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2012 02 09 swisscanto (lu) bond invest global high yield pptx city wire 2012 02 09 swisscanto (lu) bond invest global high yield pptx city wire Presentation Transcript

  • Short Duration Global High YieldAn Attractive Carry StrategySwisscanto Asset Management Ltd.Shahzada Omar Saeed, Head of High YieldParis, February 2012
  • Agenda1. High Yield at Swisscanto2. The Case for Short Duration High Yield3. Investment Process4. Product(s) and Performance5. Appendix – The Case for High Yield2© Swisscanto Asset Management AG
  • Lead Managers Profile Consistent & Solid Track Record of Alpha Generation12.00%10.00% Shahzada Omar Saeed8.00% Head of High Yield Omar Saeed (1975), MBA in Financial Management, is the lead manager for the Swisscanto (CH) Institutional Bond Fund -6.00% Global High Yield I and Swisscanto (LU) Bond Invest Global High Yield H CHF/EUR/USD B and J4.00% Previously he worked for Western Asset Management Company in London as a High Yield Portfolio Manager, where he was responsible to co-manage euros800m in High Yield and leverage loan portfolios. He gained similar experience at2.00% Foreign & Colonial Asset Management where he was co- manager for the Global High Yield retail funds. In addition Omar gained industry experience at Standard & Poor’s Rating0.00% Services in London. Omar received his MBA from Greenwich University, Pakistan Campus of Southeastern University, F&C Maximum Western Asset Western Asset Swisscanto (CH) Swisscanto (LU) Washington D.C. in 1998 with Distinction in Financial Income Fund European High European Institutional Bond Invest Short Management. (Apr 06-Apr 07) Yield Portfolio Leverage Loan Global High Duration Global (Jun 07-Jul 09) Fund YieldBond Fund High Yield Fund (Oct 07-Jul 09) (Jan 10 - to date) (Jan 11 - to date) Joined Swisscanto: 2009 Professional experience: 13 years 3 © Swisscanto Asset Management AG
  • Swisscanto – High Yield Team Hansueli Gasser Senior Portfolio Manager Hansueli Gasser (1959), lic. oec. HSG, is a member of the Senior Management and works as Credit Analyst and Portfolio Manager in the High Yield team. As Portfolio Manager, he co-manages the Swisscanto (CH) Institutional Bond Fund - Global High Yield I. He began working in the securities business at UBS in 1985. In the course of his professional career, he has acquired in-depth knowledge in corporate finance and M&A, and also in the credit, issuing and investment business. Joined Swisscanto: 2003 Professional experience: 25 years Roland Hausheer Senior Portfolio Manger Roland Hausheer, (1973), lic. oec. et lic. iur. HSG, is a Director and member of the Senior Management. As a senior portfolio manager within the high yield team he covers the airlines, energy and transportation sectors and co-manage its funds. Roland began his career in the financial industry as credit analyst at RMF Investment Management, Pfaeffikon (SZ) and London. Prior to that, Roland was part of the Global Proprietary Trading team at Credit Suisse, London and as Credit Analyst/Portfolio manager responsible for trading fundamental credit strategies in both high yield and investment grade names. Joined Swisscanto: 2011 Professional experience: 10 years4© Swisscanto Asset Management AG
  • High Yield at SwisscantoA historical perspectiveHigh Yield AUM ($m) at Swisscanto$1400$1200$1000 $800 $275.00 $600 $195.00 $400 $500.00 $200 $0 June 2007 June 2008 June 2009 June 2010 December 2011 Swisscanto (CH) Institutional Swisscanto (LU) - Bond Invest High Yield in non-dedicated funds Bond Fund - Global High Yield I Global High Yield H High Yield AuM’s almost tripled in 2 years --- Committed & Growing Set of Investors5© Swisscanto Asset Management AG
  • Agenda1. High Yield at Swisscanto2. The Case for Short Duration High Yield3. Investment Process4. Product(s) and Performance5. Appendix – The Case for High Yield6© Swisscanto Asset Management AG
  • Case for Short Duration High YieldKey benefits:• Significantly reduces exposure to interest rate risk, as duration is 60% less than that of regular High Yield;• Substantially reduce volatility; 40% of the volatility but still able to capture 80% of the regular High Yield and an excellent substitute for Equities• Despite similar credit ratings to our core High Yield product, credit risk is lowered due to shorter duration;• A strong substitute for leverage loan asset class/funds; The Only Provider of a Global High Yield Short Duration Fund7© Swisscanto Asset Management AG
  • Investment Rationale –Short Duration High Yield versus Interest Rate Sensitive Products Short Duration High Yield’s negative correlation to interest rates would be at least similar to leveraged loans Source: J.P. Morgan; S&P/LCD High Yield serves as a hedge against rising treasury yields8© Swisscanto Asset Management AG
