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Baring High Yield Bond Fund                                  Berlin Citywire                                  November 201...
Agenda• Why Barings for High Yield?• The Baring High Yield Bond Fund• Investment case for the asset class• Macroeconomic E...
Why Barings for High YieldSection 1                             3
Baring Asset Management• An international investment management company with a history dating back to 1762• Operating in e...
Fixed Income at Baring Asset Management• US$17.1 billion Fixed Income AUM: US$6.3bn in Global Fixed mandates• 33.7% of fir...
How are we different?• We have a unique TOP DOWN scenario based approach to managing high yield• We are NOT a bottom up pu...
Our Investment Philosophy• We believe macroeconomic factors are the primary market drivers• We believe that markets are we...
Investment Process Overview                   Scenario process highlights attractive US vs Euro vs EM HY, rating buckets  ...
Our Scenario Process is Different• “What is already discounted in current market prices?”• “How could the world look like ...
Current Scenarios                           Scenario 1           Stabilisation of Global Growth                           ...
Current Scenarios Scenario 1                  Stabilisation of Global Growth    The initial pace of US recovery falls bac...
Global scenarios                      Bond and currencies, October 2012      US 10 year                     EUR “BBB” rate...
Fundamental Issuer Analysis: High Yield Corporate                      How we research individual Companies          Indus...
Fundamental Issuer Analysis: High Yield Corporate                       Univision Communications           Geographically ...
Risk Controls• Daily VAR reports• Monthly portfolio analysis outlining returns across scenarios by market and rating• Mont...
The Baring High Yield Bond FundSection 2                                  16
Baring High Yield Bond Fund               Key CharacteristicsObjective / Strategy                                         ...
Chart layouts                       Two charts to a pageEurope HY Spreads higher vs. US HY                                ...
Where in HY                      Market – US vs Europe CorporatesGross leverage by rating                                 ...
Where in HY                       Market – US vs Emerging CorporatesNet Leverage (x)                                      ...
Where in HY                       Most interest rate sensitive: higher rated BBs Correlations to 5yr US Treasury by spread...
Where in HY                             Risk/Return profile of BB-B superior to                             ‘CCC’ rated cr...
Where in HY                       SectorsHY Cash Spread vs. Gross Leverage          Median Spread (bp) 650                ...
31st October 2012                       Fund allocation by sector and credit rating                                       ...
Baring High Yield Bond Fund                         Asset Allocation Changes 100%   80%                                   ...
Baring High Yield Bond Fund                        Performance 30th September 2012        (% ) 25                         ...
Why Barings for High Yield?                      • GLOBAL high yield offering                      • Distinct TOP DOWN sce...
Investment case for asset classSection 3                                  28
The Investment Case for High Yield           Key Considerations1. Balance sheets healthy, default rates low, leverage mana...
1         Fundamentals                                Leverage remains low & Comfortable CoverageNet Leverage             ...
1                 Fundamentals                                               Margins high, Cash on Balance Sheet highLTM E...
1                  Fundamentals                                                       Low Default ratesCurrent Default Rat...
1             Fundamentals                                      Record High Yield Issuance350,000300,000250,000200,000150,...
1          Fundamentals                                New IssuanceUse of Proceeds mainly to Refinance Debt          (% ) ...
1         Fundamentals                                Refinancing not a near term concernUnited States                    ...
2     Valuation                                  Risk/Reward profile is compellingFrom the long term perspective, credit o...
2         Valuation                                Spreads still attractive on adjusted basisLeverage Adjusted Spreads    ...
3         Technicals                                The Fixed Income Menu25                                               ...
3            Technicals                                       High Yield vs. Equities52 Week Rolling Volatilities         ...
Technicals                     3         How much do spreads need to widen for                               investor loss...
3         Technicals                                 Demand for YieldGlobal Credit Net Supply vs. Market Size       (% )  ...
The Investment Case for High Yield           Key Considerations1. Balance sheets healthy, default rates low, leverage mana...
Macroeconomic EnvironmentSection 4                            43
The Macro Environment• The market environment has been volatile and remains dominated by political risks• “The Fiscal Clif...
Europe                       ECB buys time for fiscal adjustmentDeveloped market debt continues                           ...
Europe                       German GDP highly correlated to EurozoneGerman GDP is following its major                    ...
United StatesJob growth is slowing                                                                   Consumer spending rem...
United StatesThe housing market continues to recover                                                     Inflation remains...
ChinaIndustrial production growth plunged                                                        Retail sales slowed down ...
Appendix           50
Bawag Global High Yield Bond Fund                                      Portfolio Composition   Fund Size: €180.3 million  ...
Performance of Bawag High Yield Bond Fund                      30th September 2012     (% )20                             ...
Investment ProfessionalsEce Ugurtas, CFA            Head of Credit Portfolio Construction Group                           ...
