cyclical 2,6 % Technology 5,0 % Energy 14,0 % Banking 5,2 % Basic Industry 12,0 % Consumer Cyclical 5,3 % Capital Goods 5,8 % Services 11,6 % Telcom 9,0 % Media 8,4 % Healthcare 8,5 % Sources: BofA Merrill Lynch, Bloomberg and Allianz Global Investors. Data as of 12 / 31 / 12. Based on the BofA Merrill Lynch High Yield Master II Index, industry percent market value. Diversification does not assure a profit or protect against loss. 6

7 Benefits of High-Yield Investing The evolution of the high-yield debt market makes it a legitimate asset class for diversified portfolios, and cements the role of high-yield bonds as an important strategic allocation. We believe there are three primary benefits of high-yield investing: income potential, risk diversification and positioning against inflation and rising rates. High current yields fill a need for income With historically low interest rates, high-yield spreads are currently approximately 531 basis points over Treasuries. 2 This gives high-yield bonds a significant yield advantage over Treasuries, which are currently so low-yielding that their real returns may actually fail to keep up with inflation. Of course, Treasuries are the only investments guaranteed by the US government as to timely repayment of interest and principal, but investors are finding attractive income opportunities with high-yield bonds. High-yield bonds provide portfolio risk diversification In addition to a high and steady stream of potential income, high-yield bonds can provide other benefits to a portfolio. Chart 4 shows that high-yield bonds have a favorable risk / reward profile when compared to more traditional asset classes including large-cap US stocks, smallcap US stocks and international stocks providing equity-like returns with much less volatility. High-yield bonds are generally less volatile because they provide a steady stream of income that provides a cushion in periods of market weakness. Chart 5 illustrates how adding high-yield bonds to a fixed-income allocation can help reduce risk and increase potential returns over the long term. The risk / reward profile of the high-yield sector has historically been more favorable than that of traditional asset classes. 2 BofA Merrill Lynch and Allianz Global Investors, as of 12 / 31 / 12. High-yield bonds are an effective diversification tool in an investor s overall portfolio. Chart 4: High-yield bonds boast a fav orable risk / reward profile Chart 5: High-yield bonds can improve the efficient frontier High yield bonds have a favorable risk / reward profile relative to other asset classes, providing equity-like returns with less volatility. Adding high yield bonds to a fixed income allocation can help reduce risk and increase potential returns over the long term. Total Return (%) Barclays US Aggregate Bond Index BofA Merrill Lynch High Yield Master II Index Russell 2000 Index S&P 500 Index MSCI EAFE Index Total Return (%) % High-Yield Bonds 100 % High-Yield Bonds % 5- and 10-Year Treasuries Risk (% Annualized) Risk (% Annualized) Sources: BofA Merrill Lynch, FactSet and Allianz Global Investors. Data from 1 / 31 / / 31 / 12. Past performance is no guarantee of future results. The performance of the indexes are not indicative of the past or future performance of any Allianz Global Investors product. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an index. Sources: BofA Merrill Lynch and Allianz Global Investors. Data from 1 / / 12. High yield is based on the BofA Merrill Lynch US High Yield 100 Index and 5- and 10-year Treasuries are based on the BofA Merrill Lynch US Treasury Current 5-Year Index and the BofA Merrill Lynch US Treasury Current 10-Year Index, respectively. Past performance is no guarantee of future results. It is not possible to invest directly in an index. 7

