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2012 06 09 swisscanto (lu) bond invest global high yield citywire

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  • 1. Short Duration Global High YieldAn Attractive Carry StrategySwisscanto Asset Management AGShahzada Omar Saeed, Head of High YieldCitywire Conference, Cologne 21-22 June 2012
  • 2. 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
  • 3. Lead Managers Profile Consistent & Solid Track Record of Alpha Generation 12.00% 1080bps 10.00% 950bps Shahzada Omar Saeed Head of High Yield Omar Saeed (1975), MBA in Financial Management, is the lead 8.00% manager for the Swisscanto (CH) Institutional Bond Fund - Global High Yield I and Swisscanto (LU) Bond Invest Global High Yield H CHF/EUR/USD B and J 6.00% 462bps Previously he worked for Western Asset Management Company in London as a High Yield Portfolio Manager, where he was 4.00% responsible to co-manage euros800m in High Yield and 246bps leverage loan portfolios. He gained similar experience at 242bps Foreign & Colonial Asset Management where he was Deputy 2.00% Manager for the Global High Yield retail fund. In addition Omar gained industry experience at Standard & Poor’s Rating Services in London. Omar received his MBA from Greenwich 0.00% 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 Management. (Apr 06-Apr 07) Yield Portfolios Leverage Loan Global High Short Duration (Jun 07-Jul 09) Fund YieldBond Fund Global High Yield Joined Swisscanto: 2009 Professional experience: 13 (Oct 07-Jul 09) (Jan 10 - to date) Fund years Before fees & expenses (Jan 11 - to date)3© Swisscanto Asset Management AG
  • 4. Swisscanto – High Yield Team 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. 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 years 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: 27 years4© Swisscanto Asset Management AG
  • 5. High Yield at Swisscanto –Now a Top Quartile High-Yield Manager By AssetsHigh Yield AUM ($m) at Swisscanto$1400$1200$1000 $315.0 $800 $600 $215.0 $400 $475.0 $200 $0 June 2007 June 2008 June 2009 June 2010 June 2012 Swisscanto (CH) Institutional Swisscanto (LU) - Short Duration High Yield Investments in Bond Fund - Global High Yield I Global High Yield H Credit/Absolute Return Funds High Yield AuM’s almost tripled since 2010 --- Committed & Growing Set of Investors5© Swisscanto Asset Management AG
  • 6. 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
  • 7. Case for Short Duration High YieldKey Investment Highlights• Significantly reduces exposure to interest rate risk• Significantly reduces volatility• The sub-asset class makes an excellent substitute vs equities• Significantly lowers credit risk• Forms a strong alternative vs the leverage loan asset class/funds Swisscanto is Currently the Only Provider for a Global High Yield Short Duration Fund7© Swisscanto Asset Management AG
  • 8. Investment Rationale – Short Duration High Yield versus InterestRate 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 strong hedge against rising treasury yields8© Swisscanto Asset Management AG
  • 9. Investment Rationale – Short Duration High Yield Currently Generates50%-55% of Volatility, but Investors Realise 90% of the Regular High Yield X Short Duration High Yield Generates 50% Regular High Yield Generates 50% Volatility for 85% of The Regular Yield – InStabile Phase Volatility for Similar Returns as Equities Other Terms Short Duration High Yield Generates a Quarter of Volatility for 85% of Equities Returns Short Duration High-Yield offers an Exceptional Risk Reward9© Swisscanto Asset Management AG
