Delivering absolute returns from global bond markets. September 2015

Transcription

1 Delivering absolute returns from global bond markets September 2015

2 What challenges do investors face? Highly volatile market environment 20 largest % price drops in 30Y Bunds since the introduction of the Euro; On average 30Y Bunds have risen almost 10bp in the week following a large sell off # of bus. Days around large 30Y Bund sell off Source: JP Morgan Research

3 Yield (%) What challenges do investors face? Global search for a yield Market cap ($bn) Source: Bloomberg as at 31 August

4 Kames Absolute Return Bond Global Fund 4

5 Kames Absolute Return Bond Global Fund Overview Performance target Fund philosophy 3 month GBP LIBOR +2.5% p.a. net of fees over rolling 3 years Based on three key strengths; Positive returns Low volatility Low correlation to underlying markets Performance sources Carry from short-dated global investment grade corporate bonds Rates alpha generated by duration neutral relative value positioning Credit & Asset Allocation alpha from high conviction stock, sector, region, curve and asset class trades No alpha derived from currency risk 5

6 Kames Absolute Return Bond Global Fund Three key components Rates Carry Credit & Asset Allocation Kames Absolute Return Bond Global Fund 6

7 Kames Absolute Return Bond Global Fund Carry module Aims to generate a low volatility, cashplus return through the cycle by capturing the excess return offered by high quality, short-dated credit Carry Rates Credit & Asset Allocation KARB Global Fund Diversified Liquid Highly granular portfolio Average tranche size >$1bn High quality Exclusively investment grade rated and subject to team stock selection (average rating A) Short dated Alpha sources Duration hedged Credit risk limited by bonds < 5 years to final legal maturity (average < 2 years) Access to primary markets, credit curve roll down and team stock selection Key-rate risk hedged using interest rate swaps FX hedged All non- exposure hedged back to 7

8 Kames Absolute Return Bond Global Fund Carry module positioning Country exposure USA UK Core Europe Peripheral Europe Nordics Switzerland Other Developed Markets Sector exposure Industrial Banking TMT Utilities Other Financials 0% 5% 10% 15% 20% 25% 30% 35% 4% 4% 3% 4% 7% 10% 13% 19% 33% 32% 31% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 40% Ratings exposure 100% 6% BBB- 90% 80% 22% BBB 70% BBB+ 60% 14% A- 50% 14% A 40% 30% 17% A+ 20% 8% AA- 10% 12% 5% AA 0% Average credit rating A As at 31 July Exposure is duration weighted 8

9 Kames Absolute Return Bond Global Fund Rates module Primary alpha focus on duration-neutral relative value positions Relative value strategies include: Carry Rates Credit & Asset Allocation Cross market Yield curve KARB Global Fund Inflation breakeven Targeting neutral duration Investment universe includes global government bonds and derivatives 9

10 Spread bps Rates alpha 30y Germany Swap Spread Long 30y Germany/short IRS swaps Rationale This trade should benefit from the lack of supply of long-end German bonds going into the summer. Net supply is forecast to be negative on the back of the public sector purchase programme (PSPP) being conducted by the European Central Bank (ECB) Action in May 2015 Long risk 30 year German bonds Short risk euro swaps 0.05 Entered trade 0 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Source: Bloomberg and Kames Capital as at 27 August For illustrative purposes only. 10

11 Kames Absolute Return Bond Global Fund Credit & Asset Allocation module Primary alpha focus on high conviction credit and fixed income asset class views Strategies include: Carry Rates Credit & Asset Allocation Credit stock selection Fixed income asset class, sector, region, and credit curve relative value KARB Global Fund Interest rate, inflation and credit market views (managed to +/- 2.5 years at fund level) Harnessing top-down and bottom-up outputs from existing team strategy process Investment universe includes global corporate and government bonds and derivatives 11

12 Credit alpha Fixed income credit team best ideas Adding value from high conviction, risk-controlled stock selection The team exploits attractive credit structures in favoured names Yield enhancing basket Generates alpha from short-dated callable bonds with attractive yield characteristics Low risk profile given economic, regulatory or reputational reasons for issuers to call the bonds New issue premium basket Alpha from bonds offering better than fair value in the primary market Participation in attractive new issues on a short-term view Appropriate interest rate or credit market hedge if necessary 12

13 Credit & Asset Allocation alpha Existing multi-layer decision-making process We seek to exploit value across fixed income assets on a relative and absolute basis Asset class Region Government / credit Europe / US High yield / emerging market Peru / Chile Sector Curve Financials / non-financials Credit steepener (e.g long 5-year short 10-year) Senior / subordinated Credit flattener Government bonds vs. corporate bonds Corporate Investment grade vs. high yield Investment grade Financials vs. nonfinancials Government High yield Financials Developed vs. emerging markets US vs. Europe US vs. Europe Senior vs. subordinated 13