  • Investment Rationale -Short Duration High Yield Generates 50% of Volatility, butInvestors Realise 90% of the Regular High Yield X Global High Yield Short Duration Stabile Phase Short Duration High-Yield offers an Attractive Risk Reward9© Swisscanto Asset Management AG
  • Investment Rationale -Asset class performance during recent periods of market stress Merril Lynch Benchmark Benchmark Benchmark Benchmark Benchmark Aug-Oct March 2011 May 2010 FY 2008 Indices data as of 26th Credit Duration Spread Yield 2011 (Fukushima (European (peak of January 2012 ratings sell-off , rising peripheral systemic Systemic treasuires, crisis) crisis) crisis ME returns uprising) SWC Glb High Yield B+ 4.2yrs 735bps 8.62% -11.8% -0.34% -3.23% -28.6% (Q432) SWC Global Short B+ 1.9yrs 730bps 7.95% -6.8% +0.24% -1.44% -13.1% Duration high-yield (Q471) A 5.6yrs 245bps 3.65% -1.6% -0.12% -0.39% -4.9% Global IG (G0BC) BBB 5.1yrs 985bps 11.05% -21% +0.64% -2.95% -25.7% Sub Financial (Q510) BB- 5.9yrs 710bps 8.4% -8.5% +1.70% -2.62% -19.0% Global EM (IM00) n.a. 2.0% -22% -0.15% -8.25% -39.1% Equities (S&P 500) (div yield) (intra (intra month month -18%) -6%) Only in a systemic crisis, investors are at risk of significant underperformance10© Swisscanto Asset Management AG
  • Investment Rationale -Lower credit risk than headline credit ratings suggest Despite MGM’s low credit ratings of B3/CCC+, this is not reflective of the group’s adequate liquidity profile (We Hold the 10.375% May 2014 secured bonds)11© Swisscanto Asset Management AG
  • Investment Rationale -Short Duration Global High Yield vs Leverage Loans Key data points as at 27th January 2012 Swisscanto Short Duration Global High Yield US Leverage Loans Index Benchmark Income 7.57% 4.8% Yield 7.95% 7.6% Final maturity <3 years 5 years Credit Spread Duration 1.9 yrs 2.7 yrs Spread vs Treasury 730bps 660 bps Leverage 4.0x 3.9x Average issuer ratings BB- B Average issue (Benchmark Credit Ratings) B+ B+ Interest Rate Risk low none (FRN structure) Liquidity (bid/offer) 1.5pts 2.0pts A. Total return expectations 10.25% Approx 7.25% B. Default rate consensus (for next 2 years) 3.0% 2.5% C. Recovery rate 35% 65% D. Default loss (B x (100%-C)) 1.9% 0.88% Total return after default loss (A-D) Approx 8.25% approx 6.25% Short Duration High-Yield offers a strong alternative to Leverage Loans12© Swisscanto Asset Management AG
  • Investment Rationale –High Yield Fundamentals stronger, despite an expected EU ZoneRecession• High Yield issuers on aggregate still focused on improving credit metrics & generating free cash flow;• Stress levels in covenants are very low compared to prior recessions13© Swisscanto Asset Management AG
  • Investment Rationale –High Yield Fundamentals stronger, despite an expected EU ZoneRecession• Corporate balance sheets would be heading into the downturn in solid shape, cash debt very close to record highs.• Albeit a maturity wall exists between H2 2013- 2015, its not an issue for the High Yield and leverage loan market during for remainder 2011 & 201214© Swisscanto Asset Management AG
  • Default outlook: Swisscanto’s conservative outlookInverse correlation of Defaults and Recoveries market estimates default Rates circa 2% at recovery of 40%20% 18.2% 60%18% 50%16%14% 12.7% 40%12% 10.4%10% 30% 7.3% 8% 5.5% 20% 6% 3.9% 4.0% 4.0% 4% 2.4% 1.5% 2.0% 10% 1.4% 2% 0.7% 0.6% 0.7% 0% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E Aggregate Default Rate (LHS) Aggregate recovery (RHS) Source: Swisscanto S&P, Moody’s and the market forecasts 2012 defaults at approx 2% & recoveries at 40%15© Swisscanto Asset Management AG
  • …leaving room for spread tighteningWhat Swisscanto short duration global high yield customised benchmark spread implies for future default rates:Actual Spread - Excess Spread* Default loss par- recovery rate Default Rate 840 bps - 350 bps = 490 bps / (100%-40%) = 8.2%*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps Forecasts as of December 2011Lets assume conservatively a recovery rate of 35% and a 4% default rate, our spread forecast:Default Rate x par-recovery rate = Default loss + Excess Spread* Forecast 4.0% x (100% - 35%) = 260 bps + 350 bps = 610 bps*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps Forecasts as of December 2011 Swisscanto forecasts fair value for Short Duration high yield market approx 600bps-625bps16© Swisscanto Asset Management AG
  • Spread tightening potential for Short Duration High yieldassessed further from a volatility perspective • With shorter business cycles and a prevailing debt crisis volatility likely to remain elevated for the medium term; • We assume a VIX level between 25-30 range over the coming years on an average basis; • Taking further into account Short Duration High Yield asset class generating 50% lower volatility than regular market, minimum excess spread investors should be compensated for conservatively is 350bps17© Swisscanto Asset Management AG
