Glmf presentation citywire italy jl oct 12


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Glmf presentation citywire italy jl oct 12

  1. 1. A truly global approach to bond investingAndrea Orsi, Associate Sales Director - ItalyOctober 2012
  2. 2. Introduction to M&G Fixed One of Europe’s leading Total assets: income asset managers €252bn €152.2bn One of Europe’s largest Investment High Corporate grade yield corporate bond fund bonds: managers €87.3bn €6.2bn One of Europe’s largest Fixed income fixed income credit research teams analysts based in London 86 Access to Prudential An active global reach resources in the US, Asia and South Africa2 Source: M&G, as at 30 June 2012
  3. 3. M&G Global Macro Bond Fund Fund facts • Fund manager: Jim Leaviss • Deputy fund manager: Mike Riddell • Launch date: October 1999 • Fund structure: UCITS III • Size: €277 million • Sector: Morningstar Global Bond sector3 Source: M&G as at 30 September 2012. Ratings as at 30 September 2012 and should not be taken as recommendations.
  4. 4. Fund manager Jim Leaviss • Jim joined M&G in 1997 from the Bank of England. He is Head of M&G Fixed Interest • Manager of the M&G Global Macro Bond Fund since October 1999 • Manager of the M&G Gilt & Fixed Interest Income Fund since April 1998 • Co-Manager of the M&G UK and European Inflation Linked Corporate Bond Funds since September 2010 • Has 20 years experience in fixed income markets4
  5. 5. M&G Global Macro Bond Fund €A Acc Risk-adjusted performance vs. sector over 1y, 3y and 5y 15 1 year 14 Annualised returns p.a. (%) 13 12 3 years 1 year 11 10 3 years 9 5 years 8 5 years 7 6 7 8 9 10 Annualised volatility of returns p.a. (%) M&G Global Macro Bond Fund Morningstar Global Bond sector average Strong absolute, relative, and risk-adjusted returns5 Source: Morningstar, Inc., Pan-European database, Global Bond sector, as at 30 September 2012. M&G Global Macro Bond Fund returns are for the euro A share class, gross income reinvested, price to price.
  6. 6. A truly global approach to bond investingJim Leaviss, Fund ManagerOctober 2012
  7. 7. Central Bank regime change7
  8. 8. Central Bank regime change: the 4 regimes 1880-2012 0.6 The Volker years and inflation fighting Central Banks 1981-2010 0.5 Post WWII debt reduction and financial repression Frequency distribution 0.4 1945-1980 The Gold Standard. Monetary stability and fixed exchange rates 0.3 The credit crisis and 1880-1939 sovereign debt crisis 2008-2012 0.2 0.1 0.0 -5 -4 -2 0 2 4 6 8 Real interest rate (deposit rate less RPI)8 Source: International Monetary Fund (1880-2010), M&G (2008-2012). Real interest rates refer to the UK.
  9. 9. What are the side effects of the central bank medicine?Source:
  10. 10. Reliance on imported oil in the 1970s did not necessarily cause inflation 16% 120% Imported oil as a % of total oil consumption 14% 100% 12% 80% Inflation rate % 10% 8% 60% 6% 40% 4% 20% 2% 0% 0% UK Australia Canada US Japan Germany Average Inflation (1975-1983), LHS Dependence on imported oil (1974-1980), RHS So what did cause average inflation rates of 8% and higher?10 Source: Bloomberg, BP Statistical Review, Nomura Research as at April 2011
  11. 11. "Inflation is always and everywhere a monetary phenomenon" Milton Friedman 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% UK Australia Canada US Japan Germany Average excess money supply growth (1975-1983) Average inflation (1975-1983) The role of policymakers in causing or controlling inflation cant be underestimated11 Source: Bloomberg, Nomura Research as at April 2011
  12. 12. Inflation protection is cheap 5 year breakeven rates 3 RPI* 2.5 UK (RPI) 2 CPI target US % 1.5 Germany UK (CPI) 1 0.5 0 The market expects inflation to average significantly below the ECB’s and BOE’s target over the next five years12 Source: M&G, as at 30 December 2011. Source: Bloomberg, as at 30 September 2012, *based on the assumption of a differential of 1% between UK RPI and UK CPI
  13. 13. Beware of the misleading emerging market narrative13
  14. 14. China – the world’s biggest credit bubble since 2009 Annual change in private credit, 2009-11 % of GDP - World Economic Outlook 2012 55 2011 2010 45 2009 35 25 15 5 -5 The question is not if, but when China’s bubble will burst14 Source : IMF Global Financial Stability Report, April 2012
  15. 15. China’s extraordinarily growth is now held up by credit Chinese GDP growth rate should be nearer to 5% than 10% Credit to GDP in % (2010) relative to per capita income in USD Ireland 250 Spain UK Portugal Credit to GDP (%) 2010 US 200 China* HK Japan Korea* 150 100 50 0 1000 11000 21000 31000 41000 51000 61000 Per capita income (USD) The Chinese government has a lot of policy firepower – but the days of 10%+ growth are behind us15 Source : World Bank, IMF, HSBC, January 2012. *China and Korea data have been adjusted by HSBC.
