High total returns and attractive income from bonds Q&A roadshow 2016 #QAroadshow2016 Michael Scott Portfolio Manager June 2016 For professional advisers only. This material is not suitable for retail clients
15/06/2016 09:56:55 Questions Why is high yield a strategic opportunity? What is your outlook for high yield? What opportunities do you see currently and going forward? 1
Why is high yield a strategic opportunity?
1 year 3 year (p.a.) 5 year (p.a.) 10 year (p.a.) Max drawdown (5 yr) Sharpe (5yr) 15/06/2016 09:56:19 Return Vol (90 days) European HY a natural income generating asset class Generating high income and low volatility returns Yield % 8 7 7.1 Asset Class Performance Risk stats 6 5 4 4.2 European HY -1.50% 5.50% 7.40% 7.80% -14.6 0.9 5.0 3 European Equities -16.20% 3.70% 0.10% -2.30% -30.4 0.3 18.0 2 RPI 1.6 % 1.6 UK Equities -9.00% 0.30% 1.60% 1.10% -19.8 0.4 18.7 1 0 0.5 Cash Gilts Stocks Fund EUR Govt. 1.10% 5.30% 6.70% 5.20% -6.3 1.4 3.3 EM Debt (Local) -2.00% -7.00% -2.40% 4.90% -32.7-0.1 12.3 Source: Schroders, Bloomberg as at 29 April 2016. Cash, gilts, stock yields, fund are gross of fees. Yield on the Fund is effective yield. The Fund is Schroder Monthly High Income Fund. RPI is UKRPYOY, Cash is 1 Month GBP LIBOR (BP0001M Index), Gilts are 10 Year UK Government Bond (GUKG10 Index), Stocks are FTSE All Share (ASX Index) *European High yield = LF88TREU Index, European Equities = SX5E Index, UK Equities = ASX Index, European Government = QW1A Index, EM Local Currency Bonds = JGENVUUG Index. 3
Slow growth and low inflation is the sweet spot for high yield If we avoid recession, high yield should remain solid Real GDP Growth of +1-2%: sweet spot for Credit Average quarterly total return at various ranges of real GDP growth Data reflect the 111 quarter period of the modern HY era from 3Q 1988 to 3Q 2015. Sources for total returns of asset classes under different speeds of economic growth: BofA ML US High Yield Index (H0A0), the BofA ML 1-10 Year US Corporate Index (C5A0), and the BofA ML 1-10 Year US Treasury Index (G5O2); Bloomberg for S&P500 returns, assuming reinvestment of dividends in the index. US Real GDP data reflect the official figures from the US Bureau of Economic Analysis of the quarter-over-quarter seasonally-adjusted annualized rate of real chain-weighted GDP. Of the 111 quarterly observations from 3Q 1988 to 3Q 2012, there were 22 quarters of real GDP growth less than +1%, 18 quarters of growth between +1% and +2%, and 21 quarters of growth in excess of +2% 4
Consistent and high level of income High income and low volatility returns it's what bonds were made for % Source: Morningstar; Bloomberg as at 29 February 2016. Dividend yield is the most recently announced gross dividend, annualised on the dividend frequency unique to the fund, then divided by the current market price. Fund uses effective yield. Abnormal dividends are not included in this yield calculation. Maximum drawdown percentage is in absolute terms and is the largest drop from a peak to a bottom in a sub-period over the time period. Dividend yield and maximum draw-downs are average figures calculated across the peer group. Peer Groups: IMA High Yield; UK Equity Income; UK Equity and Bond Income; Morningstar EAA OE Global Bond 5
What is your outlook for high yield?