  • 10. 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 the 8th Credit Duration Spread Yield 2011 (Fukushima (European (peak of June 2012 ratings sell-off , rising peripheral systemic Systemic treasuires, crisis) crisis) crisis ME returns uprising) SWC Glb High Yield B+ 4.2yrs 800bps 8.88% -11.8% -0.34% -3.23% -28.6% (Q432) SWC Global Short B+ 1.95yrs 735bps 7.91% -6.8% +0.24% -1.44% -13.1% Duration high-yield (Q471) A- 5.8yrs 250bps 3.39% -1.6% -0.12% -0.39% -4.9% Global IG (G0BC) BBB 5.0yrs 1030bps 11.375% -21% +0.64% -2.95% -25.7% Sub Financial (Q510) BB- 5.7yrs 815bps 9.125% -8.5% +1.70% -2.62% -19.0% Global EM (IM00) n.a. 2.1% -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
  • 11. Investment Rationale –Lower Credit Risk: A Case of Temporal Seniority 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
  • 12. Investment Rationale –Short Duration Global High Yield vs Leverage Loans Key data points as at 8th June 2012 Swisscanto Short Duration Global High Yield US Leverage Loans Index Benchmark Income 7.5% 4.0% Yield 7.9% 6.87% Final maturity <2.5 years 5 years Credit Spread Duration 1.95 yrs 3 yrs Spread vs Treasury 735bps 584 bps Leverage 3.8x 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 1st June 2012 Approx 10% Approx 6% 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% approx 5.125% Short Duration High-Yield offers a strong alternative to Leverage Loans12© Swisscanto Asset Management AG
  • 13. Investment Rationale – High Yield Fundamentals In Far BetterShape, Despite an on-going EU Zone Recession • Corporate balance sheets are in solid shape, cash to debt ratios well above average • Cash levels can cover all debt maturities for 2012, however from H2 2013 - 2015 a maturity wall does exist in Europe • Fundamental Picture amongst US High Yield Corporates remains solid13© Swisscanto Asset Management AG
  • 14. Investment Rationale – High Yield Fundamentals in Far BetterShape, despite an on-going EU Zone Recession• 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 recessions14© Swisscanto Asset Management AG
  • 15. Default Outlook – Swisscanto’s Conservative Outlook...Inverse Correlation of Defaults and Recoveries market estimates default Rates circa 2.5% 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% 1.7% 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 2011 2012E Aggregate Default Rate (LHS) Aggregate recovery (RHS) Source: Swisscanto S&P, Moody’s and the market forecasts 2012 defaults approx 2.5% & recoveries at 40%15© Swisscanto Asset Management AG
  • 16. …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 735 bps - 300 bps = 435 bps / (100%-40%) = 7.3%*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps (For Regular High Yield) as of 8th June 2012 Our fund offers a spread carry of 840bps, hence tightening potential stronger than the marketLets 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 + 300 bps = 560 bps*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps (For Regular High Yield) as of 8th June 2012 Swisscanto Forecasts Fair Value for Short Duration high yield market approx 500bps-550bps16© Swisscanto Asset Management AG
  • 17. Spread Tightening Potential for Short Duration High-Yield –Assessed from a Volatility Perspective • With shorter business cycles and a prevailing debt crisis volatility likely to remain elevated for the medium term • We assume an average VIX level of mid- 20s over the coming years on an average basis • Taking into account Short Duration High Yield sub-asset class generating 50% lower volatility than regular high-yield, minimum excess spread investors should be compensated for conservatively is 250bps-300bps range17© Swisscanto Asset Management AG
  • 18. We Forecast Short Duration High Yield Total Returns of8%-10%% p.a. (EUR hedged) in 2012-2013 Total Return Forecast for 12 months Running income unhedged Swisscanto short duration HY benchmark 7.90% (May 30th 2012 onwards) Yield Interest rate differential + hedging transaction Hedging costs + yield differential -0.06% costs of 12bps p.a. Typically ranges averages 60 bps + Current Positive carry over benchmark +1.00% benchmark Running income EUR hedged 8.84% Expected impact of change in 2yr treasury Assume 2 year treasury/bunds yields rise a -1.00% yields further 50 bps (0.625%) That is 135bps tightening x duration of the Expected impact of change in spreads +2.6% benchmark (1.95 yrs) to 600 bps Expected return before fees 10.46% Source: Swisscanto18© Swisscanto Asset Management AG