8 The Evolution of High-Yield Bonds into a Vital Asset Class When interest rates rise, high-yield bonds, which are negatively correlated with Treasuries, provide solid positioning. Spread compression has historically led to prolonged periods of compelling high-yield performance. 3 Barclays, BofA Merrill Lynch, FactSet and Allianz Global Investors, as of 12 / 31 / 12. Based on the BofA Merrill Lynch High Yield Master II Index. 4 Barclays, BofA Merrill Lynch, FactSet and Allianz Global Investors. Data as of 12 / 31 / 12. Based on the BofA Merrill Lynch High Yield Master II Index. Smallcap stocks are represented by the Russell 2000 Index, large-cap stocks by the Russell 1000 Index and non-us stocks by the MSCI EAFE Index. Like stocks, high-yield bond returns are closely correlated to the fundamentals of their issuing companies. High-yield bonds help investors combat inflation and rising rates Should interest rates rise from today s historic lows as they inevitably will an allocation to high-yield issues would be an obvious choice. High-yield bonds have shown a tendency to hold up better than other types of bonds, particularly Treasuries. However, it s important to keep in mind that bond prices will normally decline as interest rates rise and the impact may be greater with longerduration bonds. High-yield bonds Chart a 0.06 correlation to interest-rate-sensitive 10-year Treasuries, providing solid positioning for risingrate environments. 3 Conversely, high-yield bonds are more strongly correlated with stocks. As of 12 / 31 / 12, they Charted a 0.63 correlation with US small-cap stocks, a 0.61 correlation with US large-cap stocks and a 0.54 correlation with international stocks. 4 Chart 6 shows that, on average, high-yield bonds have outperformed Treasuries by 3.02 percentage points during rising-rate cycles. We believe the reason for high-yield bonds ability to perform more like stocks during rising-rate cycles may be that, much like stocks, high-yield bond returns are closely correlated to the business successes and fundamentals of their issuing companies. This closer link to business fundamentals means that when interest rates rise, high-yield bonds tend to outperform investment-grade bonds, since interest rates tend to rise when business conditions are robust. High-Yield Outlook While there has been concern about the possibility of an overheated high-yield bond market, we believe there are compelling reasons why the outlook for high-yield bonds remains strong. Strong historical performance when spreads are low Although high-yield spreads have come down significantly from their recent highs, low spreads have historically been accompanied by prolonged periods of compelling highyield performance (see Chart 7) as corporate fundamentals improve. This causes the prices of high-yield bonds to rise, which can boost total return. Chart 6: High-yield bonds have outperformed in three of four rising-rate cycles During the four periods of rising rates since 1988, high-yield bonds outperformed high-quality bonds by an average of 1.59 percentage points, and outperformed Treasuries by an average of 3.02 percentage points. Rising-Rate Cycle 1: 3 / 29 / 88 to 2 / 24 / 89 Rising-Rate Cycle 2: 2 / 4/94 to 2 / 1/95 Rising-Rate Cycle 3: 6 / 30 / 99 to 5 / 16 / 00 Rising-Rate Cycle 4: 6 / 30 / 04 to 6 / 29 / 06 Core Bonds 3.41 % 2.04 % 2.02 % 2.99 % 10-Year Teasuries 2.82 % 6.07 % 1.64 % 2.29 % High-Yield Bonds 8.95 % 1.77 % 1.84 % 7.41 % Cycle Total Rate Hike High-Yield Returns at High-Yield Returns at % Change Beginning of Cycle End of Cycle % 6.50 % 9.75 % % % 3.00 % 6.00 % % % 4.75 % 6.50 % % % 1.00 % 5.25 % % Source: Morningstar Direct as of 12 / 31 / 12. Core bonds are represented by the Barclays US Aggregate Index and high-yield bonds by the BofA Merrill Lynch US High Yield Master II Index. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an index. Past performance is no guarantee of future results. 8