  • We forecast short duration High Yield total returns of8%-10%% p.a. (CHF hedged) in 2012 Total Return Forecast for 12 months Running income unhedged 7.90% Swisscanto short duration HY benchmark Yield (December 2011 onwards) Interest rate differential + hedging transaction costs Hedging costs + yield differential -1.00% of 10 bps Typically ranges between +50 bps & 60 bps + Positive carry over benchmark +1.00% benchmark Running income CHF hedged 7.90% Assume 2 year treasury/bunds yields rise a further Expected impact of change in 2yr treasury yields -0.57% 30 bps (1.3%) That is 150bps tightening x duration of the Expected impact of change in spreads +2.92% benchmark (1.95 yrs) to 650 bps Expected return before fees 10.25% Source: Swisscanto18© Swisscanto Asset Management AG
  • Agenda1. High Yield at Swisscanto2. The Case for Short Duration High Yield3. Investment Process4. Product(s) and Performance5. Appendix – The Case for High Yield19© Swisscanto Asset Management AG
  • High Yield Investment Process – An Integrated Approach 50% • High Yield Team are members & contributors to the Beta Credit, Equity & Alternative Investment Tracks Analysis • Objective of these tracks is to gauge "Risk-off" & "Risk-on" nature of the market Portfolio Construction • Opinions and conclusion reached arent necessarily approx. 100 issuers binding, as nature of the asset class would demand a varying Portfolio Strategy implemented by PM 50% • Bottom up emphasis of 50% does not imply 50% time Credit spent on bottom up process, almost 80% of time consumed by High Yield team is on stock selection Analysis & trade idea generation; Equal emphasis applied to Top Down and Bottom up Process20© Swisscanto Asset Management AG
  • High Yield Investment Process – An integrated approach Issuer analysis & Strategy Portfolio Control construction• Vertically integrated • Consistent and efficient • Multi-level management of all implementation relevant risks• Apart from the Macro strategy, the high-yield team • Solid platform are contributors within the • Best execution alpha tracks for the credit, sector, equity and alternative investments strategy(s)• Pragmatic and systematic Simple, systematic and replicable21© Swisscanto Asset Management AG
  • High Yield Investment Process – An integrated approach Bottom up analysis & Credit Beta Ratification Execution Portfolio construction• Apart from the Macro • In-depth Credit • Challenged by co- • Solid platform strategy, the high-yield analysis manager, and sector • Best execution via team are contributors specialist from Investment • Relative Value • trading desk within the alpha tracks for Grade side during daily Analysis the credit, sector, equity and weekly reviews and alternative • Decisions are immediately investments strategy(s) binding for HY portfolio &• Pragmatic and systematic Investment grade PM’s holding High Yield bonds • Systematic documentation Simple, systematic and replicable22© Swisscanto Asset Management AG
  • High Yield Issuer AnalysisAn equal emphasis on bottom-up processManagement Experience managing leverage Reporting style – transparency, accessibility Quality and depth of experienceCompany Analysis Relative competitive position Key profitability drivers Cyclicality of businessFinancial Profile Free cash flow (FCF) generation (EBITDA – cash interest- taxes- working capital adjustments- capital expenditures-dividends; (FCF/Sales, FCF total debt), net debt to EBITDA, Interest cover ratios Liquidity and covenant analysis (average debt maturity, borrowing capacity, headroom within Covenants, bondholder protection Seniority of debtAsset Valuation Calculate asset values based on total enterprise value (TEV) to EBITDA, its comparability with to public comparables, near term market transactionsRelative Value Across capital structure, (loans, senior secured, senior sub, sub, holdco etcAnalysis Compare value vs market and vs peers, convexity of the bond Analysing default probabilities via assessing Compensation per turn of leverage & implied equity cushion Fundamental rating (analog rating agencies) - Trading recommendations (over-/underweight). In Depth & Traditional Credit Analysis23© Swisscanto Asset Management AG
  • High Yield strategyRatification processAnalysts recommendation Ratification ObjectivesResponsible PM / Analyst Challenged by co-manager, Decisions are communicatedgives recommendations based and sector specialist from and immediately binding foron secondary analysis and Investment Grade side the High Yield portfolio &market observations during daily and weekly Investment grade portfolio reviews managers holding High Yield bonds Systematic documentation Vertical integrated Analysts/Investment Manager Model24© Swisscanto Asset Management AG
