Swisscanto (LU) Bond Invest Global High Yield Edition for Switzerland, Germany, Austria, Liechtenstein and Luxembourg
The challange: Invest in high-yield bonds Term The ability of a company to repay its credit is evaluated by rating agencies such as S&P. The rating scale ranges from AAA (highest quality) to D (in default of payment). Often there is also a rough division into first-class investments (investment grade) and high-yield bonds (non-investment grade). The interest rate is dependent on the borrower quality of a company. This means if the borrower quality of a company is good, there is a lower interest rate for the bonds. If, on the other hand, the borrower quality is poor, the risk for the investors is higher and, in return, they receive higher interest rates. Thus the term "high yield". Examples of high-yield bonds A somewhat poorer borrower quality does, however, not necessarily mean that the company or its products are bad. It could just be the case that the current market situation is unfavourable. The diagram 1 lists some companies in the different rating classes. Diagram 1: Bond credit rating (S&P) Comparison with equities High-yield bonds can be an alternative to equities. This makes a comparison of the two investment segments expedient, as share capital and high-yield bonds are "neighbours" in the credit structure of a company. In the case of bankruptcy, for instance, the creditors of high-yield bonds are ranked directly ahead of the shareholders. With regard to total yield, high-yield papers thus also achieve a similar return to that of equities in the medium and long term. Current period of low interest rates With first-class bonds, the current income is almost the same as the current general interest rate level (see diagram 2, "Risk-free interest"). Currently the interest rate level is, however, very low and any rising interest rates would have a negative influence on the bond prices. On the other hand, with high-interest bearing bonds, the current income is made up of a base rate (risk-free interest) together with a compensation for the credit risk taken. The share for compensating the credit risk is relatively large for high-yield bonds. The negative influence of rising interest rates on high-yield bonds is thus much lower. Investment-Grade AAA AA Johnson & Johnson Novartis Diagram 2: Income example for high-yield bonds with a short residual term for 2011 A BBB McDonald's Deutsche Telekom The currencies in the example have been hedged in CHF. Non-Investment-Grade (High Yield) BB B CCC CC C Fiat/Sunrise/Clariant Ford/Europcar Bausch & Lomb Current income hedged in CHF +5.0% Market influences +1.3% -1.2% -0.3% Result CHF 5.5% DDD DD +0.7% D Risk-free interest (2 years) Credit risk mark-up Improvement in market environment* (Credit Spreads) Borrower defaults* Effect of rise in interest rates* Adjusted income* The naming of individual securities is made purely by way of example and shall not constitute a recommendation to buy or sell these securities. *Swisscanto estimate for 2011 2
The solution: Point in time and partner Historical high-yield returns It can be observed that in the history of high-yield bonds, the market undergoes a self-cleaning process following a slump. What is striking is that the turbulent periods each lasted approximately 2 years, followed by a year marked by a strongly positive counter-movement, with the situation stabilising for several years afterwards. If investors had invested in US high-yield bonds at the end of 2007 (at the most unfavourable point in time), they would have been in the black again just two years later. A similar scenario was experienced in 1990/91 (recession), 2000/2001 (bursting of the technology bubble as well as 11 September 2001) and 2008 (financial crisis). Of course, the best time for investing in high-yield bonds would have been at the beginning of 2009, when the high-yield bond prices were very attractive. For psychological reasons, however, many investors understandably did not do this. Swisscanto is of the opinion that it is still worthwhile investing in high-yield bonds because we are at the beginning of a more quiet phase with stable high-yield returns. while the credit risk compensation is retained. The objective of the fund is to achieve a large part of the high-yield return with smaller market price fluctuation (volatility) (see diagram 4). Diagram 4: Return/Risk Global High Yield Income High Yield Equities SWC (LU) Bond Invest Global High Yield (short residual terms) Investment-grade bonds Risk (volatility) Diagram 3: Annual yields (in %) of US high-yieldbonds since 1984 25.6 17.4 12.5 9.7 5.0 0.8-9.6 46.2 17.1 15.7 19.2 11.4 12.8-1.0 1.9 2.4-5.9 5.3-1.4 29.0 11.1 11.9 2.7 1.9-26.2 58.2 84 86 88 90 92 94 96 98 00 02 04 06 08 10 15.1 Ø 10.7 Today Swisscanto, the right partner for high-yield investments Investing in high-yield bonds calls for a great deal of experience in analysing borrowers. Swisscanto has proven specialists at its disposal and is excellently networked in the market. At Swisscanto, moreover, the functions performed by analysts and portfolio managers are not strictly separated, which means that fundamental expertise is always combined with a good knowledge of the market. As a result, already today institutional investors entrust Swisscanto with CHF 1 billion for investment in high-yield bonds. Source: Barclays Capital / Diagram: Swisscanto Short residual terms The value fluctuations of high-yield bonds are greater than those of bonds from the investment grade sector. The Swisscanto (LU) Bond Invest Global High Yield compensates for this disadvantage by shortening the average residual term of the bond (to approx. 1.9 years). This allows the risk of price losses due to interest rate increases to be markedly reduced, 3
