Investment Case: Fallen Angel High-Yield Corporate Bonds

Transcription

1 Investment Case: Fallen Angel High-Yield Corporate Bonds 1

2 ETF Disclosure This material does not constitute an offer to sell or solicitation to buy any security, including shares of any Fund. An offer or solicitation will be made only through a Fund s prospectus or summary prospectus and will be subject to the terms and conditions contained. This material and the information provided herein are not directed at or intended for distribution to any person (or entity) who is a citizen or resident of (or located or established in) any jurisdiction where the distribution of these materials and/or the purchase or sale of interests of a Fund would be contrary to applicable law or regulation or would subject a Fund to any registration or licensing requirement in such jurisdiction. Persons who wish to review this material are required to inform themselves about and to observe any legal or regulatory restrictions which may affect their eligibility to make an investment in a Fund. Professional advice should be sought in cases of doubt. THIS MATERIAL MAY ONLY BE PROVIDED TO YOU BY VAN ECK GLOBAL AND IS FOR YOUR PERSONAL USE ONLY AND MUST NOT BE PASSED ON TO THIRD PARTIES WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT OF VAN ECK GLOBAL. IF YOU HAVE NOT RECEIVED THIS MATERIAL FROM VAN ECK GLOBAL, YOU ARE HEREBY NOTIFIED THAT YOU HAVE RECEIVED IT FROM A NON-AUTHORIZED SOURCE THAT DID NOT ACT ON BEHALF OF VAN ECK GLOBAL AND THAT ANY REVIEW, USE, DISSEMINATION, DISCLOSURE OR COPYING OF THIS MATERIAL IS STRICTLY PROHIBITED. BEFORE MAKING AN INVESTMENT DECISION, PLEASE CONSULT A QUALIFIED INVESTMENT AND TAX ADVISOR. Any projections, market outlooks or estimates in this material are forward-looking statements and are based upon certain assumptions that are solely the opinion of Van Eck Global. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. Further, any information regarding portfolio composition, portfolio composition methodology, investment process or limits, or valuation methods of evaluating companies and markets are intended as guidelines which may be modified or changed by Van Eck Global at any time in its sole discretion without notice. Index and fund performance data quoted represents past performance and is for illustration purposes only. Past performance is not a guarantee of future results. Performance information for the Market Vectors Fallen Angel High Yield Bond ETF (commenced April 16, 2012) reflects temporary waivers of expenses and/or fees. Had the Fund incurred all expenses, investment returns would have been reduced. Investment return and value of the shares of the Fund will fluctuate so that an investor s shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Fund returns reflect dividends and capital gains distributions. Net asset value (NAV) per share is calculated by subtracting total liabilities from the total assets, then dividing by the number of shares outstanding. Share price is the last price at which shares were traded on the Fund s primary listing exchange. Fund shares may trade at, above or below NAV. Performance current to the most recent month end available by calling 888.MKT.VCTR or by visiting marketvectorsetfs.com. Forecasts, estimates, and certain information contained herein are based upon proprietary research and the information contained in this material is not intended to be, nor should it be construed or used as investment, tax or legal advice, any recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security. References to specific securities and their issuers or sectors are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities or gain exposure to such sectors. The Fund(s) may or may not own the securities or be exposed to the sectors referenced and, if such securities are owned or exposure maintained, no representation is being made that such securities will continue to be held or exposure maintained. NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE Van Eck Securities Corporation, Distributor 335 Madison Avenue, New York, NY