  • Portfolio Surveillance – Adequate Resources to SystematicallyCover 140 Issuers Global High Yield fund: 80 High Yield 16 Investment Grade Short Duration Global High Yield: 78 High Yield 10 Investment Grade Total High Yield Issuers: 102 Significant Overlap Total Investment Grade Issuers: 22 Limited Overlap Total Issuers: 124 HY and IG Issuers Investment Grade & Xover Coverage Stefan Eichenberger (autos): 6 (Xover Issuers) Blaise Roduit Pharma/Consumer Staple): 4 (Xover Issues) Jerome Benathan (Energy & Telecoms): 8 (IG/Xover Issuers) Mirko Santucci (IG Financials): 11 (IG Issuers) Total Issuer Coverage: 29 (24% of issuers) Hansueli Gasser: 35-40 HY issuers S.Omar Saeed: 30 HY issuers Roland Hausheer: 35-40 Issuers (Capital Goods, Consumer cyclical, (Telecoms, Services Cyclical, (Energy, airlines, transportation) Technology, Commodities ) Paper & Packaging)25© Swisscanto Asset Management AG
  • Investment Process:Sell discipline an Absolute Key Relative value target• Valuation of bond, meets or exceeds our fair value target• And/or the credit risk associated with holding a bond is no longer compensating for the expected returns ; for e.g. entire CCC overweight sold on April 21st 2010 (5 days prior to the recent market sell-off relating to soverign debt fears); During May-July 2011 we built upto c20% cash and government bonds, anticipating a sell-off Revised credit opinion• Analyst/PM changes his original premise that effects our fundamental valuation We outperformed the benchmark 4 out of 5 times during periods of market stress26© Swisscanto Asset Management AG
  • Investment Process:Strong Sell Discipline Evidenced by Outperformance duringtimes of Market Stress 1.00% 0.50% +9bps Cumulative Outperformance 18.00% 0.00% Feb 10 May 2010 Nov 10 Mar 2011 July-Oct 17.50% -0.50% +22bps 2011 17.00% -1.00% +255bps 16.50% -1.50% -47bps 16.00% -2.00% 15.50% Alpha -2.50% 15.00% +15bps +73bps -3.00% 14.50% -3.50% 14.00% -4.00% 13.50% Benchmark (CHF 100% hedged) Benchmark (CHF 100% Swisscanto CH Inst Global hedged) High Yield Fund Swisscanto CH Inst Global High Yield Fund * Before fees * Before feesStrong Investment Process Ensures Consistent Outperformance during periods of market stress27© Swisscanto Asset Management AG
  • Portfolio construction• Optimal diversification – we target issuers concentration at about 100 issuers (+/- 10) with High Yield accounting for 85 names (+/- 10) with the remainder comprising of top 15 (+/- 5) picks in the investment grade space• Allocate 5%-7% of portfolio for tactical capital structure and relative value arbitrage trades on a monthly basis• Consistent implementation of the macro- and credit-strategy• Neutral positioning of currencies• Efficient implementation through state-of-the-art tools• Cost-efficient execution of trades through own execution desk Optimal diversification, consistent and efficient implementation28© Swisscanto Asset Management AG
  • Risk ManagementMarket risks PM risk quantification (Barra) Ongoing quantification by CRO (Risk Metrics) Risk monitoring committe identifies new risksPerformance Ongoing performance control by performance analystCounterparties Management of counterparty limitsCompliance Independent controlling of all investment guidelines. Automated control of limits in SimCorp Dimension.Op risk Operational risk committee Internal and external audit Comprehensive management of all relevant risks29© Swisscanto Asset Management AG
  • ControlInvestment controlling Team leader Investment Portfolio manager CIO controlling• Depiction of the • Monthly reviews • Limit monitoring by benchmarks at securities • Continuous performance independent controlling level monitoring • Automatic reporting carried• Daily updated out by the system representation of the positioning as per investment policy in the Simcorp portfolio management system• Breakdown of the tracking error using BARRA Independent investment controlling30© Swisscanto Asset Management AG
  • Agenda1. High Yield at Swisscanto2. The Case for Short Duration High Yield3. Investment Process4. Product(s) and Performance5. Appendix – The Case For High Yield31© Swisscanto Asset Management AG
  • Swisscanto (CH) Institutional Bond Fund - Global High Yield I(Global High Yield Fund)32© Swisscanto Asset Management AG
  • Swisscanto (CH) Institutional Bond Fund - Global High Yield IProduct Strategy• Actively managed and well-diversified multi-currency global high-yield bond fund Benchmark: Customized Global High Yield Benchmark: 66.67% Merril Lynch European currency 2% constrained• No Leverage , excluding financials + 33.33% Merril Lynch US HY 2% constrained, excluding financials• Fully hedged in CHF• Benchmark: Customized Global High Yield Benchmark: 66.67% Merril Lynch Merrill Lynch Global High Yield hedged in CHF (Q432) from 01.02.2010 European currency 2% constrained , excluding financials + 33.33% Merril• Lynch US HY 2% constrained, excluding financials Actively managed and well-diversified multi-currency global High Yield bond fund• Merrill Lynch Global Corp. hedged in CHF (Q432) from 01.02.2010• Minimum average ratings allowed : B-/B3• Minimum average ratings allowed : B-/B3• Min. 85% invested in high yield bonds (non-sovereign and non-government issuers)• Min. 85% invested in High Yield bonds (non-sovereign and non-government issuers)• Maximal bond weight: Weight in the benchmark index + max 3.0% (max 1% if rated CCC and below)• Maximal bond weight:• ISIN:CH0030955865 index + max 3.0% (max 1% if rated CCC and below) Weight in the benchmark• Tracking Error ex ante <3%-4%• Tracking Error ex ante <3%-4%33© Swisscanto Asset Management AG