Baring High Yield Bond Fund              Share Class Overview                                                             ...
European Distribution Contacts                            Head of Sales Europe and Middle East                            ...
Important                      InformationFor Professional Investors/Advisers only. It should not be distributed to or rel...
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  1. 1. Baring High Yield Bond Fund Berlin Citywire November 2012Baring AssetManagement Limited Ece Ugurtas – Director, Fixed Income & Currency155 Bishopsgate,London, EC2M 3XYTel +44 (0)20 7628 6000Fax +44 (0)20 7638 7928www.barings.comAuthorised and regulated by theFinancial Services Authority
  2. 2. Agenda• Why Barings for High Yield?• The Baring High Yield Bond Fund• Investment case for the asset class• Macroeconomic Environment 2
  3. 3. Why Barings for High YieldSection 1 3
  4. 4. Baring Asset Management• An international investment management company with a history dating back to 1762• Operating in eleven countries with professionals from twenty five different nations• Providing investment management services in emerging and inefficient markets, asset allocation and specialist fixed income to investors worldwide• Working in partnership with many of the world’s largest financial institutions• Owned by Massachusetts Mutual Life Insurance Company (MassMutual)• Current assets under management US$50.7 bn• 96 investment professionals• Winner of the Queen’s Award for Enterprise: International Trade 2010 London, Boston, Dubai, Frankfurt, Hong Kong, Paris, San Francisco, Santiago, Seoul, Taipei, Tokyo, TorontoAssets as at 30 September 2012, Investment Professionals as at 1 October 2012 4
  5. 5. Fixed Income at Baring Asset Management• US$17.1 billion Fixed Income AUM: US$6.3bn in Global Fixed mandates• 33.7% of firm’s total AUM• Strong track record of managing fixed income portfolios for over 25 years – Investment managers average 19 years’ experience• Three main business lines: – Global Government and Global Aggregate mandates – High Yield – EMD mandates An experienced and successful teamSource: Barings, assets as of 30 September 2012 5
  6. 6. How are we different?• We have a unique TOP DOWN scenario based approach to managing high yield• We are NOT a bottom up pure credit selection fund• We invest in GLOBAL high yield: European, US and Emerging Market high yield corporates• We COMBINE top down with bottom up conducting our own individual bottom up credit analysisSource: Baring Asset Management, October 2012 6
  7. 7. Our Investment Philosophy• We believe macroeconomic factors are the primary market drivers• We believe that markets are weakly efficient – in the medium to long term macro economic factors determine market levels – volatility in the short term is caused by investors positioning for a variety of outcomes• We avoid single point forecasts – we forecast different macro economic scenarios• Bottom up credit analysis is essential to extract value from idiosyncratic nature of high yield bondsSource: Baring Asset Management, October 2012 7
  8. 8. Investment Process Overview Scenario process highlights attractive US vs Euro vs EM HY, rating buckets Which sectors? Fundamental bottom up credit analysis Risk management & execution Portfolio of 150-170 names Names monitored daily by Credit TeamSource: Baring Asset Management, October 2012 8
  9. 9. Our Scenario Process is Different• “What is already discounted in current market prices?”• “How could the world look like in a year from now?” – potential shocks to the current market consensus that could occur from here• 3 scenarios with a probability threshold of 10-15%• Each scenario is populated with macroeconomic forecasts – GDP, inflation, current account, budget balance for a variety of developed and emerging markets• Forecasts are attached to those scenarios – credit spreads, swap spreads, bond yields, currenciesSource: Baring Asset Management, October 2012 9
  10. 10. Current Scenarios Scenario 1 Stabilisation of Global Growth Scenario 2 Fiscal Slippage, Inflation Risks Scenario 3 Financial Contagion Hits GrowthSource: Baring Asset Management, October 2012 10