  • 19. 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
  • 20. High Yield Investment Process – An Integrated Approach 50% • High Yield Team are members & contributors to the Credit, Beta 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 Lead 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
  • 21. 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, equity and alternative investments strategy(s)• Pragmatic and systematic Simple, Systematic and Replicable21© Swisscanto Asset Management AG
  • 22. 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
  • 23. High Yield Issuer Analysis –An 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
  • 24. High Yield strategy – Ratification processAnalysts Ratification ObjectivesrecommendationResponsible PM / Analyst Challenged by co- Decisions aregives recommendations manager, and sector communicated andbased on secondary specialist from immediately binding for theanalysis and market Investment Grade side High Yield portfolio &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
  • 25. Portfolio Surveillance – Adequate Resources to SystematicallyCover 130-140 Issuers Global High Yield fund: 86 High Yield 11 Investment Grade Short Duration Global High Yield: 71 High Yield 12 Investment Grade Total High Yield Issuers: 111 Significant Overlap Total Investment Grade Issuers: 15 Significant Overlap Total Issuers: 126 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
  • 26. 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 c19% 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
  • 27. Investment Process – Strong Sell Discipline Evidenced byOutperformance during times of Market Stress 1.00% +7bps 0.50% Cumulative Outperformance 20.50% 0.00% Feb 10 May 2010 Nov 10 Mar 2011 July-Oct 20.00%-0.50% 2011 +22bps 19.50%-1.00% 19.00%-1.50% +242bps 18.50%-2.00% -47bps 18.00% Alpha-2.50% 17.50%-3.00% 17.00%-3.50% +15bps +96bps 16.50%-4.00% Benchmark (CHF 100% hedged) 16.00% Benchmark (CHF 100% Swisscanto CH Inst Global Swisscanto CH Inst Global High Yield Fund hedged) High Yield Fund * Before fees & expenses * Before fees & expenses Strong Investment Process Ensures Consistent Outperformance during Periods of "Risk-off"27© Swisscanto Asset Management AG
  • 28. Investment Process – Consistent Implementation of StrategyPortfolio Positioning Since April 2012 Lowered duration, increased cash levels , improved credit ratings and increased allocations to secured bonds28© Swisscanto Asset Management AG
  • 29. 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 Implementation
  • 30. Risk ManagementMarket risks PM risk quantification (Risk Manager IV) 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 Risks30© Swisscanto Asset Management AG
  • 31. Control – Investment 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 Risk Manager IV Independent Investment Controlling31© Swisscanto Asset Management AG
  • 32. Agenda1. High Yield at Swisscanto2. The Case for Short Duration High Yield3. Investment Process4. Product(s) and Performance5. Appendix – The Case For High Yield32© Swisscanto Asset Management AG
  • 33. Swisscanto (CH) Institutional Bond Fund – Global High Yield I(Global High Yield Fund)33© Swisscanto Asset Management AG
  • 34. Swisscanto (CH) Institutional Bond Fund – Global High Yield IProduct Strategy• Benchmark: Customized Global High Yield Benchmark: 66.67% Merril Lynch European currency 2% constrained, excluding financials + 33.33% Merril Lynch US HY 2% constrained, excluding financials• Merrill Lynch Global High Yield hedged in CHF (Q432) from 01.02.2010• Actively managed and well-diversified multi-currency Global High Yield bond fund• Minimum average ratings allowed : B-/B3• 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)• Tracking Error ex ante <3%-4%34© Swisscanto Asset Management AG