  • Performance – Remains Comfortably Top Quartile (in localcurrency terms) versus peers Minimum 7% is the cumulative differential in interest rate s & hedging costs b/w CHF & EUR & USD In addition differences in benchmarks resulting in a varying total return profile34© Swisscanto Asset Management AG
  • Performance –Performance vs Relevant European Peers (in LC terms), Since Takeover High Yield - Total Return Minimum25% 2.5% interest rate difference20% b/w CHF & EUR /USD/GBP15% Implying we are top ranked10% amongst peers 5% 0%-5%-10%-15% 01/02/2011 01/02/2010 01/10/2010 01/12/2010 01/10/2011 01/04/2010 01/06/2010 01/08/2010 01/04/2011 01/06/2011 01/08/2011 01/12/2011 SWISSCANTO CH INS BD-GL HY-I ALLIANZ EURO HIGH YIELD-C ABERDEEN GL-SL EURO HY BD-A2 PICTET-EUR HIGH YIELD-P UBS LUX BOND FUND-EU HI YD-P CL (GUE) EUR H/Y BOND-B BLUEBAY-HIGH YIELD BOND-B€ NEWTON GLBL HI YLD BD-£-INC F&C MAXIMUM INCOME BD-1-INC ING L RENTA-GL HI YLD-PC€H HSBC GIF-EURO H/Y BOND-IC THREADNEEDLE-GL H YD EUR-AE KAMES HIGH YIELD GLOBL BD-A€ 35 © Swisscanto Asset Management AG
  • Swisscanto (CH) Institutional Bond Fund - Global High Yield IConsistent investment style and strategy 27th January, 2012 • Better than benchmark credit ratings in our fund: Fund BB- vs Benchmark B+ Key Portfolio statistics Global High Yield Benchmark • Shorter duration than the benchmark, 0.4yrs- 0.5yrs, allowing to reduce volatility & retain pull Cash 2.90% 0.0% to par feature Investment Grade 10.70% 2.60% • Retain a greater security and recovery profile for BB 29.0% 52.9% our fund. The benchmark consists of 30% B 44.8% 32.9% secured bonds, we maintain 37.5% secured CCC 12.7% 11.6% bonds (within our 35%-40% targeted range) Average credit ratings B+/BB- B+ • Retain NO active exposure to toxic & illiquid high Average Duration 3.7yrs 4.15yrs yield rated financial tier-1 securities Average Yield 9.77% 8.58% • Retain a running yield of approx 100bps above Par weighted coupon 8.92% 7.75% the benchmark coupon of 7.8% we plan to maintain this level, implying a cumulative income Secured bonds 37.5% 30.4% of approx 8.9% (before tax) on a cumulative Cumulative Performance** 17.67% 15.12% basis (unhedged); **since internal implementation of new benchmark internally 1st feb 2010 & before costs, fees, Higher Quality, Higher Carry, High Security & Yet Market Beating Performance36© Swisscanto Asset Management AG
  • Swisscanto (CH) Institutional Bond Fund - Global High Yield IKey sector positioning• Emphasis still primarily based upon issuer selection and bottom-up analysis• Overweight, TMT, Healthcare, Consu mer & services cyclical, Packaging, Building materials & IG subordinated (Tier- 1, UT2, LT2) financials with short calls (<2 years)• Retain underweight Energy & Utilities, Basic Industries, Airlines, Housing & construction sectors• Current emerging markets exposure (on a commercial basis) of approx 23%, (main exposures to South Africa, Latin America, Russia, China/HK,)37© Swisscanto Asset Management AG
  • Swisscanto (CH) Institutional Bond Fund - Global High Yield IKey DataName Swisscanto (CH) Institutional Bond Fund - Global High Yield ICurrencies CHF (global portfolio all currencies are hedged)Tranches I (Institutional)Security number 3095586ISIN CH0030955865Domicile SwitzerlandDistribution DistributingRegistration CHAll-in fee 0.80% p.a.38© Swisscanto
  • Swisscanto (LU) Bond Invest Global High Yield H CHF/EUR/USDB and J(Short Duration Global High Yield Fund)39© Swisscanto
  • Swisscanto (LU) Bond Invest Global High Yield HKey Investment GuidelinesName Swisscanto (LU) Bond Invest Global High Yield H (Short Duration)Portfolio Maturity 3 years – 4years (Current 2.85years)Single Positions Max 10% > 4 yearsPortfolio (credit) spread duration Benchmark 1.9years +/- 0.5years or <2.5 yearsPortfolio Instruments Fixed & Floating rate notes + CDSTarget Issuers Minimum 70 issuersReference Index 50% Merril Lynch US HY (1-3 year) + 50% Merril Lynch EU HY (1-3 year), ex-financialsCurrent Yield to Maturity 9.5% (dynamic)Average Credit Ratings Strictly maintained between B+ to BB- (benchmark B+) Per Issuer BB & B max 5% Per Issuer >CCC max 2.5%Secured Bonds Exposure >30% of portfolioSectors Max weight per sector 20% Max weight Financials 10% (incl: Max weight subordinated financials 5%)Risk Tracking error ex ante >3%-4%40© Swisscanto