  11. 11. Current Scenarios Scenario 1 Stabilisation of Global Growth  The initial pace of US recovery falls back under the onset of fiscal tightening and the retrenchment within the private sector.  Growth remains at close to trend in core-Europe, whilst growth in the peripheral European economies remains weak. Fiscal retrenchment in the peripheral European countries does continue but not in a manner that threatens popular support for the Euro. The European Central Bank (ECB) maintains an accommodative monetary stance.  US bond yields rise relative to those in Europe and Japan. Scenario 2 Fiscal Slippage, Inflation Risks  Global monetary policy remains very accommodative across all developed markets to counter the effects of fiscal consolidation.  Governments struggle to maintain their fiscal plans amidst disappointing growth outcomes. This leads to a deterioration in risk premia especially in those markets where central bank authorities do not engage in large scale asset purchases.  Emerging markets decouple in terms of economic outcomes – healthier growth & improving fundamentals. Scenario 3 Financial Contagion Hits Growth  The shock effects of financial market contagion from a default within the European periphery send the world into a recession. Demand constrained economies suffer a modest deflation.  Global bond yields fall, albeit real yields rise, as aggressive and sustained monetary policy easing ensues. Further measures of Quantitative Easing are put in place. Credit creation processes are disrupted and risk asset performance is heavily prejudiced.  Commodity currencies suffer substantially. The Chinese abandon their commitment to CNY appreciation.Source: Baring Asset Management, October 2012 11
  12. 12. Global scenarios Bond and currencies, October 2012 US 10 year EUR “BBB” rated USD / JPY USD HY “CCC” rated EUR / USD3.5 800 120 1.5 3000 7003.0 110 2500 1.4 6002.5 100 2000 500 1.32.0 400 90 1500 300 1.21.5 80 1000 200 500 1.11.0 70 100 00.5 0 60 1.0 Scenario 1 Scenario 2 Scenario 3 Current Acknowledging a number of possible market outcomesSource: Bloomberg; Baring Asset Management, October 2012 12
  13. 13. Fundamental Issuer Analysis: High Yield Corporate How we research individual Companies Industry Management / BUSINESS Strategy RISK Competitive Operational RISING FALLING Position Competence CREDIT WORTHINESS 1 2 3 4 5 Analyst Analyst CORPORATE QUALITY Score Score A B C GOOD BAD Policy Capital EXAMPLES Structure BASIC ENERGY 2B BUY FINANCIAL RISK EUROPCAR 5B SELL Profitability Financial Cash Flow Flexibility AGROKOR 3B HOLD Identifying attractive issuersSource: Baring Asset Management, October 2012 13
  14. 14. Fundamental Issuer Analysis: High Yield Corporate Univision Communications Geographically Aggressive diversified, but management policy competitive market BUSINESS RISK Pricing vs. Peers, Sector, Rating Dominant market- leading position in High margins due to lower BAM S&P/ Yield Spread domestic market programme costs and rating Moodys (bps) favourable TV contracts Univision 3B B+/B2 6.6% 505 TVN 3B B+/B1 6.2% 600 Univision Univision Allbritton 2B B+/B2 4.2% 395 Score: 3B Score: 3B Sinclair - B/B2 5.4% 375 US B Rated - - 6.4% 540 Highly Adj. DEBT to leveraged as a EBITDA ~ 11.4x; result of the Interest coverage ~ LBO 1.6x FINANCIAL RISK Adequate liquidity Significant and positive FCF, refinancing risk with large debt maturities with cash sources Weak credit metrics, albeit in 2017 cover uses >1.2x strong market position, profitability and growthSource: Barings , October 2012 14
  15. 15. Risk Controls• Daily VAR reports• Monthly portfolio analysis outlining returns across scenarios by market and rating• Monthly risk report outlining risk contributions by geography, rating, sector and top 10 contributors to risk• Monthly full liquidity analysis on credits trading below price 80• Expensive List/Concern list 15
  16. 16. The Baring High Yield Bond FundSection 2 16
  17. 17. Baring High Yield Bond Fund Key CharacteristicsObjective / Strategy Guideline ranges• To produce a high level of income and long term capital appreciation 150-170 names• Top down combined with bottom up credit research• Focussed portfolio of best ideas in preferred sectors, ratings, markets• To outperform global high yield peer groupRisk management• Maximum active position per name 0.8/0.9%• No sector/ country limits• Max 10% CCC• ‘No default’ focused strategy• Portfolio is not constructed on single point forecast but required to be robust in at least 2 out of 3 scenariosMinimum issue size• Liquid, active traded focus $400m & €350mTurnover 60-70% 17
  18. 18. Chart layouts Two charts to a pageEurope HY Spreads higher vs. US HY Default rates lower in Europe … OAS (%)2,500 162,000 121,5001,000 8 500 4 0 -500 0 Aug-00 Aug-02 Aug-04 Aug-06 Aug-08 Aug-10 Aug-12 Apr-08 Dec-08 Aug-09 Apr-10 Dec-10 Aug-11 Apr-12 Euro HY Index US HY Index Difference US Europe … but Loan Market under greater stress (%) 20 16 12 8 4 0 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 US EuropeSource: Merrill Lynch, 12 September 2012 18
