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Citywire nma kames capital jan 2013
 

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    Citywire nma kames capital jan 2013 Citywire nma kames capital jan 2013 Presentation Transcript

    • Active bond managementYesterday’s technology?January 2013Stephen Snowden – Investment Manager
    • Agenda1. The case for actively managed corporate bond funds – versus index trackers – retail targeted bonds2. Market view3. The Fund4. Q&A 2
    • Equities & bonds – important differences Equities Bonds Trading mechanism Exchange Counterparty Pricing Exchange ? Market size £1,774 bn , £533 bnSo what does this mean?1. Corporate pricing can be inconsistent and liquidity is lower2. Corporate bonds are therefore less suitable to index trackingSource: FTSE UK All-share Index market cap from FactSet as at 31 December 2012. iBoxx £ Non-Gilt Index from Barclays as at 31 December 2012 3
    • Liquidity – what the fund managers are saying q y g y g “daily volumes are on a par with where they were in 2007” Richard Woolnough, manager of the £6.5bn M&G Corporate Bond Fund, £5.8bn M&G Strategic Bond Fund & £10.7bn M&G Optimal Income Fund g p Bond Vigilantes, 4 Dec 2012 “trading in the sterling corporate bond market is more expensive and difficult than before the financial crisis” crisis Ian Spreadbury, manager of the £3.3bn Fidelity Moneybuilder Income Fund Investment Week, 4 Dec 2012“anybody who says liquidity is not a problem is lying” Richard Hodges, manager of the £1.6bn Legal & General Dynamic Bond Fund Independent on Sunday, 19 Aug 2012 “liquidity in the corporate bond market can be pretty patchy” Paul Reed, manager of the £5.8bn Invesco Perpetual Corporate Bond Fund Investment Week, 17 Dec 2012 4
    • Index -v- Active v Fallen Angels • In isolation a fallen angel is not a big issue for an index tracking corporate bond fund t ki t b df d • The problem is when it is systemic Spanish & Italian corporate bonds 14.8% of the iBoxx € Non-Sovereign Index = €499bn That is 2.3x the size of the European High Yield market • The Th problem is much smaller for the £ corporate bond bl i h ll f th t b d market Spanish & Italian corporate bonds 3.0% of the iBoxx £ Non Gilt Index = £16bn Non-Gilt • But the dislocation when it happens will be large Are index tracking corporate bond funds a low risk option?Source: iBoxx & BoA/Merrill Lynch 5
    • Index -v- Active v • Large single name risk – 7.0% 7 0% of the inde index the creeping non-call • Large financial call risk – 7.4% of the index • Index trackers typically yield less Are index tracking corporate bond funds a low risk option?Source: Barclays, iBoxx & Lipper 6
    • Index -v- Active v Gilt yields -v- Index interest rate risk • Active funds have typically been 8.0 5.5 managed with less duration than 7.8 78 5.0 50 the i d th index 7.6 4.5Modified duration 7.4 4.0 • Gilt yields have fallen but interest 7.2 72 3.5 rate risk of the index has % 3.0 increased 7.0 2.5 6.8 2.0 • An interesting time in the interest 6.6 1.5 15 rate cycle to increase duration 6.4 1.0 risk! Dec 08 Mar 09 Dec 09 Mar 10 Dec 10 Mar 11 Dec 11 Mar 12 Dec 12 Jun 08 Sep 08 Jun 09 Sep 09 Jun 10 Sep 10 Jun 11 Sep 11 Jun 12 Sep 12 iBoxx £ Non-Gilts (LHS) 10 year gilt yield (RHS) Are index tracking corporate bond funds a low risk option? Source: Barclays, iBoxx & Bloomberg 7