  • Swisscanto (LU) Bond Invest Global High Yield HConsistent Investment Style & Strategy 27th January, 2012 Key Portfolio statistics Short Duration High Yield Fund Benchmark Cash 3.5% 0.00% Investment Grade 8.1% 1.80% BB 23.6% 54.0% B 60.0% 31.4% CCC 4.8% 12.8% Average Credit Ratings BB- B+ Average Credit Spread Duration 1.94yrs 1.90yrs Average Yield 9.63% 7.95% Secured bonds 43.2% 17.5% EU High Yield 55.0% 50.0% US High Yield 45% 50% Total positions 115 265 Cumulative Performance* 3.52% 2.05% *CHFJ Tranche initiated 31st January 2011 before fees, hedging costs Higher Quality, Higher Carry & High Security Yet Market Beating Performance41© Swisscanto Asset Management AG
  • Swisscanto (LU) Bond Invest Global High Yield HPull to Par Effect  Pull to Par effect to become very strong in the next 6 months; 10.50%  Investors entering in the strategy now, 15% Credit Spread Duration <1 year are effectively entering the sweet-spot of the portfolio ---almost 75% of portfolio Credit Spread Duration 1- 8.50% 2 years will have a duration less than 2 years; Credit SpreadDuration 2- 2.5 years  Volatility in the fund is likely to decrease 36.5% Credit SpreadDuration even more and the highest yield 2.5-3 years amongst peers of 9.5% will allow 33.00% Credit Spread Duration >3 superior risk adjusted returns; years  Focus is to maintain our superior track record of ZERO defaults and ZERO near defaults; Investors Taking Exposure Now Are Close to Entering The Sweet Spot of the Portfolio42© Swisscanto Asset Management AG
  • Swisscanto (LU) Bond Invest Global High Yield HDiversification - A Flexible Manadate Geographic Strategy at Geographic Strategy at Launch 31st Janaury 2011 Present EU High Yield US US 43% High EU High Yield High Yield 57% Yield, , 45% 55%  Anticipating the LTRO scheme by the ECB, on  A Portfolio of 80 issuers spread amongst 15 the 19th December 2011, we cut our entire sectors; overweight in US HY and moved OW in EU HY  54% of sector positioning is defensive;  Global Strategy and expertise allows us to efficiently invest across geographic areas;43© Swisscanto Asset Management AG
  • Swisscanto (LU) Bond Invest Global High Yield H Performance vs Peers Maintain zero exposure in GIPS, ex-Italy (3.3% exposure to Italian high yield corporates), zero defaults & zero near defaults in our portfolio Contrary to the above 97% of our investments reported earnings better than and in line earnings results, showcasing our superior stock selection capacity 44 © Swisscanto Asset Management AG
  • Swisscanto (LU) Bond Invest Global High Yield HDifferences in Total Return Profile Compared to Peers 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% US HY (BB-B) 1-3 year 2% Cap EU High Yield (ex financial) 2% Swisscanto Short Duration HY Swisscanto Global HY Short * Before fees (USD H) Cap (CHF H) Benchmark (ex-financial) 2% cap Duration FUND (CHF J Tranche -1.00% (CHF H) H)  Relative Underperformance versus peers purely due to differences in product & geographic area of focus (peers are focusing on >B and 100% US HY short duration benchmarks;  Substantiates our Superior Alpha Generation Capacity versus Competitors45© Swisscanto Asset Management AG
  • Why Swisscanto High Yield?• Swisscanto is the only provider of a truly global high yield short duration fund;• Experienced Manager with a strong track record of consistent alpha generation --- lead managers solid track record of generating only 1 default and 1 near default in 13 years;• A well diversified portfolio a result of a implementing a strong investment process;• Portfolio Strategy geared towards consistently maintaining higher quality, higher carry, higher security bias, and still generate higher returns than its benchmark;• Swisscanto short duration high yield fund, offers the highest yield (of 9.5%) versus all short duration peers in the world;• Top Scores by Lipper (CH-Institutional Fund) An Unrivalled Investment Philosphy and Product Strategy at Present46© Swisscanto Asset Management AG
  • Swisscanto (LU) Bond Invest Global High Yield HKey DataName Swisscanto (LU) Bond Invest Global High Yield HCurrencies CHF / EUR / USD (global portfolio all currencies are hedged)Tranches B (Retail) J (Institutional)Security number H CHF B: 11963041 H CHF J: 12353466 H EUR B: 11963062 H EUR J: 12353467 H USD B: 12353464 H USD J: 12353468ISIN H CHF B: LU0556184884 H CHF J: LU0582724935 H EUR B: LU0556185345 H EUR J: LU0582725072 H USD B: LU0582725312 H USD J: LU0582725403Domicile LuxemburgDistribution ReinvestingRegistration CH, FL, D, A, LUXAll-in fee B-Tranche: 1.30% p.a. / J-Tranche: 0.80% p.a.47© Swisscanto
  • Agenda1. High Yield at Swisscanto2. The Case for Short Duration High Yield3. Investment Process4. Product(s) and Performance5. Appendix – The Case For High Yield48© Swisscanto Asset Management AG