  • 35. Performance – Remains Comfortably Top Quartile (in localcurrency terms) versus peers Minimum 9.8% is the cumulative differential in interest rates & hedging costs b/w CHF & USD Implying Our Top Ranking35© Swisscanto Asset Management AG
  • 36. Performance – Performance vs Relevant European Peers(in LC terms), Since Takeover High Yield - Total Return Profile 30% Minimum 2.6% 25% Cumulative interest 20% rate & hedging cost difference 15% b/w CHF & EUR 10% & GBP 5% Implying we rank #2 0% -5%-10%-15% 01.02.2010 01.04.2010 01.06.2010 01.08.2010 01.10.2010 01.12.2010 01.02.2011 01.04.2011 01.06.2011 01.08.2011 01.10.2011 01.12.2011 01.02.2012 01.04.2012 SWISSCANTO CH INS BD-GL HY-I ALLIANZ EURO HIGH YIELD-C ABERDEEN GL-SL EURO HY BD-A2 PICTET-EUR HIGH YIELD-P HERMES GLB HIGH YLD BD-Z£A HENDERSON HIGH YLD M IN-A-IN 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 ROBECO HIGH YLD BD-E€ KAMES HIGH YIELD GLOBL BD-A€36© Swisscanto Asset Management AG
  • 37. Swisscanto (CH) Institutional Bond Fund – Global High Yield IConsistent Investment Style and Strategy8th June, 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 toCash 8.00% 0.00% par featureInvestment Grade 10.20% 4.25% • Retain a greater security and recovery profile forBB 25.40% 50.50% our fund. The benchmark consists of 30% securedB 44.00% 33.75% bonds, we maintain 43% secured bondsCCC 12.4%* 11.50% (exceeding our 35%-40% targeted range)Average credit ratings BB- B+ • Retain NO active exposure to toxic & illiquid highAverage Duration 3.54yrs 4.15yrs yield rated financial tier-1 securitiesAverage Yield 10.12% 8.875% • Retain a running yield of approx 100bps abovePar weighted coupon 8.60% 7.75% the benchmark coupon of 7.78% we plan to maintain this level, implying a cumulative incomeSecured bonds 43.4% 31.6% of approx 8.6% on a cumulative basis (unhedged);Cumulative Performance** 20.0% 17.58%* 1.4% CCC bonds to be redeemed by end of June 2012 due to an IPO**since internal implementation of new benchmark internally 1st feb 2010 & before costs, fees, Higher Quality, Higher Carry, High Security & Yet Market Beating Performance37© Swisscanto Asset Management AG
  • 38. Swisscanto (CH) Institutional Bond Fund – Global High Yield IKey Sector Positioning• Emphasis still primarily based upon Sector breakdown issuer selection and bottom-up analysis Aerospace &• Overweight, TMT, Healthcare, Defense; 1.4% Paper & Forestry; 5.4% Consumer & services cyclical, Metals & Mining; Investment Grade Packaging, Building materials & IG Packaging; 3.2% 3.7% Financials; 4.6% subordinated (Tier-1, UT2, LT2) Building Materials; Retailers; Chemicals; 2.8% financials with short calls (<2 years) 7.5% 3.3% Utilities; 1.0% Healthcare; 7.2%• Retain underweight Energy & Machinery; 2.5% Transport; 7.5% Real Estate; 1.6% Utilities, Basic Industries, Airlines, Housing & construction sectors Automotive; 3.4% Technology; 0.9%• Current emerging markets exposure Telecoms; 15.9% Consumer Energy; 4.1% (on a commercial basis) of approx Staples; 5.0% Cyclical services; Media; 5.1% 18%, (main exposures to South 9.6% Africa, Latin America, Russia, China/HK,)38© Swisscanto Asset Management AG
  • 39. Swisscanto (CH) Institutional Bond Fund – Global High Yield IKey Data Name Swisscanto (CH) Institutional Bond Fund - Global High Yield I Currencies CHF (global portfolio all currencies are hedged) Tranches I (Institutional) Security number 3095586 ISIN CH0030955865 Domicile Switzerland Distribution Distributing Registration CH All-in fee 0.80% p.a.39© Swisscanto Asset Management AG
  • 40. Swisscanto (LU) Bond Invest Short Duration Global High Yield HCHF/EUR/USD B and J40© Swisscanto Asset Management AG
