Aviva investors global credit absolute return (gcar) may 2013 montreux complied
AVIVA INVESTORSMay 2013This document is for professional clients and/or qualified investors only. The content is not to be viewed by or usedwith retail investors or pension scheme members.GLOBAL CREDIT ABSOLUTERETURN (GCAR) STRATEGYCITYWIRE EVENT - MONTREUXMark Wauton
WHY CREDIT ABSOLUTE RETURN?Global Credit Absolute Return– Global fixed income investors face historically low absolute yields– A global high yield focused strategy delivers incremental yield and less rate sensitivity– Active hedging reduces volatility and minimizes downside during periods of market stress– True global diversification and dynamic geographic exposure management expands the creditopportunity set– Ability to deliver high returns with very attractive Sharpe ratios3Credit lends itself well to absolute return strategies
– Strong technicals continue to besupportive of credit due to net negativeprimary issuance, and continued inflowsinto the asset class– Liquidity has been hampered due toregulatory change with dealers holdingless inventory which will be a continuedtrend– Despite the recent spread tighteningcredit spreads over a period of 50yearshave traded tighter to treasuriesTHE ABSOLUTE RETURN CREDIT OPPORTUNITY- VALUATIONGlobal Credit Absolute Return4Source: Bloomberg, Federal Reserve Bank of New York, Moody’s, S&P, Citigroup Fixed Income Indices, Morgan Stanley Research: “What We’reWatching”, 15 April 2013.01002003004005006007001925 1935 1945 1955 1965 1975 1985 1995 2005Spread (bps)AverageUS BBB Credit Spread to TreasuryPrimary Dealer Holdings of Corporate Bonds
– High levels of cash that still reside oncorporate balance sheets have reducedleverage from the pre-crisis levels.– In addition projected default rates remainlowTHE ABSOLUTE RETURN CREDIT OPPORTUNITY- FUNDAMENTALSGlobal Credit Absolute Return5Note (1st Graph): Implied defaults calculated using 35 % recovery rate. Historic defaults calculated using Moody’s default data since 1970 and currentindex ratings composition.Source: Bloomberg, Moody’s, Company Data, Morgan Stanley Research: “What We’re Watching”, 15 April 2013.Net Leverage1.0 x1.5 x2.0 x2.5 x3.0 x3.5 x4.0 xMar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12HYIGCredit vs. Historical Loss Rates
OUR EDGEGlobal Credit Absolute Return6Global team with 9+ yearsexperience working togetheron absolute return strategiesMinimize downsideby dynamicallyhedging market,sector and namespecific riskFocus on issuerswith larger capitalstructures tomaintain investmentflexibilityActive exposuremanagement basedon identified stop-loss and targetlevels andquantitative inputsDiligentfundamentalresearch with anextensivequantitativeoverlayPeopleDeepAnalysisActiveHedgingLiquidityDynamicTradingα
INVESTMENT FOCUS7Global Credit Absolute ReturnCMBS/RMBSCollateralized DebtObligationsCreditIndicesSovereignBondsIG Corps(Bonds, CDS)Financials(Bonds, CDS)HIGH YIELD(Bonds, CDS)StressedCreditsHighLiquidityRisk - LowRisk - HighHybridBondsDistressedCreditsPeripheral Corps(Bonds, CDS)Equities –Cash, OptionsEquityIndexOptionsPeripheralSovereignsOur investment strategy is high yield centric and invests mainly in liquid senior and secured issues ofcompanies in the US and EuropeReorgEquityCreditIndexOptionsLowLiquidity
INVESTMENT STYLEGlobal Credit Absolute Return870 60FUNDAMENTALS TECHNICALSLONG TERM SHORT TERM40 80TOP DOWN BOTTOM UP70 60TEAM INDIVIDUAL70 30MOMENTUM VOLATILITY65 70TRADING BUY & HOLD80 20Our rangeCurrent
INVESTMENT PROCESSSIX STEPS9Global Credit Absolute ReturnStep One Step Two Step FiveStep FourCycleanalysisBetapositioningSizingTimingScalingExecution OngoingRiskManagementStep SixAlphaAppraisalStep ThreeConstant Research & Development
STEP 1: TOP DOWN CYCLE ANALYSIS– Reducelong bias– Increasemarkethedgesprimarily via indices– Reducebeta of longs– Marketneutralto net shortbias– Maintain index hedges– Add single name andthematic sectorbaskethedges– Increasenetlong position– Reduceindex hedges– Take profit/ unwind singlename CDSs– Increasebeta of longs– Long bias– Strategic carry trades pluseventdriven tacticaltrades– Selective tacticalshorts– Capitalstructure hedging Rising VolatilitySteady VolatilityDecliningVolatilityMarket StressHow do we identify the volatility regime we are in?Qualitative perspective: We look at de-leveraging within the financial sector, sovereign/ banking sectorsolvency and assessment of traditional default cycle.Quantitative perspective: We look at market correlation of risk assets and we use quantitative modelsthat help us identify mean reversion vs. momentum10Global Credit Absolute Return“Due to the inherent leverage in the developed world’s financial system, the medium to long-term will bedefined by shorter exaggerated spread volatility cycles embedded within the longer traditional credit defaultcycle. These spikes in volatility will often erode capital without a corresponding rise in defaults therebyplacing a premium on quantitative analysis, skillful trading and beta management techniques tocomplement sound fundamental analysis.”1 2 3 4 5 6