3 ETF Disclosure Principal Risk Factors: The Fund may be subject to credit risk, interest rate risk and a greater risk of loss of income and principal than higher rated securities. Investors should be willing to accept a high degree of volatility and the potential of significant loss. Securities rated below investment grade are commonly referred to as high yield securities, or junk bonds. High yield securities may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities. The secondary market for securities that are junk bonds may be less liquid than the markets for higher quality securities and as such, may have an adverse effect on the market prices of certain securities. The illiquidity of the market may also, at certain time, adversely affect the Fund s ability to arrive at a fair value for certain junk bonds. The illiquidity of the market could also make it difficult for the Fund to sell certain securities in connection with a rebalancing of the index. In addition, periods of economic uncertainty and change probably would result in an increased volatility of market prices of high yield securities and a corresponding volatility in the Fund s net asset value ( NAV ). Investments concentrated in the financial services and industrials sectors may be subject to more volatility than investment in a diver group of sectors and are subject to the risks associated with such sectors. For a more complete description of these and other risks, please refer to the Fund s prospectus. Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called creation units and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 888.MKT.VCTR or visit marketvectorsetfs.com. Please read the prospectus and summary prospectus carefully before investing. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. 2012, Van Eck Global. Merrill Lynch, Pierce, Fenner & Smith Incorporated and its affiliates ( BofA Merrill Lynch ) indices and related information, the name Bank of America Merrill Lynch, and related trademarks, are intellectual property licensed from BofA Merrill Lynch, and may not be copied, used, or distributed without BofA Merrill Lynch s prior written approval. The licensee s products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by BofA Merrill Lynch. BOFA MERRILL LYNCH MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS). Performance and characteristics of the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA) are quoted throughout this material. H0FA is representative of the entire Fallen Angels high yield corporate bond market. H0FA does not represent the performance or yield of the Fund or underlying index. See index description on page 19 3

4 Downgraded. Overlooked. Potentially Undervalued. Fallen Angel bonds have historically outperformed high yield corporate bonds and the average active high yield mutual fund manager. Proven Index Track Record* 3/15/ /31/2011 Historic Index Cumulative Return (%) 120% 115.8% 100% 101.8% 84.6% 80% 60% 40% 20% 0% *Index performance is not illustrative of Fund performance. The Fund has a limited operating history. -20% BofAML Fallen Angel Lipper High Current Yield Category Avgerage Barclays High Yield Very Liquid Source: FactSet. This chart is for illustrative purposes only. Historical information is not indicative of future results. Current data may differ from data quoted. Past performance is no guarantee of future results; Market Vectors Fallen Angel High Yield Bond ETF commenced on April 16, An investor cannot invest directly in an index. The results assume that no cash was added to or assets withdrawn from the Index. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown. See index descriptions on slide 20. See slides 2 and 3 for important disclosures. 4

5 What are Fallen Angels? The term Fallen Angel refers to corporate bonds that were once investment grade, but have since been downgraded to non-investment grade (i.e. high yield ) bond status. Despite being a subset of high yield corporate bonds, Fallen Angels could arguably be treated as a separate asset class from original issue high yield bonds. Generally more concentrated in BB; other high yield has more in B and CCC-rated bonds Fallen Angel issuers tend to be larger and more well-established companies Historically more likely than original issue high yield bonds to migrate to investment grade status Well-known Fallen Angels: Toys R Us, JCPenney, Sprint. See slides 2 and 3 for important disclosures 5

6 Fallen Angels as an Alternative High Yield As of March 31, 2012: As a subset of high yield, Fallen Angels accounted for approximately 15% of high yield universe The BofAML US Fallen Angel Index had a higher percentage of BB rated bonds than the BofAML US High Yield Index Index Characteristics As of 3/31/2012 Index Current Yield to Worst Modified Duration Market Value ($ Mil) # of Bonds in Index % of Fallen Angels BofAML US Fallen Angel , % BofAML US High Yield ,051,361 2,091 15% Credit Composition of High Yield Indices As of 3/31/2012 BofAML US Fallen Angel BofAML US High Yield BofAML Original Issue High Yield BB 72.2% 44.7% 39.9% B 19.3% 39.3% 42.9% CCC 7.6% 14.6% 15.9% CC 0.8% 1.1% 1.2% C 0.1% 0.2% 0.2% D 0.0% 0.0% 0.0% Source: Bank of America Merrill Lynch Global Index Systems Yield to Worst is generally defined as being the lowest yield that a buyer can expect to receive. Modified Duration measures the responsiveness of a bond s price to interest rate changes. It is defined as the percentage change in price for a 100 basis point change in interest rates. See index descriptions on slide 20. See slides 2 and 3 for important disclosures 6

