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Henderson global investors newcits 1110

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  • 1. November 2010 Managing Absolute Return in the Fixed Income Space Stephen Thariyan Head of Credit
  • 2. Making money in credit – the story so far
    • Part 1
      • Dramatic re-pricing of the asset class
      • Low interest rates stimulate the economy and lead to a “grab for yield”
      • Corporate bonds prices rally on strong demand – relatively fairly priced?
      • Government bond rally has driven a lot of credit’s total return
    • Part 2
      • Volatility predominates as micro, macro and technical factors impact liquidity
      • Volatility invariably leads to mispricing
      • Credit funds should exploit volatility arising from macro, corporate and liquidity concerns
  • 3. Source: Merrill Lynch, as at 31 October 2010 % Now, more than ever, active management is essential The opportunity An unprecedented re-pricing of credit Historical sector spreads Opportunity Vehicle Where we expect spreads to go Security selection Security selection Sector selection Security selection Asset allocation Sector selection Security selections Core credit index funds Absolute return credit funds Core plus credit Fund
  • 4.
    • Volatility in credit markets will provide good alpha generating opportunity for Credit Alpha Fund
    Choice of manager and strategy is key iTraxx main weekly range bp Looking ahead Expect trend of recent volatility to continue (5-20bps per week) An exception as opposed to the norm. Low volatility (average 1.5bp weekly range in iTraxx Main). Few opportunities in credit led to excessive leverage and strategies which strayed from the path Volatility is here to stay The opportunity Source: Bloomberg, as at 30 September 2010
  • 5. Diverse and experienced team of credit specialists Source: Henderson Global Investors, as at 16 November 2010 (* includes tenure at New Star) ** Includes ABS team Portfolio managers supported by 24 credit specialists** Core Credit Team Metals & mining, building materials, paper, packaging (15,1) Andrew Griffiths Credit analyst Financials, insurance (7,2) Natalie Wilson Asset management – credit analyst, accountancy Financials, insurance (12,7) Richard Thomson Asset management – credit analyst Capital goods, aerospace and defence, building and construction, paper, packaging (7,2) Joanne Tuitt-Persaud Asset management, business restructuring Retail (3,1) Aman Mahal Asset management Utilities, energy, steel (4,4) Kalvi Nadarajah Asset management Telecoms, media, technology, gaming (11,5) Marc Dallon Asset management, accountancy Consumer products, tobacco, transport, travel and leisure, healthcare, support services (13,5) James Briggs Retail Credit Team Banking, consultancy Retail, healthcare (loans) (17,1) Stef Abelli Corporate credit and structured credit Building materials, TMT (loans) (19,9) David Milward Asset management Portfolio manager (5,6*) Ben Pakenham Asset management – credit, equities Portfolio manager (18,8*) James Gledhill Asset management Portfolio manager (8,8) Jenna Barnard Asset management - credit, accountancy Head of Retail, portfolio manager (17,13) John Pattullo Leveraged Loans Team Asset management - credit dealer Portfolio manager (10,10) Philip Payne Asset Management - credit dealer Portfolio Manager (8,8) Tom Ross Asset Management Portfolio Manager (8,7) Chris Bullock Asset Management Head of Credit (19,3) Stephen Thariyan Investment Banking, buy-side Publishing, gaming + leisure, utilities (loans) (20,6) Sally Tankard Chemicals, paper & packaging, business services (loans) General industrials, auto, consumer products (loans) Responsibility Background Yrs credit experience, yrs with Henderson Nicholas Ware Frederickson Elissa Johnson Hedge fund, banking, private equity Hedge fund, investment banking, buy-side (10,1) (16,1)
  • 6. Credit Alpha Longs Shorts Thematic Pair Trades Tactical Thematic Pair Trades Tactical Source: Henderson Global Investors, as at 31 October 2010 Strategies Instruments Fund details Investment grade bonds High yield bonds Credit Default Swaps Credit Default Swap indices Credit Default Swaps Credit Default Swap indices July 2007 Inception Stephen Thariyan / Tom Ross / Chris Bullock Manager 3-month Libor +5% (gross) Performance target Daily dealing, daily notice Liquidity 70-100 Typical number of positions Annual management fee: 1.5% Performance fee: 20% of net performance over Libor (with high water mark) Fees £380m AUM 3% - 6% Typical Vol Pooled (UCITS III OEIC) Product sterling, euro, US dollar Share classes available +/- 0.5x / 2-3x Typical exposure (Net/Gross)