  19. 19. Where in HY Market – US vs Europe CorporatesGross leverage by rating Spread to government by rating 6.00 1,500 5.00 1,250 4.00 1,000 3.00 750 2.00 500 1.00 250 0.00 0 BB B CCC HY BB B CCC HY EUR USD EUR USD Europe generally less leveraged and cheaper vs. USSource: Morgan Stanley, 7 September 2012, Bloomberg 15 October 2012 19
  20. 20. Where in HY Market – US vs Emerging CorporatesNet Leverage (x) Spread per turn of Net Leverage (bps/x) A A BBB BBB BB BB B B 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 0 50 100 150 200 250 300 350 EM Corporates US Corporates EM Corporates US Corporates EM Corporates have LOWER leverage yet offer more spreadSource: Bank of America Merrill Lynch, 25 September 2012 20
  21. 21. Where in HY Most interest rate sensitive: higher rated BBs Correlations to 5yr US Treasury by spread bucket 52wk Trailing Correl to 5yr Trsy0.80.6 0..300bp0.4 300..400bp 400..500bp0.2 500..600bp0.0 700..1,000bp 600..700bp 1,00bp+-0.2-0.4-0.6-0.8 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 0..300bp 300..400bp 400..500bp 500..600bp 600..700bp 700..1,000bp 1,00bp+ B and CCC least interest rate sensitive but …Source: Bank of America Merrill Lynch, 25 September 2012 21
  22. 22. Where in HY Risk/Return profile of BB-B superior to ‘CCC’ rated credit‘BB-B’ credit; lower risk and lower return volatilityGlobal Corporate Default Rates (%) Excess return over 12 months (%) 50 120 40 Long-term average 90 60 30 30 20 0 10 -30 0 -60 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2002 2004 2006 2008 2010 2012 BB B CCC/C BB-B CCC• ‘BB’ and ‘B’ credit compared to ‘CCC/C’ tend to have significantly lower default rates• Variations in excess returns also lowerSource: S&P/Bloomberg, 31 March 2012, BofA Merrill Lynch/Bloomberg, 28 September 2012 22
  23. 23. Where in HY SectorsHY Cash Spread vs. Gross Leverage Median Spread (bp) 650 Metals & Mining 600 Technology 550 500 Telecom Energy Gaming/Leisure 450 Retail Autos & Parts General Industrials 400 Healthcare Consumer Goods Media 350 Paper/Packaging 300 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 2Q12 2Q11 Median Gross Leverage Deleveraging Sectors: Metals, Healthcare & GamingSource: Morgan Stanley, 16 October, 2012 23
  24. 24. 31st October 2012 Fund allocation by sector and credit rating Capital Fund Size: $1, 271.3 million Goods Other Basic UST s/d 3.8% 10.4% Industry Duration: 3.5 years 5.3% 16.9% Holdings: 165 Healthcare 5.6% By Sector Telecoms Services 14.1% US Short Cash 5.7% Dated Govt 6.9% Tech 5.3% 5.8% Energy Media Consumer 12.5% Cash 6.4% Cyc 6.9% EMD HY US HY 6.6% 18.4% 51.8% A-1 / Cash BBB UK HY AAA 6.9% 1.2% 4.2% 5.3% BB European 27.6% HY By CCC 8.9% 13.5% Credit Rating*Source: Baring Asset Management: 31st October 2012. BCredit Ratings show the highest rating between S&P and Moody’s. Source: Barings / customisedAllocations are subject to change 52.1% 24
  25. 25. Baring High Yield Bond Fund Asset Allocation Changes 100% 80% Cash EM Government Bonds 60% US HY^ 40% EM HY* 20% European HY 0% Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Active Asset Allocation CallsSource: Barings as at 30th September 2012*Includes Australia ^includes CLO 25
  26. 26. Baring High Yield Bond Fund Performance 30th September 2012 (% ) 25 20.4 20 17.7 15 14.2 11.5 10.9 10.7 10 8.4 8.0 6.9 6.4 5 0 YTD 2012 1 Year 3 years (ann.) 5 years (ann.) 10 Years (ann.) Baring High Yield Bond Fund Peer Group Median*Past performance is not a guide to future performanceSource: Morningstar / Barings, to 30th September 2012 Fund Performance is in US Dollars on a NAV per unit basis, withgross income reinvested, Net of fees. Inception July 1993.* Morningstar GIFS Fixed Income Global High Yield Peer Group - Customised Peer Group 26
  27. 27. Why Barings for High Yield? • GLOBAL high yield offering • Distinct TOP DOWN scenario based approach • Combined with focussed bottom up credit selection • Proven investment track recordSource: Baring Asset Management, October 2012 27
  28. 28. Investment case for asset classSection 3 28
  29. 29. The Investment Case for High Yield Key Considerations1. Balance sheets healthy, default rates low, leverage manageable2. Supportive macro environment: growth recovery to ensure default rates stay low, corporate earnings grow BUT not too strong that corporates return to “equity friendly” behaviour3. Low global interest rates for longer to intensify the search for “yield” HY remains attractive based on strong fundamentals, valuations and technical factors 29
  30. 30. 1 Fundamentals Leverage remains low & Comfortable CoverageNet Leverage Interest Coverage(Net Debt/LTM EBITDA, x) (LTM EBITDA/Net LTM Interest Expense, x)4.5 4.04.3 3.84.1 3.63.9 3.43.7 3.23.5 3.03.3 2.83.1 2.62.9 2.42.7 2.22.5 2.0 1996 1998 2000 2002 2004 2006 2008 2010 1996 1998 2000 2002 2004 2006 2008 2010 Leverage Ratio Average Leverage (3.6x) CoverageRatio Average Coverage (3.3x) Corporates have been deleveraging Strong Interest coverage RatiosSource: BofA Merrill Lynch/Bloomberg 30 June 2012 30