9 Default rates are low The fundamentals in the high-yield market have greatly improved since the credit crisis of : Balance sheets are stronger, leverage is lower. As a result, the main risk associated with high-yield bonds defaults has diminished in recent years, from a historical 4 % to today s 2 %. 5 As Chart 8 shows, defaults have been much higher during previous periods most recently, during the credit crisis of 2008 but we believe the probability of default rates rising significantly from current levels in the next 12 months is minimal. Investors should also note a key difference between high-yield bonds and stocks: Bondholders are higher in the capital structure. That means if bankruptcy occurs, high-yield bondholders, who are lenders, would be paid ahead of stockholders, who are owners. Defaults, the main risk associated with high-yield bonds, are near historically low rates. Default rates aren t expected to increase significantly in the next 12 months. 5 BofA Merrill Lynch, JP Morgan and Allianz Global Investors, as of 12 / 31 / 12. Chart 7: Periods of low spreads have produced double-digit high-yield returns High-yield bonds performed impressively during periods when spreads narrowed dramatically and investors risk appetites improved. Performance (%) Yield Spread (basis points) High-Yield Performance High-Yield Debt Spreads Sources: BofA Merrill Lynch and Allianz Global Investors. Data as of 12 / 31 / 12. High-yield performance represented by the BofA Merrill Lynch US High Yield Master II Index. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an index. Past performance is no guarantee of future results. 9

10 The Evolution of High-Yield Bonds into a Vital Asset Class Chart 8: High-yield default rates are historically low The default rates of high-yield bonds are low, in large part because credit fundamentals are strong thanks to earnings improvements and refinancing activity. This has reduced debt burdens, lowered interest expenses and pushed out maturities. We expect this trend to continue. Default Rate of BB, B, CCC (Percent) BB Default Rate (left) B Default Rate (left) CCC Default Rate (left) All Speculative Grade Issuers, trailing 12 months (right) 05 Default Rate of All Issuers (Percent) Sources: BofA Merrill Lynch, JP Morgan and Allianz Global Investors. Data of all speculative grade issuers as of 12 / 31 / 12. Data of BB, B and CCC default rates are as of 12 / 31 / 11. Past performance is no guarantee of future results. Passive high-yield ETFs may have significant disadvantages to actively traded high-yield portfolios. Investors who have added just a 10 % allocation of high-yield bonds to their traditional 60 / 40 portfolio of stocks and bonds have historically found increased returns, less risk and a superior Sharpe ratio. How High-Yield Bonds Fit into an Asset Allocation Strategy With the establishment of high-yield bonds as a legitimate asset class that is larger, better established and less risky than in years past, we believe there are compelling reasons why investors should consider a long-term allocation to a portfolio of actively managed highyield issues. High-yield bonds are an attractive addition to almost any portfolio allocation As we have shown, high-yield bonds have historically provided high current income potential, improved risk / reward profiles and provided solid positioning against rising rates. Yet to the detriment of long-term investors, many basic asset allocation models are unallocated, underallocated or misallocated to high-yield bonds. Traditionally, investors have relied heavily on fixed income to generate an income stream in their portfolios. But as interest rates have tapered off in recent years, so have the yields that investors earn on conventional bonds. In fact, the yield on a traditional 60 / 40 portfolio of 60 % stocks and 40 % bonds is near its lowest level in 35 years. As Chart 9 shows (next page), historically, investors who have looked beyond this conventional investing framework and added high-yield bonds to 10 % of their portfolio have found increased returns with less risk and a superior Sharpe ratio. Using an asset allocation strategy does not assure a profit or protect against loss. Investors should consider investors investment time frame, risk tolerance level and investments. Passively managed high-yield ETFs vs. actively managed high-yield portfolios While exchange-traded funds (ETFs) are gaining acceptance as efficient ways to access many asset classes, they are not always the optimal investment vehicle for high-yield investing. Because of the high-yield marketplace s unique characteristics, passively managed high-yield ETFs may actually have significant disadvantages compared with actively traded high-yield portfolios. For example, ETFs are meant to closely track indexes, but, unlike equity ETFs, which usually own all of the stocks in a benchmark, fixedincome ETFs hold significantly fewer issues than the indexes they re tracking, which often contain thousands of individual securities. Case in point: One major high-yield index, the BofA Merrill Lynch High Yield Master II 10