  • 7. ‘ Pair trades’. Going long a credit that the fund favours versus short a credit it does not. Typically pairs are either in the same or similar sectors. Comprises both long and short positions Will also express ‘relative value’ between sectors Thematic Pair Trades Short time horizon Long time horizon Credit Alpha Multi strategy credit - the three strategies Short term positions in liquid securities that exploit technical imbalances in the market Tactical Source: Henderson Global Investors, as at 31 October 2010 0 200 0 200 0 200 Gross exposure by strategy
  • 8. Pair trades example Source: Bloomberg, as at 31 August 2010 Long BMW vs short Tomkin
    • Pair trade example:
    • A 4% position which has contributed 29bps to fund performance
    • Position currently 2.8% following partial close out on 20/07/10
    Long BMW vs Tomkin Spread (bp)
  • 9. Pair trades example Source: Bloomberg, as at 31 August 2010 Long Iron Mountain vs short Stena
    • Pair trade example:
    • A 2% - 3.5% position which has contributed 20bps to fund performance
    • Long non-cyclical vs short cyclical
    • Position remains open but is close to target of -100 spread
    Long Iron Mountain vs short Stena Spread (bp)
  • 10. Credit Alpha Long risk BP – Intra day chart Spread (bp) Thematic example Source: Bloomberg, as at 31 August 2010 Risk reduced as volatility of trade increased
    • Thematic trade example:
    • A 2% - 3% position which has contributed 11bps to fund performance
  • 11. Heidelberg
    • Tactical example:
    • Heidelberg
      • A 1% position which has contributed 10bps to fund performance
      • Combination of analysts positive view on Heidelberg flow and positioning information, we were able to make a number of trades in the liquid Heidelberg 2017 issue
      • Rationale: Taking a contrarian position to market maker positioning over a period of time. Information gathered by Tom Ross and the 2 credit dealers.
    Price (p) Tactical example Source: Bloomberg, as at 31 March 2010 Credit Alpha
  • 12. Credit Alpha Current structure of portfolio Thematic 75% Pair Trades 50% Tactical 9% EUR 104% GBP 5% USD 24% Source: Henderson Global Investors, as at 31 October 2010 Gross exposure by strategy Gross exposure by currency Corporate bonds 26% CDS 89% CDS index 18% Gross exposure by investment type Current net = -8%, current gross = 132% Investment grade = 99% High yield = 33%
  • 13. Monthly NAV performance Historic performance since inception Source: Morningstar, Datastream, Henderson Global Investors, as at 31 October 2010 Note: Performance is based on close of business pricing. Official A share class performance after the deduction of AMC and performance fees is shown after March 2010. % Credit Alpha 23.66 0.42 0.65 1.13 2.35 1.79 3.65 3.51 4.96 3.28 -0.63 -0.84 1.33 2009 0.92 0.06 -0.34 0.45 0.66 0.22 -0.13 N/A N/A N/A N/A N/A N/A 2007 -1.25 0.05 Jun -1.89 0.93 May 1.66 1.04 Apr 1.57 0.25 Mar 1.16 0.85 Feb 2.23 -0.64 Jan 2010 2008 % 0.26 -1.57 Oct N/A -0.01 Nov 7.81 -2.92 Total -0.23 -3.74 0.44 -0.23 N/A 1.28 0.74 1.89 Dec Sept Aug Jul
  • 14. Credit Alpha attribution by trade type Source: Henderson Global Investors, 31 October 2010 Note: Attribution uses desk estimates which have been calculated arithmetically Credit Alpha Attribution: Long / Market Neutral / Short Spreads widened on month
  • 15. Credit Alpha Distribution of monthly returns bp Distribution of monthly returns Source: Henderson Global Investors, as at 31 October 2010 Note: Figures are produced by the desk, from the P&L attribution before the deduction of Annual Management Charges (AMC) . mean 25 > 50
  • 16. Henderson Horizon Euro Corporate Bond Fund Key features
    • Euro Corporate Bond Fund profile:
    • Benchmark: iBoxx Euro Corporates Index
    • Target: Benchmark + 1% (net of fees)
    • Universe: At least 80% invested in investment grade bonds issued in EUR
    • UCITS III (Sophisticated)
    • Non-Euro bond holding: up to 20%
    • Cash holding: Max 10% - average 2 – 5%
    • Duration range (relative): +/- 2 years
    • Ability to use credit derivatives
    • Tracking error range: typically 2-3%
    • Base currency: EUR
    • Launch date: 18 December 2009
    • Structure: Horizon SICAV fund
    • Domicile: Luxembourg
  • 17.