  • 41. Swisscanto (LU) Short Duration Global High Yield H –Key Investment Guidelines Name Swisscanto (LU) Bond Invest Global High Yield H (Short Duration) Portfolio Maturity 3 years – 4years (Current 2.7years) Total Single Positions Max 10% > 4 years Portfolio (credit) spread duration Benchmark 1.9years +/- 0.5years or <2.5 years Portfolio Instruments Fixed & Floating rate notes + CDS Target Issuers Minimum 70 issuers Reference Index 50% Merril Lynch US HY (1-3 year) + 50% Merril Lynch EU HY (1-3 year), ex-financials Current Yield to Maturity 9.2% (dynamic) Strictly maintained between B+ to BB- (Benchmark B+) Average Credit Ratings Per Issuer BB & B max 5% Per Issuer >CCC max 2.5% Secured Bonds Exposure >30% of portfolio Max weight per sector 20% Sectors Max weight Financials 10% (incl: Max weight subordinated financials 5%) Risk Tracking error ex ante >3%-4% ex-post (4%-5%)41© Swisscanto Asset Management AG
  • 42. Swisscanto (LU) Short Duration Global High Yield H –Consistent Investment Style & Strategy 8th June, 2012 Key Portfolio Statistics Short Duration High Yield Fund Benchmark Cash 11.50% 0.00% Investment Grade 6.90% 2.80% BB 20.30% 49.00% B 55.60% 32.60% CCC 5.70% 12.30% Average Credit Ratings BB B+ Average Credit Spread Duration 1.79yrs 1.90yrs Average Yield 9.20% 7.91% Secured bonds 48.2% 19.6% EU High Yield 43.5% 50.0% US High Yield 56.5% 50.0% Total Positions 116 273 Cumulative Performance* 7.29% 4.83%CHF J *H initiated 31st January 2011 before fees, hedging costs Higher Quality, Higher Carry & High Security Yet Market Beating Performance42© Swisscanto Asset Management AG
  • 43. Swisscanto (LU) Short Duration Global High Yield H:Pull to Par Effect – "Hard-Wired" Commitment to Lower Duration to1.5yrs from 1.8yrs by YE 2012 • Pull to Par effect to become very strong in the next 6 months 15.0% 23.0% Credit Spread Duration • Investors entering in the strategy now, <1 year (incl Cash) are effectively entering the sweet-spot of Credit Spread Duration 1- 2 years the portfolio ---almost 75% of portfolio Credit Spread Duration 2- will have a duration less than 2 years 22.0% 2.5 years Credit Spread Duration • Volatility in the fund is likely to decrease 2.5-3 years further and the highest yield amongst 31.0% Credit Spread Duration >3 years peers of 9.2% will allow superior risk 9.0% adjusted returns *As at June 8th 2012 • 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 Portfolio43© Swisscanto Asset Management AG
  • 44. Swisscanto (LU) Short Duration Global High Yield H –Sector Diversification Financials - Senior ; 1.20% Real Estate; 1.10% Financials - Paper & Forestry; Subordinated; 4.20% 6.90% Key Highlights Chemcials; Metals & Cash; 11.50% 3.30% Minings; Cyclical Services; 3.70% • Portfolio consists of 86 issuers, Packaging; 9.80% 1.50% diversified in 15 sectorsTransport; 7.30% Building Materials; 7.20% • 55% of sector positioning is defensive Telecom/Media; 9.30% • Financial subordinated issues Auto; 3.30% exposure below the max 5% limit • No sector exposure beyond 20% Energy & Utilities; Consumer Retailers; 5.60% 6.30% Staples; 2.90% Pharma/HealthCare; 14.90%44© Swisscanto Asset Management AG
  • 45. Swisscanto (LU) Short Duration Global High Yield H – Global Strategy &Expertise Allows For us to Efficiently Invest Across Geographic Areas Geographic Strategy at Geographic Strategy Geographic Strategy at Launch (31st January (Dec 2011 – March 2012) Present 2011) (June 15th 2012) EU EU High High Yield US US Yield 43% High EU High 43% US Yield High Yield ; High 57% Yield; 45% Yield 55% 57% • Sovereign related stress • Prior to LTRO1 program • Since April 2012 , tight & recession in peripheral implementation, on the 19th valuations and profit Europe = underweight EU December 2011, we cut our taking on EU short entire overweight in US HY and duration high-yield moved overweight in EU HY positions , move back to underweight EU45© Swisscanto Asset Management AG