  31. 31. 1 Fundamentals Margins high, Cash on Balance Sheet highLTM EBITDA Margins Global HY Cash/Debt Cash on balance sheet over total debt (% ) (% )18 1617 17% 14 10% 1216 1015 814 613 412 2 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Margins at highest levels High cash on balance sheetsSource: Morgan Stanley, Bloomberg 22 October 2012 31
  32. 32. 1 Fundamentals Low Default ratesCurrent Default Rate 2.6%Moodys projects 3.0% (Dec 2012) & S&P 3.3% (Dec 2012) 15 20 15 10 10 5 5 0 0 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Dec-81 Dec-83 Dec-85 Dec-87 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Global Default Rate EM Europe US Global Default Rates remain low & below long term averageSource: Bank of America Merrill Lynch, 15 October 2012 32
  33. 33. 1 Fundamentals Record High Yield Issuance350,000300,000250,000200,000150,000100,000 50,000 0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 BB B CCC NR Record high issuance in last 3 years: mostly in B area, YTD 2012 $300bnSource: BofA Merrill Lynch Global Research/Bloomberg, 15 October 2012 33
  34. 34. 1 Fundamentals New IssuanceUse of Proceeds mainly to Refinance Debt (% ) 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 LBO Refinance Acquisition Dividend/Byback Other Prudent management of balance sheetsSource: Morgan Stanley, 22 October 2012 34
  35. 35. 1 Fundamentals Refinancing not a near term concernUnited States Europe Maturities ($bn) (€) 160 45 140 40 120 35 30 100 25 80 20 60 15 40 10 20 5 0 0 2012 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019 2020 Bonds Loans Bonds Loans “Wall of Maturity” is being managedSource: BoA/Merrill Lynch - Bloomberg, 15 October 2012 35
  36. 36. 2 Valuation Risk/Reward profile is compellingFrom the long term perspective, credit offers value Default rate (% ) Spread to worst 16 2,000 14 High-yield spreads 608bp 1,750 12 High-yield defaults 2.6% 1,500 10 1,250 8 1,000 25-year average = 586bp 6 750 4 500 2 250 25-year average = 4.1% 0 0 Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 High-yield default rate High-yield spreads Still potential for credit spread tightening as market mis-prices default ratesSource: JP Morgan, S&P, 1 October 2012 36
  37. 37. 2 Valuation Spreads still attractive on adjusted basisLeverage Adjusted Spreads HY Credit Spreads adjusted forSpread/(Net Debt/EBITDA) Average Loss and Volatility (Spread – average historical loss / 12 month vol) (bp/x) (bp/%)1,000 250 200 150 Asia Median 100 US` Median 50 100 EU Median 0 -50 -100 01 02 03 04 05 06 07 08 09 10 11 12 2001 2003 2005 2007 2009 2011 Asia HY SPL Europe HY SPL US HY SPL Asia EU US S&P 500 Average Adjusted Spread levels still elevated, HY still attractively valuedSource: Morgan Stanley & Bloomberg 5 September 2012 37
  38. 38. 3 Technicals The Fixed Income Menu25 Fixed Income Assets Yield20 10yr US Treasury Bonds 1.8% 10yr European Government Bonds 1.6%15 10yr UK Government Bonds 1.8%10 US Investment Grade Corporate 2.8% 5 US Mortgage Bonds 1.3% JPMorgan EMBI+ 4.6% 0 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 JPMorgan GBI EM Global Diversified 5.8% Global High Yield BB-B (HW40) OR … Global Broad Mkt Corp (GOBC) US High Yield 6.1% Global High Yield Index (HW00) European High Yield 7.0% Global Sovereign Broad Market Plus Index (GOPG) Attractive on an ABSOLUTE & RELATIVE basis to other fixed income assetsSource: BofA Merrill Lynch/Bloomberg, 22 October 2012 38
  39. 39. 3 Technicals High Yield vs. Equities52 Week Rolling Volatilities 52 Week Rolling Average Returns45% 100%30% 50%15% 0% 0% -50% Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 ML Global High Yield MSCI AC World ML Global High Yield MSCI AC World Jan-03 – Sept-12 Global High Yield MSCI All Country World Return (%) 9.9 7.4 Volatility (%) 8.9 19.1 High Yield offers better risk/return Return/Vol ratio 1.1 0.4 profile to equitiesSource: BoA Merrill Lynch, MSCI Barra, January 2003 - September 2012 39
  40. 40. Technicals 3 How much do spreads need to widen for investor losses? (% of the new HY investors in losses)100 • HY has higher carry, lower duration offering cushion for 80 investors 1/2 of “new money” 60 experience losses • Spreads would have to widen +600bps before “new” investors suffered losses 40 20 0 0 100 200 300 400 500 600 700 800 900 1000 Back up in yields (+bps) Assumes time horizon to end of the year & includes last 4 months carrySource: Morgan Stanley 5 September 2012 40