STEP 2: BETA POSITIONINGStrategic Holdings Tactical Holdings IndicesInvestmentCharacteristicsHigher quality, lowervolatility, stable toimproving credit profile,generally secured orseniorHigher volatility, specialsituation names with asubstantial value gap andidentified catalystsBroad market indicesconsistent with marketvolatilityPrimaryObjectiveCarry Capital Return Carry / Capital ReturnRatings BB/B, Investment Grade BB-CCC, Investment GradeDirection Long Long + Short Long + ShortInstruments Primarily Cash Bonds,some CDSCash, CDS Credit Indices, IndexOptions, Equityoptions, Rate FuturesHorizon 6-12 months up to 3 months 3-6 months% Gross 60 to 80% 20% to 80% 0 to 50%% NAV 60 to 80% -50 to 50% -25% to 25%Strategic +TacticalLongsTacticalShortsNetExposureCreditIndices11Global Credit Absolute ReturnCredit Index trades are more tactical in nature and are generally layered in to change the betapositioning and therefore directional bias of the strategy1 2 3 4 5 6
STEP 2: CURRENT POSITIONING12Global Credit Absolute ReturnShort SubordinatedSpanish,Italian BanksLongSubordinatedFinancials- Barclays T1s- Axa T1s- BNP T1s- AIG UT2s- Allianz T1sStrategic Holding Tactical HoldingsSource: Aviva Investors as at 28 February 2013.- BBVA- Santander- Intesa SanpaoloCable TelecommGlobal HYStrategic Names- Charter- Windstream- Cablevision- Dish- Unitymedia- ZiggoLong US HYCrossover Names- Dollar General- Ford- Host Hotels- Pioneer Natural- ResourcesIndices- Short iTraxxSenior FinancialsIndices
TRADE IDEA: BUY HARLAND CLARK 9.5% SENIOR NOTES13Global Credit Absolute ReturnData is shown for illustrative purposes only.Company: Harland Clarke (MFW) is a provider of integrated payment solutions, marketing services, and security solutionsRationale: At the point of entry, MFW Senior Unsecured bonds were trading at c.16% YTW, a significant discount tocompetitors and the market due to concerns about a secular decline in check printing and medium term maturities.Fundamentals– Strong 3Q12 results and reiteration ofguidance for FY2012– Price increases and a growth inMarketing Services offsetting secularvolume declines.– Improving earnings and positive FCF– 50% excess cash flow sweepreducing secured leverage ahead ofnotesValuation– Closest comparable Deluxetrading at 6X EV/EBITDA vs.4.5X LTM leverage– Positive transactionbenchmark for HarlandFinancial Solutions division:Open Solutions was bought byFISERV for 10X EBITDA inJanuary 2013.Trading– Upside for the bonds under a refinancingscenario in early/mid 2013 to June par call– Significant decline in volatility post 3Q12results and good technical entry point.– Average entry price of 87.25– Exited at a target price of 100 for anaverage total return of 16%Entry poststrong Q3numbersExit remainingposition at 100target.Added more toexisting positionFISERV buysOpen Solutions.Sold 1/3 position
STEP 6: RISK MANAGEMENT14Global Credit Absolute Return1 2 3 4 5 6Type ofRiskSpecificSectorMarketRisk FreeInstrumentInvestmentObjective– Capital structure hedges– Minimize idiosyncratictail risk– Maximize idiosyncraticSharpe– Hedge adverse sectorrisk– Thematic short sectorbaskets– Directional biasmanagement– Manage embeddedrate riskEx-Ante Analysis: Our hedging framework ensures that the risk/return trade off is appropriate for idiosyncraticand sector specific developments and prevailing market conditions. For tail risk events, the manager has ananalytical framework to take individual positions and/or the entire fund notionally back to cashProprietaryAnalysis– Amplitude betaanalysis– Equivalence– Step-wise Analysis– Capital structurehedging Model– Net beta adjustedpositioning analysis– Scenario analysis– Stress tests– Index volatility analysisIn addition to traditional standard deviation, downgrade & liquidity risk monitoring, we have developed asophisticated proprietary risk analysis framework.– Rates analysis– Single Name CDS– Subordinated Debt– Equity + Options– Credit Indices– Equity Indices– Index Options– Futures– Cash