11 Index, represents 2,112 high-yield holdings as of 12 / 31 / 12. To mirror the general characteristics of the index without holding all of the 2,000+ securities, a high-yield ETF would likely hold the largest, most liquid and most recent new issuers. Like ETFs, actively managed portfolios may not fully represent an index or may be over- or underweight certain securities. However, unlike ETFs, many active managers look for issuers they believe to have upgrade potential or the best perceived creditworthiness. In addition, when high-yield markets are stressed, trading can become an issue for ETFs if secondary trading volume fails. That s because ETFs must make good on cash deliveries every day, even during market downturns. If an ETF shareholder redeems shares, the ETF must provide proceeds. But when markets are dropping, ETF traders can encounter unfavorable bid / ask spreads yet must still take the price available that day. Of course, unlike actively managed portfolios, which only allow for redemption at the end of the day regardless of market activity, ETFs offer the ability to redeem midday. Moreover, active managers who use bottom-up, fundamental research may be able to reduce their exposure to riskier bonds before markets become overly stressed in the first place. Active managers seek to directly improve outcomes for shareholders through fundamental analysis, diversification and constant risk assessment. Chart 9: The high-yield advantage Adding a 10 % high-yield bond allocation to a traditional stock and bond portfolio may help improve risk-adjusted performance over time. Traditional Portfolio Alternative Portfolio Stocks: 60 % Allocation Bonds: 40 % Allocation High-Yield Bonds: 10 % Allocation Stocks: 55 % Allocation Bonds: 35 % Allocation Allocation Allocation 3 year % % Annulized Retrurn Standard Deviation Sharpe Ratio 5 year 3.88 % 4.37 % 10 year 7.35 % 7.74 % 15 year 5.80 % 5.92 % 3 year year year year year year year year Source: Morningstar Direct as of 12 / 31 / 12. Stocks are represented by the S&P 500 Index, bonds by the Barclays US Aggregate Index and highyield bonds by the BofA Merrill Lynch High Yield Master II Index. Data is rebalanced quarterly. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an index. Past performance is no guarantee of future results. 11

12 Managers of actively managed high-yield portfolios can take direct steps to seek to improve outcomes for their shareholders, although there is no guarantee these strategies will be successful. Unlike ETFs, active managers: Assess credit quality with thorough analysis. Examining an issuer s sector, market positioning, strategy, balance sheets and financial statements helps the manager determine if the company s dayto-day operations will allow it to service its liabilities adequately over the long term. Verify that spreads match creditworthiness. When they determine that the spread underestimates the creditworthiness, they may decide to invest more; if the spread is insufficient, they can reduce their holdings. Look for upgrade candidates. As we previously mentioned, it s important to hold securities whose creditworthiness is likely to improve. Any improvement in an issuer s credit rating tends to result in a lower overall interest rate and an increase in the value of the securities. Can diversify their portfolios between sectors and companies instead of seeking to replicate an index. Of course, diversification does not assure a profit or protect against loss. Passively Managed ETFs Actively Managed Portfolios Passive Management style Active Generally largest, most liquid issuers in index Must take the price available in the market throughout the day, even in illiquid markets Not a goal of ETFs, which seek to represent a passive index Representative holdings Stressed markets Managing risk Depends on manager; can be a welldiversified representation of an index Typically not forced into intraday trading Risk can be actively managed Not a goal of ETFs Can assess credit quality Yes, depending on manager Not a goal of ETFs Generally lower than actively managed portfolios Can examine balance sheets of underlying issuers Costs Yes, depending on manager Generally higher than ETFs 12

13 xxx Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. Past performance is not indicative of future performance. No offer or solicitation to buy or sell securities, nor investment advice / strategy or recommendation is made herein. In making investment decisions, investors should not rely solely on this material but should seek independent professional advice. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer and / or its affiliated companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or willful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This is a marketing communication. This material has not been reviewed by any regulatory authorities, and is published for information only, and where used in mainland China, only as supporting materials to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Europe GmbH, an investment company in Germany, subject to the supervision of the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); RCM (UK) Ltd., which is authorized and regulated by the Financial Services Authority in the UK; Allianz Global Investors Hong Kong Ltd. and RCM Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator. 13

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