  41. 41. 3 Technicals Demand for YieldGlobal Credit Net Supply vs. Market Size (% ) (% )30 2025 1520 1015 510 0 5 -5 0 -10 EUR HY EUR IG US HY US IG Asia IG* EUR HY EUR IG US HY US IG Coupon/Redemptions/Calls Supply 2009 2012e• Corporates are a source of inflows • EU Net supply already negative• Almost 20% of market value of US, Europe and Asian Credit to investors in 2012Source: Morgan Stanley 5 September 2012Net Supply = Supply – coupon –calls-maturities 41
  42. 42. The Investment Case for High Yield Key Considerations1. Balance sheets healthy, default rates low, leverage manageable2. Supportive macro environment: growth recovery to ensure default rates stay low, corporate earnings grow BUT not too strong that corporates return to “equity friendly” behaviour3. Low global interest rates for longer to intensify the search for “yield” HY remains attractive based on strong fundamentals, valuations and technical factors 42
  43. 43. Macroeconomic EnvironmentSection 4 43
  44. 44. The Macro Environment• The market environment has been volatile and remains dominated by political risks• “The Fiscal Cliff” & the upcoming US elections• Europe – Is Greece staying or leaving? – Can Europe find a powerful enough backstop to prevent a spill over to Spain and Italy?• China – A “soft”, a “rough” or a “hard” landing? And who will really know? – What will be the implications for the rest of Asia and Australia? How much more global policy accommodation will there be?What will be the effects on bond yields and inflation and will it keep growth going? 44
  45. 45. Europe ECB buys time for fiscal adjustmentDeveloped market debt continues Creating volatility in vulnerableto increase relative to GDP countries Unemp % (%)30 825 Spain Greece 720 615 Ireland France 510 Italy US Britain 5 Australia Germany Japan 4 0 3 0 50 100 150 200 250 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Debt to GDP % Italy Spain• The Spanish unemployment rate has risen to 24.4% and Italy’s debt to GDP ratio is now above 120%. In July Spanish 10 year debt yielded over 7% as markets lost confidence in its ability to finance itself.• The ECB’s Outright Monetary Transactions (OMT) have bought time for Spain and Italy, they may agree to purchase their short dated debt if they enter a bailout program and adhere to its conditionality.Source: Eurostat, Bloomberg (Sept 2012) 45
  46. 46. Europe German GDP highly correlated to EurozoneGerman GDP is following its major …with manufacturing PMIs enteringexport partners lower… recessionary territory (%) 6 65 115 4 60 110 105 2 55 100 0 50 95-2 45 90-4 40 85-6 35 80-8 30 75 Sep-05 Sep-07 Sep-09 Sep-11 Aug-07 Feb-09 Aug-10 Feb-12 Germany Italy Spain German Manufacturing PMI IFO Business Expectations• European politicians have begun to reduce the pace at which austere, fiscal deficit reduction is implemented. Such austerity has accelerated the pace at which Europe has entered recession.• Overall Eurozone GDP declined by 0.2% in Q2 2012. With German exports making up over a third of their economy the Eurozone slowdown is having a major impact on its largest economy.Source: IFO, Markit, Bloomberg (Sept 2012) 46
  47. 47. United StatesJob growth is slowing Consumer spending remains mutedUS Payrolls and Unemployment Rate Earnings, Income and Retail Sales 900 10.0 8 10 600 9.5 6 5 4 300 9.0 2 0 0 8.5 0 -2 -5-300 8.0 -4-600 7.5 -10 -6-900 7.0 -8 -15 Dec-08 Dec-09 Dec-10 Dec-11 Dec-08 Oct-09 Aug-10 Jun-11 Apr-12 Non Farm Payrolls LHS x 1000 Average Hourly Earnings % yoy LHS Initial Jobless Claims x 1000 LHS Personal income % yoy LHS Unemployment rate % RHS Retail Sales % yoy RHS• Job creation has slowed down after a strong start of the year.• Consumers remain cautious.• Uncertainties surrounding the fiscal cliff are high.Source: US Department of Labor Statistics, Bureau of Economic Analysis, US Census Bureau ,Bloomberg (Dec 2008 to September 2012) 47
  48. 48. United StatesThe housing market continues to recover Inflation remains on a downward trendNew Home Sales and House Prices Headline and Core CPI with Average price of Gasoline $/gallon 150 5.0 4.5 4.0 100 4.0 3.0 50 3.5 2.0 0 1.0 3.0 -50 0.0 2.5 -1.0-100 2.0 -2.0-150 -3.0 1.5 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Case Schiller House Price Index % change 3mths annualised CPI %yoy LHS New Home Sales % yoy CPI Core % yoy LHS Existing Home Sales % yoy Ave. Gasoline price US$ RHS• House prices and home sales continue to pick up due to low mortgage rates. Housing affordability is at multi year highs.• Inflation continues to moderate despite an increase in commodity prices. Wage costs remain subdued. The Fed has increased its policy accommodation by announcing unlimited purchases of mortgage backed securities.Source: US National Association of Realtors, Case Schiller,Bureau of Labor Statistics, AAA, Bloomberg (Dec 2008 to September 2012) 48