GLOBAL CREDIT ABSOLUTE RETURNPERFORMANCE & RISKSource: Lipper Hindsight & Aviva Investors, as at 30 April 2013. Data is provided net of fees in EUR. Benchmark: 3 Month EURIBOR. Pastperformance is not a guide to future performance. 15Global Credit Absolute ReturnRisk StatisticsAnnualised volatilitysince inception3.58%Net Beta AdjustedExposure58%1 Year Sharpe Ratio 4.24As at 30 April 20184.108.40.206.1 0.10.30.8012345673 Months 6 Months 1 Year SinceInceptionReturns(%)Global CreditAbsoluteReturn3 MonthEURIBOR
GLOBAL CREDIT ABSOLUTE RETURN FUNDPOSITIONINGSource: Aviva Investors as at 30 April 2013. 16Global Credit Absolute Return89122844GCAR Longs – Asset AllocationCash 8%Investment Grade - US9%Investment Grade - EU12%High Yield - US 28%High Yield - EU 44%56378GCAR Longs – Geographic DistributionEurope 56%US 37%Cash 8%3%6%29%14%25%3%0%5%10%15%20%25%30%AA A BBB BB B CCCGCAR Longs – By Ratings-0.4%-1.3%-10.0%-1.3%-11.0%-9.0%-7.0%-5.0%-3.0%-1.0%AA A BBB BBGCAR Shorts – By Ratings
Aviva Investors Global Credit Absolute ReturnInvestment policy / objective Aim to achieve a positive return under all marketconditions by investing in global corporate bonds with anemphasis on high yield, CDS, loans and equities.Performance target 3.5% to 5% above 3 month EURIBOR, Net*Bloomberg Ticker AVGCIIE LXLeverage Up to 2.5XBase currency EUR, with hedged share classes in GBP and USDLegal structure Sub-fund of Aviva Investors SICAVCountry Registration Luxembourg, UK, SwitzerlandLiquidity DailyMinimum investment € / $ / ₤ 500,000Annual management fee 0.50%Performance fee 20% of performance above 3 month EURIBORHigh Watermark YesAdministrator JP Morgan Bank LuxembourgAuditor Ernst & YoungLegal Counsel Elvinger, Hoss & PrussenKEY INVESTMENT TERMS18Global Credit Absolute Return*This is an internal target only. It does not form part of the fund objective.
PROPRIETARY RISK ANALYSISGlobal Credit Absolute Return19Source: Aviva Investors. Data is shown for illustrative purposes only.
PROPRIETARY RISK ANALYSISGlobal Credit Absolute Return20Source: Aviva Investors. Data is shown for illustrative purposes only.
BIOGRAPHYMark WautonHead of CreditAfter a six year career in theArmy, Mark joined investmentindustry in 1986Main responsibilitiesMark is responsible for our high alpha capabilities ininvestment grade, high yield and credit absolute returnfixed income capabilities, while also ensuring that wedeliver for more traditional active mandates.Experience and qualificationsMark joined Aviva Investors in April 2009. Prior tojoining Aviva Investors Mark was Head of StrategicCredit trading at ABN AMRO.Mark has held Head of Fixed Income roles atCommerz International and Dunedin Fund Managersas well as Head of European Fixed Income at UBSAsset Management. He also co-managed theAlphaGen Credit Hedge Fund at Gartmore.Mark successfully completed the AIIMR in 1994 and isnow an ASIP. He holds an MSc in Investment Analysisfrom Stirling University.21Jiten JoshiPortfolio ManagerJoined investment Industry in1994Main responsibilitiesJiten is managing our Global Credit Absolute Returnstrategy along with Mark Wauton and Dinesh Pawar.Experience and qualificationsJiten was previously a special situations analyst at PaliCapital responsible for idea generation across thecapital structure of stressed and distressed credits.Prior to Pali, he was an Executive Director responsiblefor managing the US exposure of a global prop desk atÅBN AMRO. Prior to ABN, he was part of a teammanaging the Gartmore AlphaGen Credit Hedge Fundfor 3 years. Prior to joining Gartmore, Jiten was a VicePresident and senior analyst covering Cable, Mediaand Energy for investment grade, high yield anddistressed securities at JP Morgan Fleming AssetManagement. Jiten’s sell side experience includesHigh Yield Origination at Chase Securities andRestructuring at Houlihan Lokey.He holds an MBA in Finance from the ColumbiaBusiness School and a BA in Economics fromColumbia University.Global Credit Absolute Return