  • High Yield versus Equities Even after big gains, returns historically remain healthy in subsequent years 46.2 29.0 25.6 19.2 17.4 15.7 17.1 15.1 12.5 11.4 12.8 11.1 11.9 9.7 5.0 5.3 10.5% 1.9 2.4 2.7 1.9 3.0 0.8 -1.0 -1.4 -5.9 -9.6 84‘ 85‘ 86‘ 87‘ 88‘ 89‘ 90‘ 91‘ 92‘ 93‘ 94‘ 95‘ 96‘ 97‘ 98‘ 99‘ 00‘ 01‘ 02‘ 03‘ 04‘ 05‘ 06‘ 07‘ 08‘ 09‘ 10‘ 11‘ Stabile Phase Stabile Phase Stabile Phase Stabile Phase Source: Barclays, J.P. Morgan, S&P/LCD6 Market Crisis and 20 years on, High Yield asset class has experienced 5 negative returns only49© Swisscanto Asset Management AG
  • ….and returns have been generated with significantly lowervolatility At 35% exposure to Swisscanto’s customised High Yield benchmark allows credit only or credit/equity portfolios to maximize the sharpe ratio of the fund and boost weighted total returns by 50bps Realized returns 8.0 Cust High Yield SW BM JCNF is US HY 7.0 HPIC1 is EUR HY 6.0 5.0 JCNF CHF hedged 4.0 HPIC1 CHF hedged 3.0 GOBC CHF hedged 2.0 Hedged Russell 2000 TR USD 1.0 0.0 -1.0 Cust Aktien Schweiz -2.0 100% Global -3.0 Investment Grade -4.0 Hedged MSCI North America Hdg USD -5.0 Hedged MSCI UK GBP -6.0 Hedged MSCI EMU EUR -7.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 22.0 Standard Deviation (Risk) Source: Swisscanto An efficient portfolio should have consistently higher allocations to the High Yield asset class50© Swisscanto Asset Management AG
  • High Yield An Excellent Substitute for Equities Stabile Phase The High Yield asset class has consistently outperformed equities51© Swisscanto Asset Management AG
  • High Yield versus interest rate sensitive products Source: J.P. Morgan; S&P/LCD High Yield serves as a hedge against rising treasury yields52© Swisscanto Asset Management AG
  • High Yield versus Investment Grade High Yield performs well versus Investment Grade in a rising rate environment Investment-grade bonds 10 Year Treasury yield High Yield bonds total 12 months ending total returns (CHF move returns (CHF hedged) hedged) Sep 87 220 bps 3.93% -3.74% Feb 89 117 bps 6.87% 0.97% Dec 1994 204 bps -0.19% -2.74% Dec 1999 179 bps -1.58% -5.67% May 2004 130 bps 11.65% 1.49% Jun 06 120 bps 2.80% -4.80% Sep 10- Apr 2011 approx 90bps 5.35% -1.05% during the past 25 years High Yield has out-performed investment grade bonds in each treasury rate hike cycle by 630bps on a CHF hedged basis Source: Swisscanto, Bloomberg, Merril Lynch High Yield has consistently outperformed investment grade over the past 6 cycles of treasury yield increases53© Swisscanto Asset Management AG
  • Default & Recovery Outlook 70 Recovery Rate (%) 60 70 Recovery Rate (%) 70 Recovery Rate (%) 50 60 60 50 50 40 40 40 30 30 20 30 20 10 20 30 40 50 60 70 10 10 ISM Manufacturing 30 3040 4050 5060 6070 ISM Manufacturing ISM Manufacturing Swisscantos expectations Source: DB, Federal Reserve, Moodys Lending standards globally likely to remain loose & despite a softening in global ISM data average default rates to remain low combined with recovery values ranging 35%-40%54© Swisscanto Asset Management AG
  • ..in addition bonds offering increasingly better securitypackages 120% 100% 12% 20% 23% 26.7% 30% 33% 34.5% 80% 60% 40% 20% 0% avg b/w 1982- 2008 2009 2010 2011E 2012E 2013E 2007 Unsecured Bonds Secured Bonds Source: Swisscanto Resulting in greater protection and significantly higher and sustainable recovery rates through a default cycle55© Swisscanto Asset Management AG
  • High Yield Fundamentals: What If a Recession Materializes?• High Yield issuers on aggregate still focused on improving credit metrics & generating free cash flow;• Stress levels in covenants are very low compared to prior recessions56© Swisscanto Asset Management AG
  • High Yield Fundamentals: What If a Recession Materializes?• Corporate balance sheets would be heading into the downturn in solid shape, cash debt very close to record highs.• Albeit a maturity wall exists between H2 2013- 2015, its not an issue for the High Yield and leverage loan market during for remainder 2011 & 201257© Swisscanto Asset Management AG
  • What If a Recession Materializes? Where do High Yield issuesstand from a credit quality perspective? High Yield issuer leverage 25% lower and proportion of CCC’s 50% lower than peak for new issues58© Swisscanto Asset Management AG
  • What If a Recession Materializes? Where do High Yield issuesstand from a structural perspective?• New issuance has secured bonds 2x higher than 2006 providing downside protection;• Defaults will be low as excessive LBO style lending experienced during 2004-2007 did not take place since 2009, i.e. four times lower59© Swisscanto Asset Management AG