  49. 49. ChinaIndustrial production growth plunged Retail sales slowed down but stillto single digit for a fifth month grew at double digit (%) (%) 17 22 15 20 13 18 11 16 9 14 7 12 5 10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12• The growth of China industrial production has fallen steadily for twelve months since the 2H2011. In August, the National Bureau of Statistics reported 8.9% growth of industrial production year-on- year (y-o-y), the slowest pace in three years. The data underscore risks that the full-year growth will slide to its lowest in two decades.• Despite the slowed down of the world second-biggest economy, the growth of retails sales still maintained at the levels above 13% y-o-y since the beginning of this year. The market expects the internal demands will remain robust and thus partly offset the contradiction in external demands.Source: US National Association of Realtors, Case Schiller,Bureau of Labor Statistics, AAA, Bloomberg (Dec 2008 to September 2012) 49
  50. 50. Appendix 50
  51. 51. Bawag Global High Yield Bond Fund Portfolio Composition Fund Size: €180.3 million Em erging Duration: 5.1 years Market Debt 34.6% Investm ent Grade & Cash 15.8% US & Euro High Yield PERU, 6.0% MEXICO, 5.9% 49.7% Cash, 13.2 BULGARIA, 2.9%PHILIPPINES, 4.7% Consumer Cyc, Healthcare, 3.8 3.1 INDONESIA, Telecoms, 4.1 3.8% Tech, 2.9 POLAND Media, 2.5 TURKEY, 5.6% (Local), 1.1% Services, 6.9 Capital Goods, Services, 0.9 BRAZIL, 4.7% 2.1 Energy, 1.7 Emerging Other, 5.7 Investment Market Debt Energy, 7.1 Grade Basic Industry, 11.4 Source: Barings 22 October 2012 Source: Barings 22 October 2012 High Yield Corporates 51
  52. 52. Performance of Bawag High Yield Bond Fund 30th September 2012 (% )20 18.715 13.6 11.4 11.510 9.3 6.0 5 0 Q3 2012 YTD 2012 1 Year 3 years (ann.) 5 years (ann.) SI (ann.) * Source: Barings, Gross of Fees as at 30 September 2012 * Inception date: 30 November 2000 52
  53. 53. Investment ProfessionalsEce Ugurtas, CFA Head of Credit Portfolio Construction Group Last updated: 4 January 2012 Fixed Income Investment Manager Location: London Investment Experience: 14 YearsEce chairs the Credit Portfolio Construction Group and is responsible for Global High Yield portfolios. Ece is the manager of the Baring High Yield Bond Fund and amember of the Scenario Team. Ece joined Baring Asset Management as a Fund Manager in 2003. Previously she worked at M&G Investment Management as aDirector of Fixed Interest Portfolio Management, managing gilt portfolios and emerging market debt funds. Ece has an MSc in Economics from the London School ofEconomics and a BSc in Economics and Politics from Bristol University. She was awarded the CFA designation in 2000. Ece speaks Turkish and German fluently.Sunita Kara, CFA Fixed Income Investment Manager Location: London Last updated: 4 January 2012 Investment Experience: 11 YearsSunita is an Investment Manager and member of the Credit Portfolio Construction Group. She is the manager of the Baring Asset Management Corporate Bond Fundand also a member of the Risk Group, which is a sub-group of the SPG, the research body responsible for asset allocation. Sunita joined Barings in 2007 and prior tobeing appointed to her current position, undertook various research responsibilities in credit and emerging market debt markets in both local and hard currency. Prior toBarings, Sunita worked for 5 years at Standard & Poors Ratings Services as a Senior Credit Analyst with research responsibilities for a portfolio of corporates. Shebegan her career as an economic analyst at HM Treasury. Sunita holds a first class BSc (Hons) in Economics from Brunel University in London and was awarded theCFA designation in 2006. 53
  54. 54. Baring High Yield Bond Fund Share Class Overview Annual ManagementFund Share Class ISIN Code ChargeBaring High Yield Bond Fund Class A USD Inc IE0000835953 1,00%Baring High Yield Bond Fund Class A USD Inc Monthly Dividend IE0032158457 1,00%Baring High Yield Bond Fund Class A USD Acc IE00B6TMN219 1,00%Baring High Yield Bond Fund Class A EUR Inc IE0004851808 1,00%Baring High Yield Bond Fund Class A EUR Hedged Inc IE0032158341 1,00%Baring High Yield Bond Fund Class A GBP Hedged Inc IE0033156484 1,00%Baring High Yield Bond Fund Class A HKD Inc Monthly Dividend IE00B62P4Q86 1,00%Baring High Yield Bond Fund Class A AUD Hedged Inc Monthly Dividend IE00B881PF08 1,00%Baring High Yield Bond Fund Class A CAD Hedged Inc Monthly Dividend IE00B7YBBB53 1,00%Baring High Yield Bond Fund Class A NZD Hedged Inc Monthly Dividend IE00B8GQ7V76 1,00%Baring High Yield Bond Fund Class I USD Acc IE00B3L6P808 0,75%Baring High Yield Bond Fund Class I EUR Acc IE00B3L6P915 0,75%Baring High Yield Bond Fund Class I GBP Hedged Inc IE00B3L6PB37 0,75% 54
