2012 10 07 swisscanto (lu) bond invest global high yield city wire italy final

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2012 10 07 swisscanto (lu) bond invest global high yield city wire italy final

  1. 1. Short Duration Global High YieldAn Attractive Carry StrategySwisscanto Asset Management Ltd.Shahzada Omar Saeed, Head of High YieldCityWire Italy, 25th-26th October 2012
  2. 2. Agenda1. High Yield at Swisscanto2. The Case for Short Duration Global High Yield3. Investment Process4. Product(s) and Performance5. Appendix - The Case for Global High Yield2© Swisscanto Asset Management AG
  3. 3. Lead Managers Profile Consistent & Solid Track Record of Alpha Generation12.00% 1080bps10.00% 950bps Shahzada Omar Saeed8.00% Head of High Yield Omar Saeed (1975), MBA in Financial Management, is the lead manager for the Swisscanto (CH) Institutional Bond Fund -6.00% Global High Yield I and Swisscanto (LU) Short Duration Global 462bps High Yield H CHF/EUR/USD B and J 325bps 327bps4.00% Previously he worked for Western Asset Management Company in London as a High Yield Portfolio Manager, where he was responsible to co-manage euros800m in High Yield and2.00% leverage loan portfolios. He gained similar experience at Foreign & Colonial Asset Management where he was Deputy Manager for the Global High Yield retail fund. In addition Omar gained industry experience at Standard & Poor’s Rating Services0.00% F&C Maximum Western Asset Western Asset Swisscanto (CH) Swisscanto (LU) in London. Omar received his MBA from Greenwich University, Income Fund European High European Institutional Bond Invest Short Pakistan Campus of Southeastern University, Washington D.C. (Apr 06-Apr 07)Yield Portfolios Leverage Loan Global High Duration Global in 1998 with Distinction in Financial Management. (internal) Fund (internal) YieldBond Fund High Yield Fund Before fees & expenses (Jun 07-Jul 09) (Oct 07-Jul 09) (Jan 10 - to date) (Jan 11 - to date) Joined Swisscanto: 2009 Professional experience: 13 years 3 © Swisscanto Asset Management AG
  4. 4. Swisscanto – High Yield Team Roland Hausheer Senior Portfolio Manger Roland Hausheer, (1973), lic. oec. et lic. iur. HSG, is a Director and member of the Senior Management. As a senior portfolio manager within the high yield team he covers the airlines, energy and transportation sectors. Roland began his career in the financial industry as credit analyst at RMF Investment Management, Pfaeffikon (SZ) and London. Prior to that, Roland was part of the Global Proprietary Trading team at Credit Suisse, London and as Credit Analyst/Portfolio manager responsible for trading fundamental credit strategies in both high yield and investment grade names. Joined Swisscanto: 2011 Professional experience: 10 years Ju Lee, Ph.D Senior High Yield Portfolio Manger Ju Lee (1970), Masters in finance and Ph.D at HEC Geneva, is a Director and for Swisscanto (CH) Insititutional Bond Fund-Global High Yield and Swisscanto (LU) Bond Invest Global High Yield. She covers sectors of chemicals, metals & mining, papers and building materials. Prior joining Swisscanto, she was a senior financial analyst at Lombard Odier covering cyclical and defensive sectors. She also acquired a robust financial expertise at Capital Group Companies and Arthur Andersen as a research associate and auditor respectively. Various sectors covered are chemicals, utilities, E&P infrastructure, medical technology, auto & auto parts, beverages, insurance and media. .Joined Swisscanto: 2012 Professional experience: 15 years4© Swisscanto Asset Management AG
  5. 5. High Yield at SwisscantoNow a Top Quartile High-Yield Manager By Assets In EuropeHigh Yield AUM ($m) at Swisscanto$1400$1200$1000 $370.0 $800 $290.0 $600 $400 $475.0 $200 $0 June 2007 June 2008 June 2009 June 2010 Aug 2012 Swisscanto (CH) Institutional Swisscanto (LU) - Short Duration High Yield Investments in Bond Fund - Global High Yield I Global High Yield H Credit/Absolute Return Funds High Yield AuM’s more than tripled since January 2010 --- Committed & Growing Set of Investors5© Swisscanto Asset Management AG