14 Spread bps Credit & Asset Allocation alpha Crossover/Main Long Investment grade / short high yield Entered trade Rationale The outperformance of the high-yield market versus investment grade since the start of the year looked overdone Action in July Long European investment grade Short European high yield via itraxx credit default swap Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Source: Bloomberg and Kames Capital as at 27 August For illustrative purposes only. 14

15 Credit & Asset Allocation alpha Consistent decisions, appropriate implementation Decision Kames Investment Grade Global Bond Fund Kames Absolute Return Bond Global Fund Investment grade vs. high yield Prefer high yield Increase allocation to favoured high yield bonds within 0-20% range Long high yield risk via Xover / short investment grade risk via itraxx Main Buy team s favoured high yield bonds with selected hedge Financials vs. nonfinancials Prefer nonfinancials Sell selected financials and use proceeds to buy favoured nonfinancials Long non-financials via itraxx Main / short financials via itraxx senior financials Buy team s favoured non-financial bonds with selected hedge 15

16 Kames Absolute Return Bond Global Fund Fund summary Risk management at fund level Strict review discipline Rates Independent risk analysis Monthly control meeting Carry Government relative value trades Credit & Asset Allocation Short-dated, high quality corporates Kames Absolute Return Bond Global Fund Stock, sector, region, curve & asset class views Targeting absolute return, low volatility, low correlation 16

17 Kames Absolute Return Bond Global Fund Portfolio summary Top 10 carry bond holdings % Rates pair trades Credit & Asset Allocation positions Rentokil Initial 5.75% 31/03/ Long Bonos Y Oblig 4.8% 31/01/24 Long Itraxx Eur Sub. Financials 5yr Qbe Ins Grp Ltd 6.125% 28/09/ Short Euro BTPS Bnd Futures Short Itraxx Eur Sen. Financials 5 Yr Santander Int Debt 3.16% 01/12/ Long Netherlands 0.25% 15/7/2025 Long Germany 2.5 % 4/7/2044 FCE Bnk Plc 5.125% 16/11/ Hammerson Plc 5.25% 15/12/ Aggregate Industr 7.25% 31/05/ Bk Of America 6.05% 16/05/ Short Euro Bund Future Sep 2015 Short Euro OAT Future Sep 2015 Long UK 5 year Fixed IRS Short Euro Fixed IRS 11/5/2046 Long Short Itraxx Main 5yr Itraxx Xover 5yr Centrica Plc 5.5% 24/10/ Stagecoach Grp Pl 5.75% 16/12/ Short US 5 Year Fixed IRS Long Canada 10yr Future Sep 2015 Yield Enhancing Portfolio Top 3 additions % United Util Wtr 6.125% 29/12/ Short US Treasury 10yr Future Sep 2015 HSBC Finance Cap 5.911% Bds 30/11/ ING Group Nv 5.775% Perp 06/08/ Tesco Plc 4% 08/09/2016 Index Linked 0.69 As at 31 July

18 Kames Absolute Return Bond Global Fund Portfolio summary Breakdown by module Carry module Rates module Credit & Asset Allocation module Total Gross exposure 93% 46% 95% 234% Net exposure 46% 1% 19% 66% Contribution to modified duration 0.4 years 0.0 years 0.5 years 0.9 years Contribution to spread duration (non beta-adjusted) 1.1 years 0.0 years 0.4 years 1.6 years Average credit rating A AA+ BBB A Value at Risk 0.50% Ex-ante volatility 0.87% Source: BoAML and Bloomberg as at 31 July On 1 November 2013 the VaR confidence interval was changed from 99% to 95%. VaR is calculated over 1 month. 18

19 Kames Absolute Return Bond Global Fund Stress-testing the portfolio Parallel interest rate moves Credit spread moves Down 100bps Down 50% Down 50bps Down 25% Down 30bps Up 25% Up 30bps Up 50bps Up 50% Up 100bps Up 100% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% Estimated fund return -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% Estimated fund return Source: UBS as at 31 July

20 Appendices 20

21 Kames Absolute Return Bond Global Fund Mandate limits and risk controls Positioning Risk limits Risk controls Carry module weighting Cash Duration range Issuer limit (investment grade corporate) Issuer limit (emerging markets, high yield) High yield & emerging market exposure* Credit quality Unhedged currency Overdraft limit 20% - 95% Minimum 5% +/- 2.5 years Maximum 3% Maximum 2% Maximum 20% Minimum B- Maximum 5% Maximum 10% Review discipline We formally review any position which makes or loses 10bps at the fund level Monthly meetings with CIO No position should make or break performance *Expected index trades. 21

22 Kames Absolute Return Bond Global Fund Risk control and position sizing Trades sized based on correlations of underlying assets Key risk control position size limits so that no single holding can have a significant effect on overall portfolio performance Review discipline we formally review any position which contributes or detracts 10bps at fund level Government bonds and rate derivatives Pair trades sized so that a 2 basis point move in the spread being traded, translates to a 1 basis point performance move at fund level, flexed for the volatility of the pair and fund manager insight Credit derivatives Pair trades sized so that a 1 basis point move in the spread being traded, translates to a 1 basis point performance move at fund level, flexed for the volatility of the pair and fund manager insight Corporate bonds 3% maximum at fund level for any investment grade name, 2% maximum at fund level for any high yield or emerging market name, subject to a maximum of 20% exposure at fund level 22