  • 46. Swisscanto (LU) Short Duration Global High Yield H –Performance vs Peers with >1 year Track Record Swisscanto Short Duration High Yield vs Peers (Euro (Inst) Tranche) 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 02.2011 04.2011 06.2011 08.2011 10.2011 12.2011 02.2012 04.2012 SWISSCANTO LU BD-GL H/Y-H€J AXA IM FIIS-US SH DUR HY-EH€ MUZINICH SHORT DUR HG YD-H€A PETERCAM L-BONDS EUR HY ST-F UBS LUX-SH DUR HIGH YLD-€HPA WFA SHRT TRM HI YLD-INV Maintain zero exposure in GIP, significant underweight in peripheral Europe (companies earnings range 15%-28% on domestic regions), zero defaults & zero near defaults in our portfolio Relative underperformance during stress period purely due to differences in product & geographic area of focus (peers are focusing on >B and 100% US HY short duration benchmarks46© Swisscanto Asset Management AG
  • 47. Swisscanto (LU) Bond Invest Global High Yield H –Performance vs More Recent & European Short Duration Peers Swisscanto Short Duration High Yield vs Nordea Short Duration High Yield Swisscanto Short Duration High Yield vs Axa EUR Short Duration High-10% 14% Yield 8% 12% 6% 10% 4% 8% 6% 2% 4% 0% 2%-2% 0%-4% -2%-6% -4%-8% -6%-10% -8% 09.03.2011 09.05.2011 09.07.2011 09.09.2011 09.11.2011 09.01.2012 09.03.2012 09.05.2012 19.08.2011 19.10.2011 19.12.2011 19.02.2012 19.04.2012 SWISSCANTO LU BD-GL H/Y-H€J NORDEA 1 LOW DUR US HY-HBI€ SWISSCANTO LU BD-GL H/Y-H€J AXA IM FIIS-EUR SH DUR H-B€I Swisscanto Short Duration High Yield vs Peers (Euro (Inst) Tranche) Swisscanto Short Duration High Yield vs Peers (Euro (Inst) Tranche) 6% 8% 6% 5% 4% 4% 2% 0% 3%-2% 2%-4%-6% 1%-8% 0%-10%-12% -1% 01.02.2012 01.04.2012 01.06.2012 02.06.2011 02.08.2011 02.10.2011 02.12.2011 02.02.2012 02.04.2012 02.06.2012 SWISSCANTO LU BD-GL H/Y-H€J WESTLB-EUR CRED SH DUR-RF-B SWISSCANTO LU BD-GL H/Y-H€J PICTET-EUR SHRTRM HI YLD-P47© Swisscanto Asset Management AG
  • 48. Swisscanto (LU) Short Duration Global High Yield H –Superior Alpha Generation versus Peers9.00% +236bps vs BM8.00%7.00%6.00%5.00%4.00%3.00%2.00%1.00%0.00% US HY (BB-B) 1-3 year 2% Cap (EUR H) EU High Yield (ex financial) 2% Cap (EUR Swisscanto Short Duration HY Swisscanto Global HY Short Duration H) Benchmark (ex-financial) 2% cap (EUR H) FUND (EUR J Tranche H) * Before Fees & Expenses  Substantiates our Superior Alpha Generation Capacity versus Competitors Globally  100% of our investments reported earnings better than and/or in line earnings results during Q1 2012, showcasing our superior stock selection capacity48© Swisscanto Asset Management AG
  • 49. Swisscanto (LU) Short Duration Global High Yield H –Quality of Excess Performance • Information ratio as per tracking error ex-post is 0.53* Before Fees & Expenses • Tracking error ex-ante within stipulated >3%-<4% range49© Swisscanto Asset Management AG
  • 50. 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 9.2%) versus all short duration peers Globally An Unrivalled Investment Philosphy and Product Strategy at Present50© Swisscanto Asset Management AG
  • 51. Swisscanto (LU) Short Duration Global High Yield H –Key Data Name Swisscanto (LU) Bond Invest Global High Yield H Currencies 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: 12353468 ISIN H CHF B: LU0556184884 H CHF J: LU0582724935 H EUR B: LU0556185345 H EUR J: LU0582725072 H USD B: LU0582725312 H USD J: LU0582725403 Domicile Luxemburg Distribution Reinvesting Registration CH, FL, D, A, LUX All-in fee B-Tranche: 1.30% p.a. / J-Tranche: 0.80% p.a.51© Swisscanto Asset Management AG
  • 52. Agenda1. High Yield at Swisscanto2. The Case for Short Duration High Yield3. Investment Process4. Product(s) and Performance5. Appendix – The Case For High Yield52© Swisscanto Asset Management AG
  • 53. 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/LCD 6 Market Crisis and 27 years on, High Yield asset class has experienced 5 negative returns only53© Swisscanto Asset Management AG
  • 54. ….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 class54© Swisscanto Asset Management AG
  • 55. High-Yield versus Equities, Similar Returns at 50% Volatility Stabile Phase High-Yield offers an Attractive Risk Reward55© Swisscanto Asset Management AG
  • 56. High Yield versus Interest Rate Sensitive Products Source: J.P. Morgan; S&P/LCD High Yield Serves as a Hedge against Rising Treasury yields56© Swisscanto Asset Management AG
  • 57. 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 Increases57© Swisscanto Asset Management AG
  • 58. Lending Standards a Primary Indicator for Default OutlookCentral Banks Globally via Respective Liquidity Programs to Ensure that Lending Standards Continue to Improve & Corporate Defaults Remain Low58© Swisscanto Asset Management AG
  • 59. Outlook for Recoveries – Strong Correlation to ISM Index 70 Recovery Rate (%) 70 Recovery Rate (%) 60 60 50 50 40 40 30 70Recovery Rate (%) 60 30 20 50 10 40 20 30 40 50 60 70 30 20 10 ISM Manufacturing 10 30 40 50 60 70 30 40 50 60 70Source: DB, Federal Reserve, Moodys ISM Manufacturing ISM Manufacturing Swisscantos expectations Swisscantos expectations For Europe For USA Global ISM Data to Remain Soft or circa 50 Level Corresponding to Recovery Values Ranging 35%-40% 59 © Swisscanto Asset Management AG
  • 60. ..recoveries to be further aided as corporates offer newissuances increasingly with better security packages 120% 100% 12% 20% 23% 26.7% 30.4% 33% 34.5% 80% 60% 40% 20% 0% avg b/w 1982- 2008 2009 2010 2011 2012E 2013E 2007 Unsecured Bonds Secured Bonds Source: Swisscanto Resulting in greater protection and significantly higher and sustainable recovery rates through a default cycle60© Swisscanto Asset Management AG
  • 61. Investment Rationale – High Yield Fundamentals in Far BetterShape, Despite an on-going EU Zone Recession • Corporate balance sheets are in solid shape, cash to debt ratios well above average • Cash levels can cover all debt maturities for 2012, however from H2 2013 - 2015 a maturity wall does exist in Europe • Fundamental Picture amongst US High Yield Corporates remains solid61© Swisscanto Asset Management AG
  • 62. High Yield Fundamentals in Far Better Shape, despite an on-going EU Zone Recession• 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 recessions62© Swisscanto Asset Management AG
  • 63. Post 2009, Where do High Yield Primary Issues Stand From aCredit Quality Perspective? High Yield issuer leverage 25% lower and proportion of CCC’s 50% lower than peak for new issues63© Swisscanto Asset Management AG
  • 64. 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 lower64© Swisscanto Asset Management AG
  • 65. Expect More of the Same Over the Next 3 years European Leverage Finance Market is estimated to generate yearly cash flows (coupons & redemptions) of approx. e20bn not enough to cover itself the refinancing needs b/w H2 2013 – H1 2016 US Leverage Finance Market no longer has a "Maturity wall" but rather a "hump in 2014" plus yearly cash flows (coupons + redemptions = est $120bn) more than adequate Above average primary issuance required between 2012-2013 to fund the maturity wall between 2013-201565© Swisscanto Asset Management AG
  • 66. And be Paid a Significant New Issue Premium66© Swisscanto Asset Management AG
  • 67. Recent Sell-off, Creates a Significant Opportunity for SpreadTighteningWhat 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 800bps - 400 bps = 400 bps / (100%-40%) = 6.7%*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps Forecasts as of 8th June 2012Lets 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 + 400 bps = 660 bps*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps Forecasts as of 8th June 2012Swisscanto forecasts fair value for high yield spread to range between 625bps-675bps67© Swisscanto Asset Management AG
  • 68. 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 average mid 20s over the coming years on an average basis • Therefore, minimum excess spread investors should be compensated for should range average 350bps-420bps (2x the 26 yr historical average or 14bps of excess spread per unit of VIX)68© Swisscanto Asset Management AG