    • Emphasis on improving credit stories
    • Focus on positive event risk and attractive bond structures
    • Senior Irish bank paper is main “peripheral” risk
    Security selection Current fund positioning Source: Henderson Global Investors, as at 31 October 2010 Note: Horizon European Corporate Bond Fund. Weights are shown relative to the iBoxx € Corporates index Security selection
    • Focus on M&A and shareholder friendly strategy
    • Cautious of companies exposed to political and regulatory risk
    • No credit value in many large-cap domestic issuers
    1.37 SSELN Scottish & Southern 1.33 RENAUL RCI Banque 1.52 NWIDE Nationwide Building Society 1.51 SYMRIS Symrise 1.78 IIILN 3i Group 1.88 AIB Allied Irish Bank 2.02 BKIR Bank of Ireland 1.59 EIB European Investment Bank 1.39 LLOYDS Lloyds Banking Group 1.43 BAA BAA Airports % relative Ticker Top 10 overweight exposures -2.42 RABOBK Rabobank -1.74 BNP BNP Paribas -1.15 ACAFP Credit Agricole -1.18 ENIIM ENI -1.26 ALVGR Allianz -1.29 RWE RWE -1.42 REXLN Rexam -1.46 SOCGEN Societe Generale -1.72 VW Volkswagen -3.11 DB Deutsche Bank % relative Ticker Bottom 10 underweight exposures
  • 18. Horizon Euro Corporate Bond Fund Relative performance Horizon Euro Corporate Bond Fund % Source: Morningstar, Henderson Global Investors, as at 30 September 2010 Note: The benchmark is iBoxx € Corporates Index. Performance is based on net of fees, gross income reinvested. Since inception figures are annualised. 5.82 6.55 2.86 Benchmark 10.54 11.57 5.03 Fund Since inception (18/12/09) YTD 3-month %
  • 19. Absolute return YTD 2010 relative to peer group Absolute return relative to peer group Competitor performance Source: Morningstar Workstation, comparison with the Morningstar Fixed Income EUR-Corporate Universe , as at 31 October 2010. Note: 2010 YTD % Total return (Net of AMC) Henderson Horizon Euro Corp Bond Fund (Class A Acc) iBoxx Eur Corp Index
  • 20. Appendix
  • 21. Henderson Credit team A successful credit fund management team Stephen Thariyan Head of Credit Stephen Thariyan joined Henderson in 2007 as Head of Credit, from Rogge Global Partners where he was a Portfolio Manager of Global Credit and its Absolute Return fund. Stephen started his career in 1988 at Ernst & Young as a Trainee Accountant and then moved to Chevron Corporation as a Senior Auditor. He moved to Gulf Oil in 1994 as a Business and Economic Adviser and then to NatWest Markets as a Director and Senior Credit Analyst. Stephen graduated from the University of Newcastle-Upon-Tyne with a BA (Hons) in Accountancy and Financial Analysis. Thomas Ross Portfolio Manager, Absolute Return Credit Tom has been co-managing Henderson's absolute return credit funds since 2006. Prior to this he specialised in credit trading on Henderson's centralised dealing desk. Here he was able to build strong relationships with market participants in order to gain flow and positioning information to supplement credit views. He joined Henderson in 2002. Tom graduated from Nottingham University with a BSc (Hons) in Biology and is a CFA charterholder. Christopher Bullock Portfolio Manager, Absolute Return Credit and European Corporate Bond Chris joined Henderson Global Investors in 2003 as Credit Analyst, focusing on the investment grade and high yield industrial sectors. He has been co-manager on the absolute return credit funds since 2006 and launched the Euro Corporate Bond fund in late 2009. He continues to provide analytical coverage for the Chemical sector. Chris trained as a management accountant with Zeneca and Accenture, before joining Insight Investment as a credit analyst. Chris graduated with a BEng (Hons) in Chemical Engineering from Aston University and is both a CFA charterholder and member of the Chartered Institute of Management Accountants. Significant combined experience