  6. 6. Agenda1. High Yield at Swisscanto2. The Case for Short Duration Global High Yield3. Investment Process4. Product(s) and Performance5. Appendix – The Case for Global High Yield6© Swisscanto Asset Management AG
  7. 7. Case for Short Duration High YieldKey Investment Highlights:• Significantly reduces exposure to interest rate risk;• Significantly reduces volatility;• The sub-asset class makes an excellent substitute vs equities;• Significantly lowers credit risk;• Forms a strong alternative vs the leverage loan asset class/funds; Swisscanto is Currently the Only Provider for a Global High Yield Short Duration Fund7© Swisscanto Asset Management AG
  8. 8. Investment Rationale -Short Duration High Yield Currently Generates 55%-60% of Volatility, butInvestors Realise 85% of the Regular High Yield X Short Duration High Yield Generates 60% Volatility Regular High Yield Generates 50% Volatility for for 85% of The Regular Yield – In Other Terms Short Phase Stabile Similar Returns as Equities Duration High Yield Generates a Quarter of Volatility for 85% of Historical Equities Returns Short Duration High-Yield offers an Exceptional Risk Reward8© Swisscanto Asset Management AG
  9. 9. Investment Rationale -Asset class performance during recent periods of market stress Merril Lynch Benchmark Benchmark Benchmark Benchmark Benchmark Aug-Oct March 2011 May 2010 FY 2008 Indices data as of the 30th Credit Duration Spread Yield 2011 (Fukushima (European (peak of September 2012 ratings sell-off , rising peripheral systemic Systemic treasuires, crisis) crisis) crisis ME returns uprising) SWC Glb High Yield B+ 4.1yrs 620 bps 7.20% -11.8% -0.34% -3.23% -28.6% (Q432) SWC Global Short B+ 1.85 yrs 525 bps 6.20% -6.8% +0.24% -1.44% -13.1% Duration high-yield (Q471) A- 5.8 yrs 175 bps 2.80% -1.6% -0.12% -0.39% -4.9% Global IG (G0BC) BBB- 4.9 yrs 760 bps 8.50% -21% +0.64% -2.95% -25.7% Sub Financial (Q510) BB- 5.8 yrs 580 bps 6.90% -8.5% +1.70% -2.62% -19.0% Global EM (IM00) n.a. 2.1% -22% -0.15% -8.25% -39.1% Equities (S&P 500) (div yield) (intra (intra month month -18%) -6%) Only in a systemic crisis, investors are at risk of significant underperformance9© Swisscanto Asset Management AG
  10. 10. Investment Rationale –Short Duration High Yield versus Interest Rate Sensitive Asset Classes Short Duration High Yield’s negative correlation to interest rates would be at least similar to leveraged loans Source: J.P. Morgan; S&P/LCD High Yield serves as a strong hedge against rising treasury yields10© Swisscanto Asset Management AG
  11. 11. Investment Rationale -Lower Credit Risk – A Case of Temporal Seniority Despite MGM’s low credit ratings of B3/CCC+, this is not reflective of the group’s adequate liquidity profile to refinance its Short Term Obligations (We Hold the 10.375% May 2014 secured bonds)11© Swisscanto Asset Management AG
  12. 12. Investment Rationale -Short Duration Global High Yield vs Leverage Loans Key data points as at 30th September 2012 Swisscanto Short Duration Global High Yield US Leverage Loans Index Benchmark Income 7.35% 4.25% Yield 6.20% 5.9% Final maturity <=2.0 years 4.9 years Credit Spread Duration 1.9 yrs 3.75 yrs Spread vs Treasury 520bps 550 bps Leverage 3.8x 4.3x Average issuer ratings BB- B Average issue (Benchmark Credit Ratings) B+ B+ Interest Rate Risk low none (FRN structure) Liquidity (bid/offer) 1.5pts 2.0pts A. 12 mths Total return expectations (30.09.12) Approx 6.125% Approx 4.25% B. Default rate consensus (for next 2 years) 3.0% 2.5% C. Recovery rate 40% 70% D. Default loss (B x (100%-C)) 1.8% 0.75% Total return after default loss (A-D) Approx 4.375% approx 3.5% Short Duration High-Yield offers a strong alternative to Leverage Loans12© Swisscanto Asset Management AG
  13. 13. Investment Rationale –High Yield Fundamentals In Far Better Shape, Despite an on-going EUZone Recession • Corporate balance sheets are in solid shape, cash to debt ratios well above average • Cash levels can cover all debt maturities for 2012, however from H2 2013 - 2015 a maturity wall does exist in Europe • Fundamental Picture amongst US High Yield Corporates remains solid13© Swisscanto Asset Management AG