Outlook for high yield Macro Global growth is slowing in both EM and DM but we don t expect a recession Low inflation is supportive for the consumer, and for income Fundamental European companies remain bondholder friendly and focused on preserving cash Default trends picking up but they are concentrated to specific sectors and issuers Technicals Very low supply and attractive valuations are very supportive of high yield Pockets of volatility fuelled by short-term sentiment create great opportunities 7
Eurozone Solid growth in Germany and Spain; Italy looks increasingly vulnerable Source: Bloomberg, Schroders, as at June 2016 8
High Yield Net Leverage 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 Mar 03 Jan 04 Nov 04 Sep 05 Jul 06 May 07 Mar 08 Jan 09 Nov 09 Sep 10 Jul 11 May 12 Mar 13 Jan 14 Nov 14 Sep 15 US EU Source: Morgan Stanley, Dec 2015; Leverage is Net Debt / EBITDA 9
Technicals Positive for the European high yield market European High Yield net supply by calendar year Sources: Morgan Stanley as of May 2016 10
Spreads are attractive given fundamentals and valuations Moody s default rate expectations in Europe High yield spreads by region While default risk expectations increased in problematic areas (US Energy and Metals & Mining in particular) prospects for Pan European high yield remains solid and now even more attractively priced! The current premiums available are ample compensation for the interest and credit risk if one can pick the right bonds! Source: Moody s; Bloomberg as at 31 January 2016. Forecast risk warning: Please refer to the important information slide at the end of this presentation. 11
What opportunities do you see currently and going forward?
Risks and opportunities Brexit and other political risks Brexit is still not likely however it is almost fully priced into sterling banks and credit now Potential volatility from upcoming elections, separatist movements and right wing parties ECB buying corporate bonds Supportive on the short term but may have unintended consequences on the long term Some high yield BBs will be eligible Interest rates No hikes on the horizon in Europe for a long time The Fed may be close to hiking again 13
Opportunities Attractive compensation in selective financials RBS 7.64% 03/29/49 Callable Allied Irish 4.125% 11/26/25 Unicredit 9.375% 07/29/49 Callable Entry level @ 97.5c Entry level @ 88c Entry level @ 103c Source: Bloomberg as at 31 March 2016. Tickers: RBS 7.64 03/29/49 Corp; AIB 4 ⅛ 11/26/25 Corp; UCGIM 9 ⅜ 07/29/49 Corp. Based on weekly prices. Stocks shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell 14
Opportunities Some out of favour issuers look very interesting after recent developments Gaz Capital 8.625% 04/29/2034 YPF Sociedad Anonima 8.5% 07/28/2025 Entry level @ 117c Entry level @ 96.50c Source: Bloomberg as at 31 March 2016. Tickers GAZPRU 8 ⅝ 04/28/34 Corp; YPFDAR 8 ½ 07/28/25 Corp. Based on weekly prices. Stocks shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell 15
Schroder Monthly High Income Fund A strategic and tactical investment opportunity for 2016 THEMES BASED Investment style RESEARCH focused stock selection Aims for equity-like returns for bond-like risk 10% 6% 2% -2% -6% UNCONSTRAINED high conviction idea Relative Fund performance vs. IMA High Yield Sector* 8.9% 6.2% 5.1% 2.9% 3.6% 4.0% 1.5% 2.6% 3.5% 3.8% 1.4% -0.4% 6 Months 1 Year 3 Years Since July 2012** Schroder Monthly High Income Acc High Yield Relative performance 1 st Quartile 1 st Quartile 1 st Quartile 1 st Quartile *Only funds with Sterling as the base currency are included. ** Michael Scott became lead portfolio manager on July 1st 2012. Inception date: 14 February 2000. Performance Source: Morningstar, bid to bid, net income reinvested, Basic Rt Tx, GBP. Past performance is no guarantee of future results. The value of an investment may go down as well as up and is not guaranteed. 16
Important information For professional advisers only. This material is not suitable for retail clients. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. This presentation is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Unit Trusts Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. The forecasts included in this document should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. As a result of the fees being charged to capital, the distributable income of the fund may be higher but there is the potential that performance or capital value may be eroded. The fund invests in higher-yielding, or non-investment grade, bonds. The risk of the issuer defaulting on the capital repayment is higher than with investment grade bonds. Issued in June 2016 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK10799 17