  • 22. Henderson Global Investors Credit capabilities Core credit Absolute Return Credit Global corporate bond coverage € 3218.3m € 632.2m € 3793.0m € 436.8m € 7.2m Source: Henderson Global Investors, as at 31 October 2010 * As at 30 June 2010 Core plus credit Retail credit € 4,692.2m* Segregated mandates Credit Alpha Fund (UCITS III) 3-month Libor +5% Investment grade credit iBoxx Index +1% High Alpha Credit Fund iBoxx Index +2% Variety of strategies Variety of % targets Retail Credit Outperform peer group Credit Long Short Fund +10-12%
  • 23. Credit Alpha Gross & net credit exposure Source: Henderson Global Investors, as at 31 October 2010 Note: Exposure figures are produced by the desk Gross & Net credit exposure Net HG: Max 33%, Min -26% Net HY: Max 19%, Min -13% Gross HG: Max 270%, Min 37% Gross HY: Max 51%, Min 12%
  • 24. Credit Alpha Relative gross exposure by strategy Source: Henderson Global Investors, as at 31 October 2010 Note: Figures are produced by the desk Gross exposure by strategy %
  • 25. Attribution Credit Alpha Fund attribution % Source: Henderson Global Investors, as at 31 October 2010 Note: Shows relative return versus 3-month Libor, figures are produced by the desk, from the P&L attribution before the deduction of Annual Management Charges (AMC) . Due to the return on cash held and discrepancies between external and internal 3-month Libor figures, relative performance from the P&L differs from the performance produced from the close of business prices. Credit Alpha
  • 26. Credit Alpha Cash vs Bonds invested Source: Henderson Global Investors, as at 31 October 2010 Note: Figures are produced by the desk % Exposure to physical bonds
  • 27. Credit Alpha Average fund size (£’000) Source: Henderson Global Investors, as at 31 October 2010 Note: Figures are produced by the desk £ Assets under management
  • 28. Net performance and fund spread DV01 Net performance and fund spread DV01 Source: Henderson Global Investors, as at 31 October 2010 Note: Performance is based on close of business pricing. Performance prior to April 2010 was adjusted by the desk to reflect the deduction of Annual Management Charges (AMC) and performance fees . Official A share class performance after the deduction of AMC and performance fees is shown after March 2010. The spread DV01 figures are produced by the desk, from the P&L NAV, p bp Credit Alpha
  • 29. CDS Regulation and Standardisation
    • Standardisation
      • CDS contracts are now standardised (maturities, coupons, restructuring, trade with accrued), which allows netting of contracts without any hidden risks (eg. annuity streams)
    • Counterparty credit risk (CCR)
      • The largest risk to the CDS market and its liquidity highlighted by September 2008. Since then banks are more active at hedging their CCR via CVA (credit value adjustment) desks.
      • At Henderson all of our ISDA and CSA agreements with our counterparties include language of bilateral collateralisation (calculated and actioned on a daily basis).
    • Centralised counterparty (CCP)
      • A panacea or simply moving the risk into one place? CDS has the propensity for jumps in valuation unlike many other OTC derivatives (Lehman CDS traded 300bps just days before defaulting). Concentrating this risk into a single place seems counterintuitive.
    • Transparency
      • Over 90% of all CDS trades are reported to Depository Trust & Clearing Corporation (DTCC). This data is publically available - see overleaf for an example of a portion of the data available.