    • Which index you follow can make a big difference.....Corporate bond pricing differentials 450 400 350credit spreads (bps) 300 s 250 200 00 150 100 Jan 08 8 Jun 08 8 Jan 09 9 Jun 09 9 Jan 10 0 May 08 8 May 09 9 Jul 08 8 Aug 08 8 Sep 08 8 Nov 08 8 Dec 08 8 Jul 09 9 Aug 09 9 Sep 09 9 Nov 09 9 Dec 09 9 Apr 08 8 Oct 08 8 Apr 09 9 Oct 09 9 Mar 08 8 Mar 09 9 Feb 08 8 Feb 09 9 Barclays Sterling Agg Ex Gilts iBoxx Sterling Non Gilts Non-Gilts Bank of America/Merrill Lynch Sterling Non-GiltsSource: Barclays ,Markit and Bloomberg as at 31 January 2010 8
    • Retail targeted corporate bonds Bypass Ahead A good g Alternative idea? Route 9
    • Retail targeted corporate bonds g pNational Grid PLC 1.25% 2021 National Grid PLC 4.1875% 2022(retail bond – index linked) (institutional bond – index linked)• Regulatory protection  • Regulatory protection  – None – Yes, from OFGEM• Credit Rating g  • Credit Rating g  – Baa1 – A3• Yield  • Yield  – RPI plus 1.25% – RPI plus 1.25% *• Minimum investment  • Minimum investment  – £100 – £1,900 (approx) *• Charges  • Charges  – Barclays bid/offer spread = 1.4% – Barclays bid/offer spread = 0.5% – 0.5% introduction fee – Annual management fee – Possible nominee and or trustee fees Is cutting out the middle man such a good idea?Source: Bloomberg. Barclays bid/offer spread as of 27th December 2012. *As of 13th September 2011, launch date of the retail bond. 10
    • Retail targeted corporate bondsProvident Financial 7% 2017 Provident Financial 8% 2019(retail bond) (institutional bond)• Seniority  • Seniority  – Senior Unsecured – Senior Unsecured• Credit Rating g  • Credit Rating g  – BBB – BBB• Yield (as of 14th March 2012)  • Yield (as of 14th March 2012)  – 7.0% – 8.3%• Minimum investment  • Minimum investment  – £100 – £50,700 (approx)• Total Return*  • Total Return*  – 12.6% – 18.0% Is cutting out the middle man such a good idea?Source: Bloomberg & Barclays. Total return calculated using Barclays offer prices. *Total return from 14 March 2012 to 31 December 2012 11
    • There sThere’s still a role for actively managed corporate bond funds Retail targeted corporate bonds Index trackers You can’t have your Not without their cake and eat it risks 12
    • Market view 13
    • 0 2 4 6 8 10 12 14 1729 1737 1745 1753 1761 Bond bubble? 1769 Source: MeasuringWorth December 2012 1777 1785 UK Gilt Yields 1729-2012 1793 1801 1809 1817 1825 1833 1841 1849 1857 1865 1873 1881 1889 1897 1905 1913 1921 1929 1937 1945 1953 1961 1969 1977 1985 1993 2001 200914
    • Why are Government bond yields so low?• Low economic growth backdrop• “Lower for Longer Central Bank Rates Lower Longer”• Quantitative Easing• Deleveraging g g• Shrinking pool of “safe haven” assets This does not make them a “good” long term investment... ...but they are a necessary evil 15
    • Government Bonds – not all are created equal qEuropean Yields 16 14 12Yield (s.a.) % 10 8 6 4 2 0 Jan 95 Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 Portugal Spain Italy France Germany IrelandSource: Bloomberg as at 30 November 2012 16
    • % 0 1 2 3 4 5 6 Dec 02 Jun 03 Gilt yields Dec 03 Jun 04 Bond bubble? Source: Bloomberg 31 December 2012 Dec 04 Jun 05 Dec 05 Jun 06 30yr Dec 06 Jun 07 10yr Dec 07 Jun 08 5yr Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 1217
    • It sIt’s not just gilts that are yielding less these days Credit Suisse High Yield Index - Yield to Worst 20 18 16 14 % 12 10 8 6 986 987 988 988 989 990 991 992 993 994 995 996 997 998 999 999 000 001 002 003 004 005 006 007 008 009 010 010 012 011 20 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20Source: Credit Suisse & Bloomberg as at 31 December 2012 18