  16. 16. EM external sovereign debt credit spreads are reaching pre-crisis levels 2000 1800 1600 1400 Z-Spread in bps 1200 Bps 1000 800 600 400 200 0 Brazil 8 ⅞ 04/15/24 Colombia 8 ⅛ 05/21/24 Philippines 10 ⅝ 03/16/25 Mexico 8 09/24/22 Peru 7.35 07/21/25 Barely compensating for liquidity risk, let alone credit risk www.bondvigilantes.com16 Source: Bloomberg, M&G, as at 30 September 2012.
  17. 17. Emerging market local currency debt – what goes in can also come out (but not very easily) Foreign holdings as % of government bonds outstanding % (end of period) 2007 2008 2009 2010 2011 Q1 2012 Hungary 30 22 20 23 34 36 Poland 20 14 18 26 30 32 South Africa 13 16 15 23 25 22 Turkey 13 10 9 13 16 23 Brazil 5 7 9 11 11 12 Mexico 11 12 12 19 26 29 Peru 30 30 21 46 48 58 Indonesia 16 17 19 31 31 29 Malaysia 15 14 17 22 26 36 Thailand 0.20 2 2 6 8 8 Emerging market economies have changed for the better – but valuations have run ahead of fundamentals17 Source: JP Morgan, September 2012.
  18. 18. EM local currency sovereign debt Correlation with equities 320 7500 300 7000 EM local currency sovereign debt index level 280 6500 260 6000 DAX index level 240 5500 220 5000 200 4500 180 4000 160 3500 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 JPM GBI-EM Global Diversified Composite Index (lhs) German equities (DAX) (rhs)18 Source: Bloomberg, as at 30 September 2012. Source: M&G, as at 30 December 2011.
  19. 19. Eurozone crisis19
  20. 20. 20 Source:, as at September 2012.
  21. 21. Eurozone unemployment poses political danger 25 23 Spain 21 Greece 19 17 Eurozone 15 % France 13 11 Italy 9 7 Germany 5 With millions of young adults unemployed, a lost generation in Europe cannot bear any more pain21 Source : Bloomberg, as at 31 August 2012
  22. 22. If you cant devalue your currency, devalue your wages Labour costs, rebased to 100 (base year 2000) 170 170 160 160 150 150 Rebased to 100 140 140 130 130 120 120 110 110 100 100 00 02 04 06 08 10 12 German France Spain UK Italy Greece But whilst this will restore competitiveness in the long run, its bad for growth in the short term22 Source: Eastspring Investments, as at September 2012.
  23. 23. Credit overcompensates for default risk23
  24. 24. Investment grade credit still looks attractive 5 year default rate, assuming a 40% recovery rate 35% 30% 27.0% 25% 21.6% 20% 15.2% 15% 11.0% 10.0% 10% 6.2% 5% 2.0% 0.3% 0.8% 0% AA A BBB Average default rate (1970-2011) Implied default rate: £ Implied default rate: €24 Source: 5 year rolling default rate –2011. Source: M&G, as at 30 December Moody’s. Implied default rates - Bank of America Merrill Lynch/Bloomberg, as at 30 September 2012
  25. 25. M&G Global Macro Bond Fund25
  26. 26. Performance levers to pull Invests globally in government bonds, corporate bonds, high yield, emerging market debt, inflation-linked bonds Positive or negative duration Positive and negative positions in sovereign and corporate debt Can invest in both developed market and EM currencies Ability to perform in both rising and falling markets26 Source: M&G.
  27. 27. Fund manager objectives Aims to outperform the Aims to deliver steady returns average fund in its peer group with lower volatility than the as well as the fund’s average fund in its peer group composite benchmark throughout the economic over the medium term cycle M&G Global Macro Bond Fund Aims to construct a diversified portfolio by Aims to take high conviction investing in a range of liquid views. Not benchmark- fixed income assets across constrained geographies Total return focus27 Source: M&G, as at 13 January 2012.
  28. 28. A fully flexible global bond fund Historical credit risk and duration positioning 10 years 8 years 1 Feb 2009 (interest rate risk) 6 years 2 Jul 2011 Duration 4 years 3 2 years Sep 2012 0 years -2 years -4 years AAA AA A BBB BB B CCC Credit risk28 Source: M&G, as at 30 September 2012.
  29. 29. Fund positioning summary M&G Global Macro Bond Fund Key portfolio themes Currency breakdown 60 Low interest rate duration of around Duration 2.5 years 50 Central banks no longer care about Inflation inflation, so we have 19% in linkers 40 Government We prefer credit over government bonds. % bonds Reduced exposure further in September. 30 Investment We prefer corporate issuers – although 20 grade covered bonds + RMBS are good value Still overcompensates for default, but 10 High yield valuations have come closer to fair value We like Mexico – but have short positions 0 Emerging in Brazil, Indonesia, Russia, South Africa markets and Turkey -10 USD EUR JPY MXN CHF NOK SEK DKK AUD GBP Added European currencies on Currencies weakness over the summer29 Source: M&G, as at 2 October 2012.