7 Structural Similarities to Investment Grade Issuers Fallen Angel issuers have tended to be larger and more established than original high yield issuers Capital structures have tended to be similar to investment grade issuers Longer-dated bonds with relatively low coupons Unencumbered assets allow issuer to borrow more debt secured by assets Results in potential for greater financing flexibility As of 3/31/2012 Index Issuer Characterstics Average Market Cap 1 Average Sales 1 Debt/Equity Ratio (%) 1 Index (Underlying Bonds) Characteristics Average Average Average Weighted Coupon 2 Duration 2 Maturity 2 BofAML Investment Grade $21,087 $18, BofAML US Fallen Angel $6,193 $11, BofAML Original Issue High Yield $2,382 $3, Source: 1 FactSet 2 Bank of America Merrill Lynch Global Index System Average figure is arrived at by taking the average of available data in each category. Some issuers in these indices are private companies, and therefore no financial data is available. Private companies are excluded from the above calculation of average statistics. Sales is calculated as gross sales and other operating revenue less discounts, returns and allowances. Debt/Equity Ratio is calculated as total debt as a percentage of total equity in local currency. Average Weighted Coupon is measured by weighting the coupon of each bond by its relative size in the index. Duration refers to modified duration, which measures the responsiveness of a bond s price to interest rate changes. It is defined as the percentage change in price for a 100 basis point change in interest rates. Maturity is the length of time until a fixed income investment returns its original investment See index descriptions on slide 20. See slide 2 and 3 for important disclosures 7

8 High Yield Default Rates Annual high yield default rates have declined from most recent highs in 2009 As of February 2011, fallen angel average default rate was marginally lower than for bonds rated speculative grade upon issue Trailing 12-Month Issuer-Weighted All U.S. Speculative-Grade Default Rate 16% Fallen Angel versus Original Issue Speculative Grade Default Rates* 14% 12% 10% 8% 6% 4% Mar % 2% 0% Source: Moody s. *All S&P issuer based. Source: Altman, Edward I. and Brenda J. Kuehne. Defaults and Returns in the High-Yield Bond and Distressed Debt Market: The Year 2010 in Review and Outlook. Feb NYU Salomon Center. See slides 2 and 3 for important disclosures. 8

9 Historical Performance vs US High Yield Fallen Angels outperformed general U.S. high yield 6 of 9 years ending 2011* Fallen Angels declined less than general U.S. high yield in 2008 Annual Returns 01/2003 to 12/ % BofA Merrill Lynch U.S. High Yield - Fallen Angel Barclays Capital High Yield Very Liquid 40% 20% 0% -20% -40% Source: FactSet. *The BofA Merrill Lynch US Fallen Angel High Yield Index has an inception date of March 13, See index descriptions on slide 20. See slide 2 and 3 for important disclosures. 9

10 Contributing Factors to Fallen Angel Performance Fallen Angels have historically seen greater price returns than original issue high yield Institutional selling could be a contributing factor as some investment grade managers forced to sell downgraded issues Rating actions tend to be anticipated by market and price deterioration may have occurred before becoming a fallen angel 60% 50% 40% Potential for Price Appreciation + Comparable Yield to Original Issue High Yield Bonds BofAML US Fallen Angel Price Return BofAML Original Issue HY Price Return BofAML US Fallen Angel Yield BofAML Original Issue HY Yield * Number of Bonds in the Fallen Angel Index % 568* 20% 10% % -10% % -30% -40% Source: Bank of America Merrill Lynch Global Index System. See index descriptions on slide 20. See slide 2 and 3 for important disclosures 10

11 A Tale of Two Angels By the time of the downgrade, the creditworthiness of Fallen Angel companies have become impaired and their debt obligations carry greater risk of credit losses Case Study #1: Lehman Brothers However, if they survive, many of the Fallen Angels adjust their business models or enjoy strengths of a brand name company that enable them to regain investment grade status Case Study #2: Xerox Date Rating Change From To 9/15/2008 A2 B3 Negative 12/8/2008 B3 C Ratings Outlook Rating to be withdrawn Rationale Unable to refinance debt due to severe credit deterioration; bankruptcy impending Company went bankrupt and defaulted on debt Date Rating Change From To Ratings Outlook Rationale 12/1/2000 Baa2 Ba1 Negative Declining business environment, management and operations problems, liquidity strain 5/1/2002 Ba1 B1 Negative Continued concern regarding free cash flow 8/10/2004 B1 Ba2 Stable Good operational execution and improving profits and free cash flow; reduced leverage 9/5/2005 Ba2 Ba1 Positive Continued improvement in business and balance sheet management 11/29/2006 Ba1 Baa3 Positive Solid business execution, stable profitability, solid free cash flow generation Source: See slide 2 and 3 for important disclosures. 11