    • It sIt’s not just gilts that are yielding less these daysGlobal Emerging Market Sovereign Plus - Yield to Worst 18 16 14 12% 10 8 6 4 1991 1992 1993 1993 1994 1994 1995 1996 1996 1997 1997 1998 1998 1999 2000 2000 2001 2001 2002 2003 2003 2004 2004 2005 2005 2006 2007 2007 2008 2008 2009 2010 2010 2011 2011 2012 2012 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2Source: Bank of America Merrill Lynch as at 31 December 2012 19
    • Credit Spreads - iBoxx £ Non-Gilt Index Non Gilt 400 350 300 250bps 200 150 100 50 0 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 12 Dec 11Source: Markit & Barclays as at 31 December 2012 20
    • Investment grade not running on empty just yet 21
    • Why the Kames Investment Grade Bond Fund? y • Significant value in investment grade bonds • Award winning fixed income team • Fund size offers competitive advantageStephen Snowden Euan McNeil in illiquid market illiq idKames Investment Grade Bond FundFund size £497mNumber of holdings 135Morningstar OBSR Rating SilverSource: Kames Capital as at 30 November 2012 22
    • Kames Investment Grade Bond Fund performance pCumulative* vs median 23 18.60% 18 15.06% 13 owth% gro 8 3 -2 Au 11 Se 11 No 11 De 11 Ja 12 Fe 12 Ma 12 Ju 12 Au 12 Se 12 No 12 De 12 Oct 11 Mar 12 Apr 12 Jul 12 Oct 12 ug ep ov ec an eb ay un ug ep ov ec O J O Kames Investment Grade Bond A Acc IMA £ Corporate Bond Sector• Ranked 8th o t of 84 outSource: Lipper as at 31 December 2012. NAV to NAV basis; net income re-invested. Total return; tax UK net; in GBP. A Acc. Past performance is not a guide to the future. *Performance shown sinceStephen Snowden became joint manager September 2011 23
    • Active asset allocationInvestment Grade Bond - Asset Allocation 30 220 28 26 200 24 180 22 20 bps% 160 18 16 140 14 12 120 10 8 100 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Cash & AAA Credit Spreads (iTraxx Europe)Source: Kames Capital & Markit as at 31 December 2012 24
    • Kames Investment Grade Bond Fund performance p• Investment grade portfolio – Global investment remit – Tactical gilts and restricted high yield – Only taking bond risk 1 year 2 years 3 years 4 years 5 years Fund 15.89% 21.26% 30.01% 58.95% 37.87% Median 13.40% 18.78% 27.97% 47.17% 31.46% Quartile 1 1 2 1 2 Outperformance 2.49% 2.48% 2.04% 11.78% 6.41%Source: Lipper as at 31 December 2012. NAV to NAV basis, net income re-invested. Total return, tax UK net, in GBP. Past performance is not a guide to the future 25
    • Appendices 26
    • Kames UK OEIC – building blocks or blend? g Strategic Bond Fund 27% 28% Investment High Yield Grade Bond Bond Fund Fund 9%Source: Kames Capital as at 31 August 2012 27
    • Competitor A IMA £ Strategic Bond offering 73% 78% IMA £ Corporate IMA £ Corporate Bond offering 92% Bond offering (1) (2)Source: Lipper as at 31 May 2012 28
    • Competitor B IMA £ Strategic 76% IMA £ Corporate offering Bond offeringSource: Lipper as at 31 July 2012 29
    • The challenge of managing corporate bond funds g g g p Fund size up but market liquidity has disappeared 80 250 70 200 60 50 150 on $ billion £ billio 40 30 100 20 50 10 0 0 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 IMA Corp Bond & Strat Bond AuM (£bn) LHS Corporate Bond Dealer Positions ($bn) RHSSource: Federal Reserve Bank of New York and Investment Management Association as at January 2012 30
    • No longer able to rely on steady supply of new bond issuance Net £ Investment Grade Corporate Bond Issuance 70 60 50 40 30£bn 20 10 0 -10 -20 20 -30 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2 2 2 2 2 2 2 2 2 2 2 Source: Barclays as at 31 December 2012 31
    • No longer able to rely on steady supply of new bond issuance g y y pp yNet € Investment Grade Corporate Bond Issuance 400 300 200€bn 100 0 -100 -200 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2011Source: Barclays as at 31 December 2012 32
    • % 60 70 80 90 100 110 120 Q1 1-1995 Q4 4-1995 Q3 3-1996 isn t Q2 2-1997 Q1 1-1998 Q4 4-1998 Q3 3-1999 Q2 2-2000 UK Household debt to GDP Q1 1-2001 Q4 4-2001 Q3 3-2002 Q2 2-2003 Q1 1-2004 Q4 4-2004 Why QE isn’t leading to inflation Q3 3-2005 Q2 2-2006 Source: Haver Analytics. UK: Household & NPISHs Outstanding as a % of SA GDP (%) March 2012 Q1 1-2007 Q4 4-2007 Q3 3-2008 Q2 2-2009 Q1 1-2010 Q4 4-2010 Q3 3-201133
    • % -20 -15 -10 -5 0 5 10 15 20 25 1729 1736 1743 1750 1757 1764 1771 1778 1785 Source: MeasuringWorth as at 31 December 2012 1792 Gilt market bubble? 1799 1806 1813 1820 1827 1834 1841 UK Real Yields: Long-dated Gilts - RPI 1848 1855 1862 1869 1876 1883 1890 1897 1904 1911 1918 1925 1932 1939 1946 1953 1960 1967 1974 1981 1988 1995 2 2002 2 200934
    • Hedged & wedgediBoxx £ Non-Gilt Index v Market iTraxx Europe Index 275 220 200 250 180 225 160bps 200 140 175 120 150 100 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 2 Jan 12 Feb 12 2 Mar 12 2 Apr 12 2 May 12 2 May 12 2 Jun 12 2 Jul 12 2 Aug 12 2 Sep 12 2 Oct 12 2 Nov 12 2 Dec 12 2 Non-gilt Non gilt (LHS) European main (RHS)Source: Markit, Bloomberg, iBoxx and Barclays as at 31 December 2012 35
    • Important information pThis document is not intended for retail distribution and is directed only at investment professionals. It should not be distributed to, orrelied upon by, private investors. The information in this document is based on our understanding of the current and historicalpositions of the markets. The views expressed should not be interpreted as recommendations or advice. All data in this presentationis sourced to Kames Capital unless otherwise stated. The views expressed and information provided are accurate at the time ofwriting. Past performance is not a guide to future performance. The value of investments and the income from them may go down aswell as up and is not guaranteed.Kames Capital is an AEGON Asset Management company and includes Kames Capital plc (Company Number SC113505) andKames Capital Management Limited (Company Number SC212159). Both are registered in Scotland and have their registered officeat Kames House, 3 Lochside Crescent, Edinburgh, EH12 9SA. Kames Capital plc is authorised and regulated by the FinancialServices Authority (FSA reference no: 144267). Kames Capital plc provides segregated and retail funds and is the AuthorisedCorporate Director of KC t Di t f Kames C it l ICVC an O Capital ICVC, Open E d d I Ended Investment Company. K t tC Kames Capital M C it l Management Li it d provides t Limited idinvestment management services to AEGON, which provides pooled funds, life and pension contracts. Kames Capital ManagementLimited is an appointed representative of Scottish Equitable plc (Company Number SC144517), an AEGON company, whoseregistered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (FSA reference no: 165548).FP ID: 2013/15003 36