  • And from a pricing perspective? – Significant premium willcontinue to be offered in the primary market Yearly cash flows in the European leverage finance market (coupons, cash & redemptions) of approx E15bn not enough to cover the refinancing needs between 2013 -2015 - in US HY yearly cash flows of $90bn is adequate Due to above average primary issuance required between 2012-2013 to fund the maturity wall between 2013-2015 investors will continue to be more than adequately compensated for the credit risks60© Swisscanto Asset Management AG
  • Default outlook: Swisscanto’s conservative outlookInverse correlation of Defaults and Recoveries market estimates default Rates circa 1.5%-2% at recovery of +40%20% 18.2% 60%18% 50%16%14% 12.7% 40%12% 10.4%10% 30% 7.3% 8% 5.5% 20% 6% 3.9% 4.0% 4.0% 4% 2.4% 1.5% 2.0% 10% 1.4% 2% 0.7% 0.6% 0.7% 0% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E Aggregate Default Rate (LHS) Aggregate recovery (RHS) Source: Swisscanto S&P, Moody’s and the market forecasts 2011 & 2012 defaults at approx 1.5%-2% & recoveries at +40%61© Swisscanto Asset Management AG
  • …leaving room for spread tighteningWhat today’s Swisscanto global high yield customised benchmark spread implies for future default rates:Actual Spread - Excess Spread* Default loss par- recovery rate Default Rate 840 bps - 420 bps = 420 bps / (100%-40%) = 7.0%*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps Forecasts as of December 2011Lets assume conservatively a recovery rate of 35% and a 4% default rate, our spread forecast:Default Rate x par-recovery rate = Default loss + Excess Spread* Forecast 4.0% x (100% - 35%) = 260 bps + 420 bps = 680 bps*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps Forecasts as of December 2011 Swisscanto forecasts fair value for high yield spread to range between 650bps-700bps62© Swisscanto Asset Management AG
  • Spread tightening potential assessed further from a volatilityperspective • With shorter business cycles and a prevailing debt crisis volatility likely to remain elevated for the medium term; • We assume a VIX level between 25-30 range over the coming years on an average basis; • Therefore, minimum excess spread investors should be compensated for should range average 400bps-425bps (2x the 26 yr historical average or 14bps of excess spread per unit of VIX)63© Swisscanto Asset Management AG
  • We forecast medium duration High Yield total returns of 10%-12% p.a.(CHF hedged) Total Return Forecast for 12 months Running income unhedged 8.42% Swisscanto customised benchmark yield (December, 2011 onwards) Interest rate differential + hedging transaction Hedging costs + yield differential -1.23% costs of 12 bps Positive carry +0.88% To range between +50 bps & 100 bps + BM Running income CHF hedged 8.07% Expected impact of change in 5-7yr Assume 7year bunds/US treasuries rise a -1.85% treasury yields further 50bps to 3% US treasuries That is 140bps tightening x duration of the Expected impact of change in spreads +5.9% benchmark (4.2 yrs) to 700 bps Expected return before fees 12.1% Market Forecasts 5%-7% total returns in USD hedged terms (before fees) for 2012 Source: Swisscanto64© Swisscanto Asset Management AG
  • Should High Yield be ignored? Increasing convergence European + US High Yield European + US between Leverage Loans (ex-financials) Leverage loans & High Yield asset 4% 8% classes EUR + US Investment Grade 32% 56% Increasing allocations by EUR + US institutional & private Treasuries wealth managers at the expense of govt bonds, investment grade bonds We call for an allocation of approximately 10% to High Yield (medium and short)65© Swisscanto Asset Management AG
  • ContactsAccount Management Portfolio Management Shahzada Omar Saeed Head of High Yield Director Waisenhausstrasse 2 CH – 8021 Zurich +41 58 344 49 11 omar.saeed@swisscanto.ch66© Swisscanto Asset Management AG
  • DisclaimerThis documentation is exclusively determinated for use through qualified representatives of Swisscanto. Any other useor duplication is strictly prohibited. The documentation must in no way be used as promotion material for publicdistribution or provided to third parts, neither direct nor indirect, without previous written approval from Swisscanto AssetManagement Ltd. The representative is alone responsible for the use of the information contained in thisdocument, particularly towards investors but also towards Swisscanto. The past performance does not represent anindicator for the evolution to come and does not constitute a guarantee for any future results. The content wasresearched and assembled meticulously. However, Swisscanto Asset Management Ltd. can not guarantee theaccuracy, integrity or actuality of the contained data. The relative sales prospectus and annual report represent the onlybinding data source for the acquisition of Swisscanto investment funds. If you need further information, please send yourwritten request to Swisscanto Asset Management Ltd., Waisenhausstrasse 2, 8021 Zurich.67© Swisscanto Asset Management AG