  30. 30. M&G Global Macro Bond Fund check-list Managed by an experienced fund manager who has worked for more than two decades in the bond markets Provides access to all fixed interest asset classes and global currencies Aims to deliver attractive risk-adjusted returns throughout the economic cycle Has additional performance levers to pull, such as negative duration as well as negative positions in credit and currencies30 Source: M&G, as at 13 January 2012.
  31. 31.
  32. 32. Prices may fluctuate and you may not get back your original investment.This document is designed for investment professionals’ use only, not for onward distribution to any other person or entity. For Switzerland: Distribution of this document inor from Switzerland is not permissible with the exception of the distribution to qualified investors according to the Swiss Collective Investment Schemes Act, the SwissCollective Investment Schemes Ordinance and the respective Circular issued by the Swiss supervisory authority ("Qualified Investors"). Supplied for the use by the initialrecipient (provided it is a Qualified Investor) only. In Spain the M&G Investment Funds are registered for public distribution under Art. 15 of Act 35/2003 on Collective InvestmentSchemes as follows: M&G Investment Funds (1) reg. no 390, M&G Investment Funds (2) reg. no 601, M&G Investment Funds (3) reg. no 391, M&G Investment Funds (5) reg. no 972,M&G Investment Funds (7) reg. no 541, M&G Investment Funds (9) reg. no 930, M&G Global Dividend Fund reg. no 713 M&G Dynamic Allocation Fund reg. no 843, M&G Global MacroBond Fund reg. no 1056 and M&G Optimal Income Fund reg. no 522. The collective investment schemes referred to in this document (the "Schemes") are open-ended investmentcompanies with variable capital, incorporated in England and Wales. In the Netherlands, all funds referred to, with the exception of M&G Investment Funds (2), M&G Investment Funds(5), M&G Investment Funds (9) and the M&G Dynamic Allocation Fund, are registered with the Dutch regulator, the AFM. This information is not an offer or solicitation of an offer for thepurchase of investment shares in one of the Funds referred to herein. Purchases of a Fund should be based on the current prospectus. The prospectus, Key Investor InformationDocument (KIID), annual report and subsequent semi-annual report, are available free of charge, in paper form, from the ACD: M&G Securities Limited, Laurence Pountney Hill, London,EC4R 0HH, GB, or one of the following: M&G International Investments Limited, German branch, Bleidenstraße 6-10, D-60311 Frankfurt am Main, the German paying agent J.P. MorganAG, Junghofstraße 14, D-60311 Frankfurt am Main, the Austrian paying agent, Raiffeisen Bank International A.G., Am Stadtpark 9, A-1030 Wien, the Luxembourg paying agent, J.P.Morgan Bank Luxembourg S.A., European Bank & Business Center, 6 c route de Treves, 2633 Senningerberg, Luxembourg, the Danish paying agent, Nordea Bank Danmark A/S IssuerServices, Securities Services, Hermes Hus, Helgeshøj Allé 33, Postbox 850, DK-0900, Copenhagen C, Denmark, Allfunds Bank, Calle Estafeta, No 6 Complejo Plaza de la Fuente, LaMoraleja 28109, Alcobendas, Madrid, M&G International Investments Limited, 34 Avenue Matignon, 75008, Paris, France or from the French centralising agent of the Fund: RBC DexiaInvestors Services Bank France. For Switzerland: Please refer to M&G International Investments Ltd., Bleidenstraße 6-10, D-60311 Frankfurt am Main or, for Sweden, from the payingagent, Skandinaviska Enskilda Banken AB (publ), Sergels Torg 2, 106 40 Stockholm, Sweden. For Italy, they can also be obtained from one of the appointed paying agents, details ofwhich can be found by visiting the contact section on the following website: Before subscribing you should read the prospectus, which includesinvestment risks relating to these funds. This financial promotion is issued by M&G Securities Limited and M&G International Investments Ltd. Both are authorised and regulated by theFinancial Services Authority and have their registered offices at Laurence Pountney Hill, London EC4R 0HH. M&G International Investments Ltd. is also registered with the CNMV inSpain. Past performance is not a guide to future performance. Performance stats are quoted gross of Italian tax on capital gains© 2012 Morningstar. All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of Morningstar OBSR, (2) may not be copied or redistributed, (3) do notconstitute investment advice offered by Morningstar OBSR, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete,or accurate. Morningstar OBSR shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use. The MorningstarOBSR Analyst Rating™ is subjective in nature and reflects Morningstar OBSR’s current expectations of future events/behaviour as they relate to a particular fund. Because such events/behaviour may turn out to bedifferent than expected, Morningstar OBSR does not guarantee that a fund will perform in line with its Morningstar OBSR Analyst Rating. Likewise, the Morningstar OBSR Analyst Rating should not be seen as anysort of guarantee or assessment of the creditworthiness of a fund or of its underlying securities and should not be used as the sole basis for making any investment decision.An S&P Capital IQ fund grading represents an opinion only and should not be relied on when making an investment decision. Past performance is not indicative of future results. Currency exchange rates may affectthe value of investments. Copyright © 2012 by McGraw-Hill international (UK) Limited (S&P), a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.