23 % growth Kames Absolute Return Bond Fund Performance Total since launch Total return (net) 7.77% Benchmark total return 2.57% Difference (net) 5.20% Total return (gross) 10.55% Best month (Oct 2011) 0.60% Worst month (Apr 2015) -0.13% Up months 33/47 Down months 14/47 Maximum Drawdown -0.51% Volatility 0.62% Sharpe Ratio Sep 11 Feb 12 Jul 12 Dec 12 May 13 Oct 13 Mar 14 Aug 14 Jan 15 Jun 15 Kames Absolute Return Bond Fund LIBOR GBP 3 Months Source: Lipper, NAV to NAV, noon prices, local currency, as at 31 August Kames Absolute Return Bond Fund B (Acc) GBP shares. Total return excluding initial charges, net of annual management charge, income re-invested. Table All Fund returns based on cumulative noon Lipper data. Gross returns based on Lipper data grossed up for AMC. Benchmark is at close. Risk statistics based on annualised monthly returns. Maximum Drawdown period based on daily returns. Past performance is not a guide to future returns. Note: the Fund launched within the last 5 years. 23

24 Kames Absolute Return Bond Fund Performance % Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD Source: Lipper, NAV to NAV, noon prices, income re-invested, local currency, as at 31 August Kames Absolute Return Bond Fund B (Acc) GBP shares. Monthly returns since launch. Total return excluding initial charges, net of annual management charge. Past performance is not a guide to future returns. Note: the Fund launched within the last 5 years. 24

25 Total return Kames Absolute Return Bond Fund Breakdown of returns since launch 12% 0.5% 10% 8% 6% 4% 0.4% 0.3% 0.2% 0.1% 0.0% -0.1% Module contribution 2% -0.2% -0.3% 0% -0.4% Oct 11 Feb 12 Jun 12 Oct 12 Feb 13 Jun 13 Oct 13 Feb 14 Jun 14 Oct 14 Feb 15 Jun 15 Carry Credit Rates Kames Absolute Return Bond Fund (LHS) All three modules have contributed positively to performance Source: Sylvan as at 30 June 2015, Price at close, gross of fees in Local Terms. Kames Absolute Return Bond Fund B (Acc) GBP shares. The contribution from the Rates module includes the profit/loss from the duration hedges (bond futures) used in the Credit module. Past performance is not a guide to future performance 25

26 Important information This document is not intended for retail distribution and is directed only at investment professionals. It should not be distributed to, or relied upon by, private investors. All data in this presentation is sourced to Kames Capital unless otherwise stated. The views expressed in this document represent our understanding of the current and historical positions of the market. They should not be interpreted as a recommendation or advice. Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed. The Kames Absolute Return Bond Fund and the Kames Absolute Return Bond Global Fund are registered in the United Kingdom, Ireland, Austria, Germany, Jersey, Guernsey, Luxembourg, Malta, Netherlands, Switzerland, Spain, Italy and Belgium. Not all available shareclasses are registered in every country. Please retailsales@kamescapital.com for the list of shareclasses registered in your jurisdiction. While the investment objective of absolute return funds is to achieve a positive return in all market conditions, this is not guaranteed in any way. Investment professionals must ensure that they meet their obligations in relation to their understanding of this product and the risks involved, and the extent to which this product meets the needs of their clients. Please refer to the Full Prospectus. This document is accurate at the time of writing but can be subject to change without notification. Kames Capital Investment Company (Ireland) plc, is an umbrella type open-ended investment company with variable capital registered in the Republic of Ireland (Company Number ), registered office at North Wall Quay, International Financial Services Centre, Dublin 1. Board of Directors: Andrew Bell (UK), Mike Kirby (Ireland) and Bronwyn Wright (Ireland). Kames Capital Investment Company (Ireland) plc is regulated by the Central Bank of Ireland. Kames Capital is an Aegon Asset Management company and includes Kames Capital plc (Company Number SC113505) and Kames Capital Management Limited (Company Number SC212159). Both are registered in Scotland and have their registered office at Kames House, 3 Lochside Crescent, Edinburgh, EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Conduct Authority, (FCA reference no: ). Kames Capital plc is the Investment Manager and Marketing Agent for Kames Capital Investment Company (Ireland) plc. Kames Capital Management Limited is an appointed representative of Scottish Equitable plc (Company Number SC144517), an Aegon company, whose registered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (PRA/FCA reference no: ). For Investors in Germany - Kames Capital Investment Company (Ireland) plc is a UCITS collective investment scheme registered in Germany by BaFin. The Prospectus, Supplement and Key Investor Information for Kames Capital Investment Company (Ireland) plc are available free of charge from CACEIS Bank Deutschland GmbH Lilienthalallee 34-36, D Munich. FPID: 2015/