  • 30. CDS Transparency Analysis of DTCC CDS data Source: JP Morgan, Depository Trust & Clearing Corporation 1 October 2010
  • 31. Net performance from August 2008 – August 2009 NAV performance from August 2008 – August 2009 Sep-Nov: -550bp Lehman -185bp Wamu -20bp Brafbi -35bp Dresdner -60bp HY Chem 2Y CDS -95bp General basis move -200bp Dec-Jan: +200bp Winners: CDS - Chem, Insurance, Steel New issues - Tobacco/Telco Losers: Structural book -165bp (ABS/Angiri/Suncorp) Feb-Mar: -230bp Sub-bank debt sell-off Angiri/Dresdner/Lloyds/Friends Prov Pair trade book: +50bp contribution End Mar-Aug: +1300bp Thematic: ~ 450bp (long fins short cyclical) Pair Trades: ~200bp Structural: ~150bp Tactical: ~500bp (new issues 518bp, short DSG 60bp) General basis move: ~500bp Source: Henderson Global Investors, as at 12 August 2009 Note: Shows net return, performance is after the deduction of AMC NAV, p Credit Alpha
  • 32. Trading discipline and risk controls Process Example Risk Controls Review fundamentals Price action relative to market Price / spread movement ‘ Hit first bid’ mentality bp impact on fund Screening tool Instrument selection Timeframe Stop-loss / target Liquidity of instrument Exit objective / stop-loss Recovery value Specific name hedge (RV) trade Index hedge Sectoral balance P&L DV01 VaR Tracking error Duration contribution Scenario Analysis Analyst Recommendation Position sizing Hedging consideration Position monitoring Ongoing RV Price target reached Sell 1.25% No Risk metrics Sell Buy Price target reached
  • 33. Which companies do we favour/should we avoid? Security selection Do corporate bonds look expensive/cheap? Asset allocation Sector selection Which sectors do we have a preference for? Flexible process change emphasis as required Top-down market view Bottom-up stock selection Corporate bond management – combine discipline and flexibility Credit investment process
  • 34. Security selection Asset allocation Sector selection Corporate bond management – a decision framework Credit investment process Valuations Market dynamics Corporate health Economic environment Company spread Relative value across curve and security type Company liquidity Refinancing needs Is the company well regarded by the market? Management Balance sheet Cashflow Unique strengths or vulnerabilities? Cyclical / non-cyclical Sector spread Relative volatility Volume and purpose of debt issuance? Investor positioning Is the sector in or out of favour? Fundamental outlook Ratings trends What stage in the leverage cycle? Macro environment an opportunity or threat? Key sector themes? Regulatory and political impact Market spread Expected default Are companies issuing? Fund flow direction Who is buying and what is the appetite? Where are we in the credit cycle? Ratings up/down ratio Direction of earnings and cash flow? Is the overall outlook favourable for credit? Assess economic, political and regulatory risks
  • 35. Macro Environment Corporate balance sheet Supply & demand Valuation + Ultra low rates and quantitative easing - Western market recovery fragile, risk of further poor economic data in 2H10 - Structural unemployment and high fiscal deficits + Decisive action by management teams + Priority on cost reduction, cash flow and liquidity + Demand stabilised / earnings improving - Top-line growth elusive / M&A appetite increasing + Sustained demand for corporate bonds + Issuance requirements relatively low, less so for senior financials - Positioning overweight and a lot of new entrants + Credit spreads remain elevated versus expected defaults + Overall yield attractive versus cash or government bonds Asset Allocation European Credit outlook Where we are in the credit cycle?
  • 36. Important Information This document is solely for the use of professionals and is not for general public distribution. This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Prospectus before investing. Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management plc (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), Henderson Alternative Investment Advisor Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no. 2606646) (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE and authorised and regulated by the Financial Services Authority) provide investment products and services. Telephone calls may be recorded and monitored. Henderson Global Investors 201 Bishopsgate, London EC2M 3AE Tel: 020 7818 1818 Fax: 020 7818 1819

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