Unconstrained Fixed Income: One Asset Manager s Perspective HIMCO Webinar

Transcription

1 Unconstrained Fixed Income: One Asset Manager s Perspective HIMCO Webinar October 1,

2 Unconstrained Fixed Income: One Asset Manager s Perspective Presenters Christopher Zeppieri, CFA Vice President and Senior Portfolio Manager Today s Host: Maureen Decker Senior Vice President, Consultant Relations Manager As of September 30,

3 Unconstrained Fixed Income: One Asset Manager s Perspective Agenda Market Landscape Driving Interest Defining The Strategy HIMCO s Portfolio Management Philosophy How It Fits Within A Fixed Income Portfolio 3

4 Market Landscape Commentary On Our Times What s past is prologue - Shakespeare The times they are a-changin - Bob Dylan Bob Dylan image: Stoned59 - originally posted to Flickr as Bob Dylan 4

5 Market Landscape Stimulus Is Abundant QE Rules as Central Banks Pump Up Balance Sheets Bloomberg.com, Sept. 24, 2014 Draghi Sees ECB Becoming More Active in Fight for Euro Bloomberg.com, Sept. 20, 2014 Bank of Japan Buys Government Debt at Negative Yield The Wall Street Journal, Sept. 9,2014 China Bank Chief Confirms Cash Injection The Wall Street Journal, Sept. 19, 2014 The Problem with the Fed s Easy Money Policies The New York Times, May 17,

6 Index Level YTM (%) Market Landscape Impacting Broad Equity & Fixed Income Markets Equity markets are at all-time highs Fixed income yields are at 10-year lows Broad Equity & Fixed Income Market Levels S&P 500 Index (LH) 1 Barclays U.S. Aggregate YTM (RH) Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Source: Bloomberg, Barclays Live, as of August 31, Past performance is no guarantee of future results. 6

7 Jan-00 Feb-01 Feb-02 Mar-03 Mar-04 Mar-05 Mar-06 Apr-07 Apr-08 Apr-09 May-10 May-11 May-12 Jun-13 Jun-14 Jun-15 Jul-16 Jul-17 Jul-18 Aug-19 Percent (%) Market Landscape Interest Rates Are Expected To Go Higher Yields across fixed income are low Potential for a rising interest rate environment exists, and is a concern for traditional fixed income investors 8 Historical & Forward LIBOR Rates Month LIBOR Historical Average (3-Month LIBOR) Forward LIBOR Rate Source: Bloomberg, as of August 31, Past performance is no guarantee of future results. 7

8 Defining The Strategy Categorizing Unconstrained Fixed Income Traditional Fixed Income Spectrum of Alternatives Benchmark-Centric Nonbenchmark-Centric Core Core Plus Strategic Unconstrained Income Bond Fixed Income- Focused Hedge Funds 8

9 Defining The Strategy What to Look for in an Unconstrained Fixed Income Strategy Not tied to a benchmark Flexible guidelines Broad opportunity set High historical risk-adjusted returns (Sharpe Ratio) Low correlation to broader fixed income market History of dynamic sector rotation Ability to size positions in best ideas to seek to drive performance 9

10 HIMCO s Unconstrained Fixed Income Portfolio Management Philosophy Evolving Markets Require Proactive Management Flexibility Broad opportunity set and investment guidelines Risk Management Clear, systematic, expected lossbased risk framework Conviction Best Ideas format Agility Diverse execution tools & capabilities Focus on riskadjusted returns in all markets 10

11 HIMCO s Unconstrained Fixed Income Portfolio Management Philosophy While Strategy Is Different, Our Approach Remains the Same Start with a macro viewpoint to identify opportunities Leverage a broad opportunity set, i.e., the global fixed income market Focus on managing two main levers: Duration and Credit Dynamic portfolio management 11

12 Percent (%) HIMCO s Unconstrained Fixed Income Portfolio Management Philosophy Credit Risk Large changes in market risk appetite have tended to affect all sectors simultaneously Diversification benefits are muted in large moves Historical Spreads of Various Credit Sectors U.S. High Yield U.S. Investment Grade Credit EMD ABS CMBS 0 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Source: Barclays Live, as of June 30, Past performance is no guarantee of future results. U.S. High Yield is represented by the Barclays U.S. Corporate High Yield Index, U.S. Investment Grade Credit is represented b y the Barclays U.S. Credit Index, EMD is represented by the Barclays EM USD Aggregate Index, ABS is represented by the Barclays Asset-Backed Securities Index, CMBS is represented by the Barclays CMBS ERISA-Eligible Index. 12

13 Yield (%) HIMCO s Unconstrained Fixed Income Portfolio Management Philosophy Interest Rate Risk Duration may be used as both an active alpha generator as well as a diversifier from credit risk Despite long-term trends, there may be short-term opportunities to produce alpha Historical 10-Year U.S. Treasury Note Rates Long-term Trends Source: Bloomberg, as of June 30, Past performance is no guarantee of future results Short-term Opportunities Periods of Rising Rates 13

14 HIMCO s Unconstrained Fixed Income Portfolio Management Philosophy Unconstrained Fixed Income in a Low Rate / Tight Spread Environment Issues In Current Environment High potential for upward interest rate migration Short-end high quality credit very rich Choppy but range-bound markets Ability to Potentially Enhance Performance Ability to manage very short duration to potentially preserve capital Ability to pursue relative value in credit Ability to act meaningfully contrarian Overlaying uncorrelated positions through broad range of instruments may potentially enhance performance, reduce volatility The views ex pressed constitute the portfolio managers judgment as of September 30, 2014, and are subject to change without n otice based on market, economic or other conditions. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. All data referenced is from sources deemed to be reliable but cannot be gua ranteed as to accuracy or completeness. 14

15 How the Strategy Fits Within a Fixed Income Portfolio Potential to Enhance Overall Portfolio Efficiency A complement to traditional, benchmarkdriven fixed income strategies Lower correlation to traditional fixed income High historical risk-adjusted return Ability to manage risk Seek to seize uncorrelated alpha opportunities across entire fixed income market 15

16 Investment Risks Fixed income investments are subject to credit and interest rate risk. To the extent that a strategy invests in asset-backed, mortgage-backed or commercial mortgage backed securities, their exposure to prepayment and extension risks may be greater than investments in other fixed income securities. Investments in high-yield securities and foreign securities, including emerging markets, involve risks beyond those inherent in solely higher-rated and domestic investments. TIPS are subject to the risks associated with inflation-protected securities ("IPS"). Risks associated with IPS investments include liquidity risk, interest rate risk, prepayment risk, extension risk and deflation risk (with deflation, the principal value of IPS holdings would be adjusted downward). Bank loans are subject to liquidity risk, prepayment risk, credit and interest rate risk, recovery and call risk. The use of derivatives, such as options, futures and swaps, can be illiquid, may disproportionately increase losses, and has a potentially large impact on performance. An unconstrained strategy may engage in short selling, which is a speculative strategy that involves additional risks. Unlike the possible loss on a security that is purchased, there is no limit on the amount of loss on an appreciating security that is sold short. 16

17 Questions & Answers For more information, please contact: Maureen Decker Senior Vice President, Consultant Relations Manager Phone: