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2013 08-02-presentation-fixed income investing in the current environment
 

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    2013 08-02-presentation-fixed income investing in the current environment 2013 08-02-presentation-fixed income investing in the current environment Presentation Transcript

    • Fixed Income Investing in the Current Environment CITYWIRE MIAMI October 16 -18, 2013
    • Overview Founded in 1986, Clark Capital Management Group, Inc. is an independent, mostly employee owned investment advisory firm, managing over $2.8* billion in client assets and based in Philadelphia, PA. Clark Capital is focused on both long only and liquid alternatives — risk management strategies, with a goal of successful capital preservation. Clark Capital tailors its Navigator Investment Solutions to the unique requirements of high net worth individuals, corporations, trusts, endowments, foundations, and retirement plans. * As of 6/30/2013 (includes sub-advised assets) 2
    • Overview Fixed Income Challenges Low yield environment Inflation risk Interest rate risk Liquidity risk Fixed Income Opportunities Opportunities in low quality debt space Flexible approach Disciplined research process Focus on risk management 3
    • Long Term Government Yield L o n g Te r m G o v e r n m e n t Y ie ld 16.00 1/1/1954 to 12/31/1982 S&P 500 S&P 500 Inflation Adjusted .S. erm G overnment 12.00 U Long T U Long T G .S. erm overnment Inflation Adjusted 10.00 U Inflation .S. 14.00 1/1/1983 to 12/31/2012 S&P 500 S&P 500 Inflation Adjusted U Long T G .S. erm overnment U Long T G .S. erm overnment Inflation Adjusted U Inflation .S. 10.38 5.58 3.45 -1.05 4.55 10.81 7.69 9.90 6.81 2.89 8.00 6.00 4.00 2.00 0.00 55 60 65 70 75 80 85 90 95 00 05 10 For illustrative purposes only. The information is not intended to be a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Returns reflect reinvestment of capital gains and dividends, if any. Indices are unmanaged and do not incur fees. It is not possible to invest in an index. Stocks are represented by the S&P 500 Index. Bonds are represented by the Ibbotson Associates U.S. Long-Term Government Index. Inflation-adjusted returns are based on the average Consumer Price Index (CPI) through the referenced period. Source: Morningstar Direct 4
    • Periodic Table of Sector Rotation — Bonds Annual Returns for Selected Bond Sectors 2003 2004 2005 2006 2007 2008 2009 2010 2011 High Yield Corporates 28.97 Unhedged Foreign Bonds 12.06 High Yield Municipals 8.58 High Yield Corporates 11.85 TIPS 11.64 Treasuries 13.74 High Yield Corporates 58.21 High Yield Corporates 15.12 TIPS 13.56 Unhedged Foreign Bonds 18.21 High Yield Corporates 11.13 Investment Grade Municipals 3.51 High Yield Municipals 10.75 Unhedged Foreign Bonds 10.94 Unhedged Foreign Bonds 9.43 High Yield Municipals 32.74 Investment Grade Corporates 9.00 TIPS 8.40 High Yield Municipals 10.52 T-Bills 3.00 Unhedged Foreign Bonds 7.28 Treasuries 9.01 Mortgages 8.34 Investment Grade Corporates 18.68 Investment Grade Corporates 8.24 TIPS 8.46 TIPS 2.84 Mortgages 5.22 Aggregate Bond Index 6.97 Aggregate Bond Index 5.24 High Yield Municipals 6.13 Investment Grade Corporates 5.39 Treasuries 2.79 Investment Grade Municipals 4.84 Mortgages 6.90 Investment Grade Municipals 5.31 Mortgages 4.70 High Yield Corporates 2.74 T-Bills 4.76 Aggregate Bond Index 4.10 Investment Grade Municipals 4.48 Mortgages 2.61 Mortgages 3.07 Aggregate Bond Index 4.34 Treasuries 2.24 10-Year Annualize d Return 2012 BEST 10-Year Standar d Deviatio n HIGHEST High Yield PERFORMA High Yield Municipals Corporates NCE 18.14 10.62 High Yield CorporatesVOLATILITY 10.59 Investment Grade Municipals 10.70 High Yield Corporates 15.81 TIPS 6.65 Unhedged Foreign Bonds 8.32 High Yield Municipals 7.79 Treasuries 9.81 Investment Grade Corporates 9.82 Unhedged Foreign Bonds 6.44 High Yield Municipals 7.68 Investment Grade Municipals 12.91 Aggregate Bond Index 6.54 High Yield Municipals 9.25 TIPS 6.98 High Yield Municipals 6.39 TIPS 6.66 T-Bills 1.80 TIPS 11.41 TIPS 6.31 Investment Grade Corporates 8.15 Investment Grade Municipals 6.78 Investment Grade Corporates 6.33 Investment Grade Corporates 6.25 T-Bills 4.74 TIPS –2.35 Aggregate Bond Index 5.93 Unhedged Foreign Bonds 6.12 Aggregate Bond Index 7.84 Aggregate Bond Index 4.21 Aggregate Bond Index 5.18 Treasuries 4.71 Aggregate Bond Index 4.33 Investment Grade Corporates 4.56 Investment Grade Municipals –2.47 Mortgages 5.89 Treasuries 5.87 Mortgages 6.23 Mortgages 2.59 Investment Grade Municipals 5.10 Investment Grade Municipals 4.53 Aggregate Bond Index 2.43 Investment Grade Corporates 4.30 Investment Grade Municipals 3.36 Investment Grade Corporates –4.94 Unhedged Foreign Bonds 4.35 Mortgages 5.37 Unhedged Foreign Bonds 5.24 Treasuries 1.99 Mortgages 5.08 Aggregate Bond Index 3.55 Treasuries 3.54 Investment Grade Corporates 1.68 Treasuries 3.08 High Yield Corporates 1.87 High Yield Corporates –26.16 T-Bills 0.16 Investment Grade Municipals 2.38 High Yield Corporates 4.98 Unhedged Foreign Bonds 1.77 Treasuries 4.75 Mortgages 2.62 T-Bills 1.07 T-Bills 1.24 Unhedged Foreign Bonds –8.79 TIPS 0.41 High Yield Municipals –2.28 High Yield Municipals –27.01 Treasuries –3.57 T-Bills 0.13 T-Bills 0.08 T-Bills 0.07 T-Bills 1.69 T-Bills 0.51 Year-End Fed 1.9% Funds Rate 3.3% 3.4% 2.5% 4.1% 0.1% 2.7% 1.5% 3.0% 1.7% 1.00% 2.25% Annual Inflation Rate 4.25% 5.25% 4.25% 0.00-0.25% 0.00-0.25% 0.00-0.25% Source: Morningstar Direct. Past performance not indicative of future results. Please see attached disclosures. 0.00-0.25% 0.00-0.25% WORST PERFORMA NCE LOWEST VOLATILITY Sources: U.S. Bureau of Labor Statistics; Federal Reserve; Barclays; Morningstar; Russell Investments 5
    • Interest Rate Rise — How Each Type of Bond Could Perform Based on Historical Data Type of Bond Economy Does Well Economy Stagnates Economy Does Poorly Treasury Bills Poorly Mediocre Well (Nominally) Treasury Bonds Poorly Mediocre Well (Nominally) Investment Grade Corporate Short Duration Mediocre Mediocre Mediocre Investment Grade Corporate Long Duration Poorly Poorly Poorly High Yield Well Poorly Poorly Floating Rate Well Mediocre Poorly Source: The Armstrong Advisory Group 6
    • 10-Year Treasury Yields Source: Morningstar Direct. Past performance not indicative of future results. Please see attached disclosures. 7
    • Rising Rate Periods Source: Morningstar Direct. Past performance not indicative of future results. Please see attached disclosures. 8
    • Rising Rate Periods Source: Morningstar Direct. Past performance not indicative of future results. Please see attached disclosures. 9
    • Finding Securities with a Negative Correlation with U.S. Treasuries — Fixed-Income Sectors to 7-10 Year Treasuries (10 years ended December 31, 2012) 1 .0 0 0 .8 0 0 .8 8 0 .6 8 0 .6 0 0 .5 2 Cor r elat ion 0 .4 1 0 .4 0 0 .2 0 0 .0 9 0 .0 7 0 .0 0 –0 .2 0 –0 .1 8 –0 .2 3 –0 .4 0 –0 .4 0 –0 .6 0 Bar clays Capit al BofA M er r ill U.S. Aggr egat e Lynch U.S. Index Inflat ion-Linked Tr easur y Index Source: Ned Davis Research BofA M er r ill Lynch U.S. Cor por at e Index BofA M er r ill Lynch M unicipal M ast er Index JP M or gan BofA M er r ill BofA M er r ill Cr edit Suisse BofA M er r ill Gover nment Lynch All U.S. Lynch Fixed Lever age Loan Lynch U.S. Bond Index Conver t ibles  Rat e Pr efer r ed Index High Yield Emer ging Index Secur it ies Index M ast er II Index M ar ket s Global Diver sified 10
    • High Yield Spreads Source: Ned Davis Research. Past performance not indicative of future results. Please see attached disclosures. 11
    • Historical High Yield Spreads and Default Rates 2 ,0 0 0 1 ,8 0 0 12 1 ,6 0 0 10 1 ,4 0 0 1 ,2 0 0 8 1 ,0 0 0 6 800 600 4 400 2 200 0 98 99 00 01 02 High yield bonds Source: Barclays Capital, J.P. Morgan 03 04 05 06 07 Bank loans 08 09 10 11 Opt ion adjust ed spr ead ( OAS) (bps) Par -weight ed default r at es (% ) 14 0 OAS 12
    • Credit Defaults Appear Likely to Remain Low The U.S. high-yield bond default rate has, historically, tracked the federal funds rate closely, with a lag of approximately two years. Given the Federal Reserve’s efforts to maintain a low interest rate environment for an extended period of time, high-yield default rates should remain depressed, which is supportive of credit spreads. Source: Credit Suisse, Bloomberg, Guggenheim Investments. Data as of 1/31/2013 13
    • How Does Clark Capital Manage Fixed Income? 14
    • Overview: Navigator® Fixed Income Total Return Goals: Total return, current income, beta management, risk/reward analysis We believe… Flexibility is the key to alpha and that a disciplined quantitative research process may lead to consistent longterm performance Proper risk management takes into consideration both the strengths and weaknesses of diversification Our prudent, flexible and highly adaptable approach enables us to constantly balance risk while pursuing alpha 15
    • Portfolio Characteristics & Allocation History as of 6/30/2013 Blackrock High Yield Bond Ticker BRHYX % 10.0% # of Positions 874 Current Yield* 5.90% Pioneer High Yield Y TYHYX 10.0% 396 4.74% JP Morgan High Yield Bond Select OHYFX 10.0% 996 6.06% Holdings Portfolio Characteristics* Total Holdings Exposure 3028 Estimated 12 Month Yield 3.05% Average Maturity 3.19 Neuberger Berman High Income Inst'l NHILX 10.0% 308 7.19% Average Duration 2.03 Eaton Vance Income Fund of Boston Cash EIBIX 10.0% 454 6.60% Cash 50.0% Average Credit Quality B 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 01.01.2005 01.01.2006 01.01.2007 01.01.2008 Low Quality Debt 01.01.2009 01.01.2010 High Quality Debt 01.01.2011 01.01.2012 01.01.2013 Short Term Treasuries This is not a recommendation to buy or sell a particular security. There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report. * Source: Morningstar Direct 16
    • Fixed Income Total Return Portfolio Objective: The Fixed Income Total Return strategy is designed to deliver excess alpha over a full market cycle measured against Barclays Capital U.S. High Yield Bond Index and Barclays Capital U.S. Aggregate Bond Index. The strategy seeks total return with a secondary goal of current income. Low Quality Debt Fixed Income Total Return Short-Term Treasuries High Quality Debt 17
    • Fixed Income Total Return Low Quality Debt Portfolio Objective: The Fixed Income Total Return strategy is designed to deliver excess alpha over a full market cycle measured against Barclays Capital U.S. High Yield Bond Index and Barclays Capital U.S. Aggregate Bond Index. The strategy seeks total return with a secondary goal of current income. Fixed Income Total Return Short-Term Treasuries U.S. Short-Term Treasury Barclays Capital 1-3 Month T-Bill BIL SPDR SHV iShares Barclays Short Treasury Cash Equivalents High Quality Debt High Quality Debt SHY iShares Barclays 1 -3 Year Treasury IEI IEF TLT TIP MUB LQD AGG IGOV iShares Barclays 3 - 7 Year Treasury iShares Barclays 7 - 10 Year Treasury iShares Barclays 20+ Year Treasury iShares Barclays TIPS Bond iShares S&P National Municipal Bond iShares iBoxx $ Investop Investment Grade Bond iShares Barclays Aggregate Bond iShares S&P/Citi International Treasury Low Quality Debt HYG iShares iBoxx $ High Yield Bond JNK Barclays High Yield Bond SPDR PHB PowerShares High Yield Corporate Bond SJNK Barclays Capital Short-Term High Yield SPDR PFF iShares S&P U.S. Preferred Stock HYS PIMCO 0-5 Year High Yield Corporate Bond HYLD Peritus High Yield BKLN PowerShares Senior Loan Portfolio HYD Market Vectors High Yield Muni Bond EMHY iShares Emerging Markets High Yield Bond GHYG iShares Global High Yield Corporate Bond IHY Market Vectors International High Yield Bond EMB iShares JPMorgan USD Emerging Markets Bond EMLC Market Vectors Emerging Markets Local Currency 18
    • Source: Morningstar Direct. Pure gross returns do not include the deduction of transaction costs, and are shown as Supplemental Information. 19
    • Source: Morningstar Direct. Pure gross returns do not include the deduction of transaction costs, and are shown as Supplemental Information. 20
    • Source: Morningstar Direct. Pure gross returns do not include the deduction of transaction costs, and are shown as Supplemental Information. 21
    • Source: Morningstar Direct. Pure gross returns do not include the deduction of transaction costs, and are shown as Supplemental Information. 22
    • Source: Morningstar Direct. Pure gross returns do not include the deduction of transaction costs, and are shown as Supplemental Information. 23
    • The ranking shown above is not indicative of the adviser’s future performance and may not be representative of any one client’s experience because the ranking reflects an average of all, or a sample of all, the experiences of the adviser’s clients. Source: Morningstar Direct. Pure gross returns do not include the deduction of transaction costs, and are shown as Supplemental Information. Peer group as of 4/15/2013. 24
    • Is the High Yield Run Over? We believe high yields remain competitive relative to other fixed income sectors from a technical, valuation and sentiment standpoint. High yields may help minimize interest rate risk while providing above average yields Fed’s intention to maintain low interest rates until unemployment dips below 6.5% combined with investors’ continued hunger for yield makes the lower quality debt space attractive from an income standpoint Hunt for yield has been an overarching theme of the last few years; investors are looking for opportunities 25
    • 26
    • Compliant Presentation Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. Not every client's account will have these exact characteristics. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment. Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account's entire portfolio and in the aggregate may represent only a small percentage of an account's portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Firm Information: Clark Capital Management Group, Inc. (Clark Capital) is an investment advisor registered with the United States Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. Clark Capital is a closely held, mostly employee owned C Corporation with all significant owners currently employed by the firm in key management capacities. The firm specializes in managing equity and fixed income portfolios for individuals and institutions. More information about Clark Capital’s advisory services and fees can be found in its Form ADV which is available upon request. Calculation Methodology: Composite returns assume reinvestment of income and other earnings, are gross of withholding taxes, if any, and are reported in US dollars. Returns prior to 1/1/07 were calculated using the Modified Dietz method. Beginning 1/1/07 returns are calculated daily. Internal dispersion is calculated using the equal-weighted standard deviation of annual account returns for those accounts included in the composite for the entire year. Trade date accounting is used. Leverage is not used in the composite. The composites are comprised of all fully discretionary accounts managed in the strategy for one full month, including those accounts no longer with the firm. Closed accounts are included through the completion of the last full month of eligibility. A copy of the complete list and description of Clark Capital’s composites, verification and performance examination reports, and policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. 27
    • Compliant Presentation Navigator® Fixed Income Total Return Composite 28
    • Compliant Presentation Navigator® Fixed Income Total Return Composite Past performance does not guarantee future results. Client account values will fluctuate and may be worth more or less than the amount invested. Clients should not rely solely on this performance or any other performance illustrations when making investment decisions. Clark Capital claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Clark Capital has been independently verified for the periods January 1, 2002 through December 31, 2011. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The Navigator Fixed Income Total Return composite has been examined for the periods from 1/1/2005 through 12/31/2011. The verification and performance examination reports are available upon request. Composite Description: The Navigator Fixed Income Total Return composite is designed to maximize total return by rotational management of a fixed income portfolio invested in Low Quality Bonds (high-yield), High Quality Corporate and Government Bonds, and Short-term Treasuries. The strategy seeks to take advantage of the performance differential between segments of the bond market under different market conditions. Through investment in segments of the fixed income market believed to be the strongest performer in the near term, the portfolio may have the opportunity to outperform the broad bond market without exposure to the risk of the equity market. Active management supported by in-depth, internally generated research seeks to pursue superior performance results with greater consistency and lower volatility of returns. The portfolio invests in exchange-traded funds and mutual funds targeting high yield corporate, investment grade corporate, government, government agency and treasury fixed income sectors. The strategy has an unconstrained allocation policy. The goal of the strategy is capital preservation while outperforming an unmanaged buy and hold investment. In a Clark Capital sponsored wrap fee program, the net-of-fee returns reflect the maximum Investment Advisory Fee (including trading and custody expenses) of .85% and the maximum Consultant Fee of 1.25%, debited monthly for an annual total of 2.1%. If a lower Consultant Fee were reflected in the performance data, returns would be higher. In a non-Clark Capital wrap fee program, the net-of-fee returns reflect the highest maximum annual fee of 3%, (includes trading and custody expenses) debited monthly. Actual fees may differ from the fees used in this presentation depending upon account size, investments and agreement with client. Benchmark Description: The benchmark is the Barclays U.S. Corporate High-Yield Index. The Barclays U.S. Aggregate Bond Index is a supplemental benchmark. The Barclays U.S. Corporate High-Yield Index covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The Barclays U.S. Aggregate Bond Index covers the U.S. investment-grade fixed-rate bond market, including government and credit securities, agency mortgage pass-through securities, asset-backed securities and commercial mortgagebased securities. To qualify for inclusion, a bond or security must have at least one year to final maturity, and be rated investment grade Baa3 or better, dollar denominated, non-convertible, fixed rate and publicly issued. The benchmarks for this composite are used because the Barclays U.S. Corporate High-Yield Index is generally representative of U.S. high yield fixed income and the Barclays U.S. Aggregate Bond Index is generally representative of broad based U.S. fixed income. Index returns reflect the reinvestment of income and other earnings and are provided to represent the investment environment during the time period shown. The volatility (beta) of the Composite may be greater or less than its respective benchmarks. It is not possible to invest in these indices. 29
    • Statistic Descriptions Standard Deviation: A statistical measure of dispersion about an average which depicts how widely the returns varied over a certain period of time. 3 Year Standard Deviation: The 3 year annualized standard deviation measures the variability of the composite and the benchmark returns over the preceding 36-month period. Beta: A measure of systematic risk with respect to a benchmark. Systematic risk is the tendency of the value of the composite and the value of a benchmark to move together. Beta measures the sensitivity of the composite’s excess return (total return minus the riskfree return) with respect to the benchmark’s excess return that results from their systematic co-movement. It is the ratio of what the excess return of the composite would be to the excess return of the benchmark if there were no composite-specific sources of return. If beta is greater than one, movements in value of the composite that are associated with movements in the value of the benchmark tend to be amplified. If beta is one, they tend to be the same, and if beta is less than one, they tend to be dampened. If such movements tend to be in opposite directions, beta is negative. Beta is measured as the slope of the regression of the excess return on the composite as the dependent variable and the excess return on the benchmark as the independent variable. The beta of the market is 1.00 by definition. Morningstar calculates beta by comparing a portfolio's excess return over T-bills to the benchmark's excess return over T-bills, so a beta of 1.10 shows that the portfolio has performed 10% better than its benchmark in up markets and 10% worse in down markets, assuming all other factors remain constant. Conversely, a beta of 0.85 indicates that the portfolio's excess return is expected to perform 15% worse than the benchmark’s excess return during up markets and 15% better during down markets. Alpha: A measure of the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by beta. A positive alpha figure indicates the portfolio has performed better than its beta would predict. In contrast, a negative alpha indicates the portfolio has underperformed, given the expectations established by beta. Alpha is calculated by taking the excess average monthly return of the investment over the risk free rate and subtracting beta times the excess average monthly return of the benchmark over the risk free rate. Sharpe Ratio: A risk-adjusted measure developed by Nobel Laureate William Sharpe. It is calculated by using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe Ratio, the better the composite's historical risk-adjusted performance. The Sharpe ratio is calculated for the past 36-month period by dividing a composite's annualized excess returns by the standard deviation of a composite's annualized excess returns. Since this ratio uses standard deviation as its risk measure, it is most appropriately applied when analyzing a composite that is an investor's sole holding. The Sharpe Ratio can be used to compare two composites directly on how much risk a composite had to bear to earn excess return over the risk-free rate. R-Squared: Reflects the percentage of a portfolio's movements that can be explained by movements in its benchmark. Downside Capture Ratio: Measures a manager's performance in down markets. A downmarket is defined as those periods (months or quarters) in which market return is less than 0. In essence, it tells you what percentage of the down-market was captured by the manager. For example, if the ratio is 110%, the manager has captured 110% of the downmarket and therefore underperformed the market on the downside. Upside Capture Ratio: Measures a manager's performance in up markets relative to the market (benchmark) itself. It is calculated by taking the security’s upside capture return and dividing it by the benchmark’s upside capture return. Bull Beta: A measure of the sensitivity of a composite’s return to positive changes in its benchmark’s return. Bear Beta: A measure of the sensitivity of a composite’s return to negative changes in its benchmark’s return. Best Month: This is the highest monthly return of the investment since its inception or for as long as data is available. Worst Month: This is the lowest monthly return of the investment since its inception or for as long as data is available. Maximum Gain: The peak to trough incline during a specific record period of an investment or composite. It is usually quoted as the percentage between the peak to the trough. Maximum Drawdown: The peak to trough decline during a specific record period of an investment or composite. It is usually quoted as the percentage between the peak to the trough. CCM-13-06-630 30