  • 69. We Forecast Medium Duration High Yield Total Returns of 10%-12%p.a. (CHF Hedged) Total Return Forecast for 12 months Running income unhedged 8.875% Swisscanto customised benchmark yield (June, 2012 onwards) Interest rate differential + hedging transaction Hedging costs + yield differential -0.69% costs of 12 bps Positive carry +0.88% To range between +50 bps & 100 bps + BM Running income CHF hedged 9.06% Expected impact of change in 5-7yr Assume 7year bunds/US treasuries rise a -2.08% treasury yields further 50bps to 1.6% US treasuries That is 100bps tightening x duration of the Expected impact of change in spreads +4.2% benchmark (4.2 yrs) to 700 bps Expected return before fees 11.2% Market Forecasts 5%-7% total returns in USD hedged terms (before fees) for 2012 Source: Swisscanto69© Swisscanto Asset Management AG
  • 70. 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)70© Swisscanto Asset Management AG
  • 71. ContactsAccount Management Portfolio Management Karsten Marzinzik Shahzada Omar Saeed Senior Account Manager Head of High Yield Manager Director E-Mail: karsten.marzinzik@swisscanto.com +41 58 344 49 11 omar.saeed@swisscanto.ch Andreas Rothmer Senior Account Manager Director E-Mail: andreas.rothmer@swisscanto.com Jan Sobotta Senior Account Manager Director E-Mail: jan.sobotta@swisscanto.com71© Swisscanto Asset Management AG
  • 72. DisclaimerDiese Unterlagen sind ausschliesslich für den Gebrauch durch qualifizierte Intermediäre von Swisscanto bestimmt.Jegliche anderweitige Verwendung oder Vervielfältigung ist untersagt. Die Unterlagen dürfen unter keinen Umständenals Werbematerial für den öffentlichen Vertrieb verwendet und ohne vorherige schriftliche Zustimmung der SwisscantoAsset Management AG weder direkt noch indirekt einer Drittpartei zur Verfügung gestellt werden. Der Intermediär ist fürdie Verwendung von Informationen aus diesen Unterlagen insbesondere dem Anleger wie auch Swisscanto gegenüberallein verantwortlich. Die vergangene Performance ist kein Indikator für die zukünftige Wertentwicklung und bietet keineGarantie für den Erfolg in der Zukunft. Die Performancedaten wurden ohne Berücksichtigung der bei Ausgabe undRücknahme der Anteile erhobenen Kommissionen und Kosten und auf der Basis der Wiederanlage etwaigerAusschüttungen berechnet. Der Inhalt wurde sorgfältig recherchiert und zusammengestellt. Provisionen, Gebühren undandere Entgelte wirken sich negativ auf die Performance aus. Gleichwohl kann Swisscanto Asset Management AG nichtdie Gewähr der Richtigkeit, Vollständigkeit sowie der Aktualität der gemachten Angaben übernehmen. AlleinverbindlicheGrundlage für den Erwerb von Swisscanto Anlagefonds sind die jeweiligen Verkaufsprospekte und Jahresberichte. Fürallfällige Rückfragen kontaktieren Sie bitte schriftlich die Swisscanto Asset Management AG, Nordring 4, 3000 Bern 25.Diese Publikation ist für die Verbreitung in Deutschland bestimmt und richtet sich nicht an Anleger in anderen Ländern.Alle hier veröffentlichten Angaben dienen ausschliesslich Werbezwecken und stellen keine Anlageberatung odersonstige Empfehlung dar. Alleinverbindliche Grundlage für den Erwerb von Swisscanto Fonds sind die jeweiligenVerkaufsprospekte und Rechenschaftsberichte. Dies ist ein Fonds luxemburgischen Rechts. Verkaufsprospekte,wesentliche Anlegerinformationen, Vertragsbedingungen sowie letzte Jahres- und Halbjahresberichte können bei derZahl- und Informationsstelle DekaBank, Mainzer Landstrasse 16, 60235 Frankfurt a.M. kostenlos und in Papierform oderunter www.swisscanto.com bezogen werden. Mit der Anlage sind Risiken, insbesondere diejenigen von Wert- undErtragsschwankungen, verbunden. Die Risiken sind im Einzelnen im Verkaufsprospekt und in den wesentlichenAnlegerinformationen dargelegt.72© Swisscanto Asset Management AG