The product: Swisscanto (LU) Bond Invest Global High Yield Fund profile The Swisscanto (LU) Bond Invest Global High Yield invests primarily in short-tem corporate and government bonds in the Non-Investment Grade sector and, with a duration of under 2½ years and an average rating between B+ and BB-, aims for a minimum return of Libor +5%. In addition to that, focussing on short-term bonds is intended to clearly reduce the influence of changes in interest rates on the development of value. Swisscanto is of the opinion that high-yield bonds are not only suitable for institutional investors, but also make very good sense as an addition to the portfolios of private persons able to take risks. The Swisscanto (LU) Bond Invest Global High Yield now makes this attractive investment category available to a wider public. Possible risks The fund is subject to market movements. In particular, investments in the non-investment sector can also show greater price movements. Furthermore, investments in foreign currencies are subject to exchange rate fluctuations. The risks are set out in detail in the sales prospectus. Who should subscribe to this Swisscanto fund? Investors who are seeking constant yields also in the current low interest rate environment (approx. 5% to 6% p.a. in CHF) and would like to further diversify their bond investment universe. expect slightly rising interest rates.... are prepared to accept short-term market price fluctuations. Advantages for investors? High-yield bonds offer very good diversification qualities in portfolios. Limited risk in the case of interest rate increases due to the bonds short residual terms. Simple and widely diversified investment in high-yield bonds. The Swisscanto (LU) Bond Invest Global High Yield is currently the only CHF high-yield product with a short residual term offered in Switzerland. Diagram 5: Investment universe Swisscanto (LU) Bond Invest Global High Yield Investment-Grade AAA AA Johnson & Johnson Novartis A McDonald's BBB Deutsche Telekom Non-Investment-Grade (High Yield) BB B CCC Fiat/Sunrise/Clariant Ford/Europcar Bausch & Lomb Investment universe Global corporate bonds in the non-investment grade area BB to CCC CC C DDD DD D The naming of individual securities is made purely by way of example and shall not constitute a recommendation to buy or sell these securities.. 4
Key data Fund name Fund category Currencies Distribution Swisscanto (LU) Bond Invest Global High Yield Bond fund CHF, EUR, USD, each hedged Reinvesting Tranches B (retail) J (institutional) ISIN CHF B tranche: EUR B tranche: USD B tranche: LU0556184884 LU0556185345 LU0582725312 CHF J tranche: EUR J tranche: USD J tranche: LU0582724935 LU0582725072 LU0582725403 Securities number CHF B tranche: EUR B tranche: USD B tranche: 11963041 11963062 12353464 CHF J tranche: EUR J tranche: USD J tranche: 12353466 12353467 12353468 Domicile Luxembourg Benchmark Legal form Customised benchmark 50% EUR high yield, 50% USD high yield Benchmark duration 1.9 years Open public fund under Luxembourg Law / UCITS III / Commitment II All-in fee B tranches: 1.30% p.a. J tranches: 0.80% p.a. Issue commission Portfolio managers As per marketing agents price list Swisscanto Asset Management Ltd., Zurich This publication is intended for distribution in Switzerland, Germany, Austria, Liechtenstein and Luxembourg and is not addressed to investors in other countries. All information published here is solely for advertising purposes and does not constitute investment advice or any other recommendation. The sole binding basis for the acquisition of units/shares in Swisscanto investment funds are the respective sales prospectuses and reports on activities. This is a fund under Luxembourg Law. The documents published (sales prospectus, simplified sales prospectus and contractual terms in the versions valid at the time being, as well as the last annual and mid-year report and possibly reports and statements of account) can be obtained free of charge at www.swisscanto.ch. The sources for obtaining the documents published in paper form free of charge according to the country are:switzerland: Swisscanto Asset Management Ltd, Nordring 4, P.O. Box 730, 3000 Berne 25, all branches of Cantonal Banks in Switzerland and the Bank Coop AG,Basle, as well as the representative and paying agency Basler Kantonalbank, Spiegelgasse 2, 4002 Basle. Germany: Paying and information agency DekaBank, Mainzer Landstrasse 16, 60235 Frankfurt a.m.. Austria: Vorarlberger Landes- und Hypothekenbank Aktiengesellschaft, Hypo-Passage 1, 6900 Bregenz. Liechtenstein: Valartis Bank (Liechtenstein) AG, Gamprin-Bendern. Luxembourg: RBC Dexia Investor Services Bank S.A., 14, Porte de France, L-4360 Esch-sur-Alzette. Past performance is no indication of future performance and does not guarantee success in the future. All investments involve risk, especially with regard to fluctuations in value and returns. In addition, investments in foreign currencies are subject to exchange rate fluctuations. The risks are described in detail in the sales prospectus and simplified sales prospectus. This marketing information was not prepared in compliance with the legal regulations for the promotion of independence of financial analyses and is also not subject to the ban on trading following the distribution of financial analyses. The information contained in this document has been compiled with the greatest care by Swisscanto. This information and opinions expressed here have been obtained from reliable sources. Despite taking professional care, Swisscanto cannot guarantee the correctness, completeness or topicality of the information. Swisscanto does not accept any liability for investments made on the basis of the information contained in this document. The information contained in the document does not constitute an offer unless this is explicitly indicated. Version 7.2011 5