  55. 55. European Distribution Contacts Head of Sales Europe and Middle East Oliver Morath Tel: +49 69 7169 1810 Email: oliver.morath@barings.comFrance and Belgium: Germany and Austria:Benoit du Mesnil du Buisson Martin Dilg+33 (0)1 53 93 60 00 +49 (0)69 7169-1824Email: benoit.dumesnil@barings.com Email: martin.dilg@barings.comLuxembourg and Switzerland: UK, Ireland, Spain and Channel Islands:Thomas Justen Rod Aldridge+49 (0)69 7169-1826 +44 (0) 20 7214 1005Email: thomas.justen@barings.com Email: rod.aldridge@barings.comMiddle East Nordic RegionNisarg Trivedi Christine Bergstedt+971 4 4019220 +44 (0)20 7214 1283Email: nisarg.trivedi@barings.com Email: christine.bergstedt@barings.com 55
  56. 56. Important InformationFor Professional Investors/Advisers only. It should not be distributed to or relied on by Retail Investors. This document is approved and issued by BaringAsset Management Limited, authorised and regulated by the Financial Services Authority and in jurisdictions other than the UK it is provided by the appropriate BaringAsset Management company/affiliate whose name(s) and contact details are specified herein. The information in this document does not constitute investment, tax,legal or other advice or recommendation. It is not an invitation to subscribe and is for information only.Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed. Past performance is not aguide to future performance. Where yields have been quoted they are not guaranteed. Changes in rates of exchange may have an adverse effect on the value, priceor income of an investment. There are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging ordeveloping markets. Investments in higher yielding bonds issued by borrowers with lower credit ratings may result in a greater risk of default and have a negativeimpact on income and capital value. Income payments may constitute a return of capital in whole or in part. Income may be achieved by foregoing future capital growth.We reasonably believe that the information contained herein from 3rd party sources, as quoted, is accurate as at the date of publication. The information and anyopinions expressed herein may change at any time. Companies and employees of the Baring Asset Management group may hold positions in the investment(s)concerned. This document may include internal portfolio construction guidelines. As guidelines the fund is not required to and may not always be within these limits.These guidelines are subject to change without prior notice and are provided for information purposes only.This document may include forward looking statements which are based on our current opinions, expectations and projections. We undertake no obligation to update orrevise any forward looking statements. Actual results could differ materially from those anticipated in the forward looking statements.This document must not be used, or relied on, for purposes of any investment decisions.Before investing in any product, we recommend that appropriate financial advice should be sought. The Key Investor Information Document (KIID) must be receivedand read. All other relevant documents relating to the product such as the Report and Accounts and Prospectus should also be read. Compensation arrangementsunder the Financial Services and Markets Act 2000 of the United Kingdom will not be available in respect to any Offshore Fund.Research MaterialBaring Asset Management only produces research for its own internal use. Where details of research are provided in this document it is provided as an example ofresearch undertaken by Baring Asset Management and must not be used, or relied upon, for the purposes of any investment decisions. The information and opinionsexpressed herein may change at anytime.Lists of locations, or location indicators on maps, are non-exhaustive. They may include locations where Barings has an office and/or where Barings has appointed alocal organisation or individual to act on its behalf for certain aspects of its business.For data sourced from Morningstar: © Morningstar, Inc. all rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its contentproviders; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsiblefor any damages or losses arising from any use of this information.An S&P Fund Management Rating represents an opinion only and should not be relied on when making an investment decision. “S&P” and “Standard & Poor’s” aretrademarks of The McGraw-Hill Companies, Inc. Copyright 2010 © Standard & Poor’s Financial Services LLC.Version 08/SDComplied: London – October 2012 (v250) 56
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