BIOGRAPHYDinesh PawarHead of Credit Flow TradingJoined investment Industry in2002Main responsibilitiesDinesh is responsible for credit flow trading and hasover 10 years of investment experience. Dinesh has anoverview of all the trading strategies within each of thecredit portfolios and provides analysis on hedging,trading tactics, and the use of derivatives.Experience and qualificationsPrior to joining Aviva Investors he was the Market RiskManager for Deutsche Bank financial marketsresponsible for managing the banks Loan Book, LoanTrading, Credit Origination and Global Risk Syndicate.Prior to this Dinesh was a Director and worked at ABNAMRO as part of the Credit prop team focusing on EUand GBP credits. Before joining ABN AMRO, Dineshwas a Credit Trader for the AlphaGen Credit Hedgefund, and was the co-manager of the Gartmore HighYield Retail fund. Dinesh has a BA Hons in BusinessFinance and an MSc in Banking and InternationalFinance from Cass Business School22Global Credit Absolute Return
IMPORTANT INFORMATIONProperty&CasualtyInsuranceLifeInsurance &AnnuityExcept where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (“Aviva Investors”) as at 30 April2013. Any opinions expressed are based on the internal forecasts of Aviva Investors and they should not be relied upon as indicating anyguarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to thefuture. The value of an investment and any income from it may go down as well as up and the investor may not get back the originalamount invested. Portfolio holdings are subject to change at any time without notice and information about specific securities should not beconstrued as a recommendation to buy or sell any securities.Aviva Investors Global Credit Absolute Return fund is a sub-fund of Aviva Investors SICAV, an open-ended investment companyincorporated as a Société dInvestissement à Capital Variable in Luxembourg. It is authorised by the Commission de Surveillance du SecteurFinancier (CSSF) and qualifies as an Undertaking for Collective Investment in Transferable Securities (UCITS) under Part I of the law of 17December 2010 relating to undertakings for collective investment. The Management Company is Aviva Investors Luxembourg. InvestmentManager is Aviva Investors Global Services Limited, regulated and authorised by the FSA. The distribution and offering of shares may berestricted by law in certain jurisdictions. This document should not be taken as a recommendation or offer by anyone in any jurisdiction inwhich such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. The content of thisdocument does not purport to be representational or provide warranties above and beyond those contained in the legal documentation andsubscription documentation of the Funds. The legal documentation and the subscription document contain the full terms, conditions,representations and warranties in respect of the Fund. Nothing in this document shall be construed as forming any part of those terms,conditions, representations or warranties. The legal documentation and the subscription documents should be read before an investment ismade. ICVC investments should not be regarded as short-term and should normally be held for at least five years. The Prospectus and KeyInvestor Information Document (KIID), are available, together with the Report and Accounts of the SICAV, free of charge from AvivaInvestors Luxembourg, 2 rue du Fort Bourbon 1st Floor.L-1249 Luxembourg, Grand Duchy of Luxembourg R.C.S. Luxembourg B25708,Aviva Investors, No.1 Poultry, London EC2R 8EJ or relevant office below. The Prospectus is available in English, French, German, Italianand Spanish. The KIID is available in the official language(s) of your jurisdiction and currently produced in Dutch, English, Finnish, French,German, Italian, Latvian, Norwegian, Spanish and Swedish. Austria: The "Raiffeisen Zentralbank Österreich AG", Am Stadtpark 9, 1030Vienna, has been appointed as paying agent within the meaning of § 34 InvFG. The redemption of shares and requests for the prospectus,the articles of association and the last annual and semi-annual reports, once published, can be made via the paying agent. Spain: Copies ofthe Prospectus and KIID together with the Report and Accounts of the UCITS which are approved by and registered with CNMV areavailable free of charge from the offices of distributors in Spain. The UCITS is authorised by the CNMV and registered on the relevantCNMV register with registration number 7.Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: No. 1 Poultry, London EC2R8EJ. Authorised and regulated in the UK by the Financial Services Authority and a member of the Investment Management Association.Contact us at Aviva Investors Global Services Limited, No. 1 Poultry, London EC2R 8EJ.Compliance ref: 13/0527/31081323Global Credit Absolute Return