12 Return Statistics Correlation Period 12/2003 to 03/2012 (Frequency: Monthly) BofAML US Fallen Angel BofAML Original Issue High Yield Barclays Capital High Yield Very Liquid Barclays Capital US Aggregate US 10YR Treasury S&P 500 BofAML US Fallen Angel 1.00 BofAML Original Issue High Yield Barclays Capital High Yield Very Liquid Barclays Capital US Aggregate US 10YR Treasury S&P Source:FactSet Correlation is the degree to which two or more variables are related and change together. The value of equity investments are more volatile than the other securities, high yield bonds are speculative and subject to credit risk, and Government bonds are guaranteed as to the timely payment of principal and interest. See index descriptions on slide 20. See slides 2 and 3 for important disclosures. 12

13 Return Statistics Historical Annualized Returns Period 12/2003 to 03/2012 (Frequency: Monthly) YTD 1 Year 3 Year 5 Year Annualized Return Entire Period Annualized StdDev BofAML US Fallen Angel BofAML Original Issue High Yield Barclays Capital High Yield Very Liquid Barclays Capital US Aggregate US 10YR Treasury S&P Source:FactSet Standard Deviation is the statistical measure of the historically volatility of a portfolio. See index descriptions on slide 20. See disclaimers on pages 2 and 3. 13

14 Index Descriptions The indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index s performance is not illustrative of the Fund s performance. Indices are not securities in which investments can be made. BofAML Fallen Angel: The BofA Merill Lynch US Fallen Angel High Yield Index (H0FA) is a subset of The BofA Merrill Lynch US High Yield Index including securities that were rated investment grade at point of issuance BofAML US High Yield: The BofA Merrill Lynch US High Yield Index (H0A0) tracks the performance of U.S. dollar denominated below investment grade corporate debt publically issued in the U.S. domestic market. Qualifying securities must have a below investment grade rating. Original issue zero coupon bonds, 144a securities, both with and without registration rights, and pay-in-kind securities, including toggle notes, qualify for inclusion. Eurodollar bonds, taxable and tax-exempt US municipal, warrantbearing, DRD-eligible and defaulted securities are excluded from the Index. BofAML Original Issue High Yield: The BofA Merrill Lynch US Original Issue High Yield Index (H0HY) is a subset of The BofA Merrill Lynch US High Yield Index including securities that were not rated investment grade at the point of issuance. BofAML Investment Grade: The BofA Merrill Lynch Global Corporate Index (G0BC) tracks the performance of investment grade corporate debt publically issued in the major domestic and eurobond markets. Qualifying securities must have an investment grade rating (based on an average of Moody s, S&P and Fitch). For Canadian dollar securities only, Fitch is replaced by DBRS in the rating calculation. Original issue zero coupon bonds and pay-in-kind securities, including toggle notes, also qualifying for inclusion. Taxable and tax-exempt US municipal, warrant-bearing, DRD-eligible and defaulted securities are excluded from the Index. Barclays Capital US Aggregate: The Barclays Capital US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollardenominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS, ABS, CMBS. Barclays Capital High Yield Very Liquid: The Barclays Capital US High Yield Very Liquid Index is a more liquid version of The Barclays Capital US Corporate High-Yield Index that measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Qualifying issues just have been issued within the past three years, have a USD 600 million minimum amount outstanding and include only the largest issue from each issuer. Lipper High Current Yield Average: The Lipper High Current Yield is comprised of open-end mutual funds with an investment objective of high (relative) current yield from fixed income securities, without quality or maturity restrictions, and tending to invest in lower grade debt issues. US 10YR Treasury: The BofA Merrill Lynch Current 30-Year US Treasury Index is a one-security index comprised of the most recently issued 30-year US Treasury bond. To qualify for the inclusion, the 30-year bond must be auctioned on or before the third business day before the last business day of the month. S&P 500: The Standard & Poor 500 Index, calculated with dividends reinvested, consists of 500 widely held common stocks covering industrial, utility, financial and transportation sectors. 14