  14. 14. Investment Rationale:High Yield Fundamentals in Far Better Shape, despite an on-going EU ZoneRecession• High Yield issuers credit quality still improving upgrades still outpacing downgrades• Stress levels in covenants are very low compared to prior recessions14© Swisscanto Asset Management AG
  15. 15. Default Outlook: Swisscanto’s Conservative OutlookInverse Correlation of Defaults and Recoveries market estimates default Rates circa 2%-2.5% at recovery of 40%20% 18.2% 60%18% 50%16%14% 12.7% 40%12% 10.4%10% 30% 7.3% 8% 5.5% 20% 6% 3.9% 4.0% 4.0% 4% 2.4% 1.5% 1.7% 10% 1.4% 2% 0.7% 0.6% 0.7% 0% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E Aggregate Default Rate (LHS) Aggregate recovery (RHS) Source: Swisscanto S&P, Moody’s and the market forecasts 2012 defaults approx 2%-2.5% & recoveries at 40%15© Swisscanto Asset Management AG
  16. 16. However Draghis Inspired Rally Limits the Asset Classes SpreadTightening PotentialWhat Swisscanto short duration global high yield customised benchmark spread implies for future default rates:Actual Spread - Excess Spread* Default loss par- recovery rate Default Rate 525 bps - 250 bps = 275 bps / (100%-40%) = 4.6%*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps (For Regular High Yield) *as of 30th September 2012 At present our strategy offers a spread carry of 660bps, hence significant tightening potentialLets assume conservatively a recovery rate of 35% and a 4% default rate, our spread forecast:Default Rate x par-recovery rate = Default loss + Excess Spread* Forecast 4.0% x (100% - 35%) = 260 bps + 250 bps = 510 bps*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps (For Regular High Yield) *as of 30th September 2012 Swisscanto Forecasts Fair Value for Short Duration high yield market approx 500bps-550bps16© Swisscanto Asset Management AG
  17. 17. Does it? Can High Yield Tighten from Hereon?The old Cliché with a Twist…Don’t Fight the FED, Don’t Fight the ECB &Don’t Fight The Flow So Long as Flows Remain Positive, Markets Will Continue to Overshoot17© Swisscanto Asset Management AG
  18. 18. But For How Long?ECBs Recent Proposals… Draghhing Along Its not different this time: • ECBs proposals DO NOT help in Capital Raising for Banks; • Defacto will involve greater austerity and hence execution risks; • Will not resolve the impaired credit lending transmission mechanism; • Significant tail risks to Spains credit ratings being downgraded to junk in the next 6 months; • Probable Greek Exit in 2013;18© Swisscanto Asset Management AG
  19. 19. Spread Tightening Potential for Short Duration High-Yield Assessed Froma Volatility Perspective • With shorter business cycles and a prevailing debt crisis volatility likely to remain elevated for the medium term; • We assume an average VIX level of mid-20s over the coming years on an average basis; • Taking into account Short Duration High Yield sub-asset class generating 55%-60% lower volatility than regular high-yield, minimum excess spread investors should be compensated for conservatively is circa 250bps range;19© Swisscanto Asset Management AG
  20. 20. We Forecast Our Short Duration High Yield Fund GeneratingTotal Returns of circa 8% p.a. (EUR hedged) During The Next 12Months Total Return Forecast for 12 months Running income unhedged 6.20% Swisscanto short duration HY benchmark Yield (September 30th 2012 onwards) Interest rate differential + hedging transaction Hedging costs + yield differential -0.25% costs of 12bps p.a. Current Positive carry over benchmark +1.40% Typically averages 100 bps + benchmark Running income EUR hedged 7.35% Expected impact of change in 2yr treasury Assume 2 year treasury/bunds yields rise a -0.20% yields further 10 bps (0.25% on wt average) That is 50bps tightening of portfolio x duration of Expected impact of change in spreads +0.90% the benchmark (1.85 yrs) to 610 bps Expected return before fees 8.00% Source: Swisscanto20© Swisscanto Asset Management AG
  21. 21. Agenda1. High Yield at Swisscanto2. The Case for Short Duration Global High Yield3. Investment Process4. Product(s) and Performance5. Appendix – The Case for Global High Yield21© Swisscanto Asset Management AG
  22. 22. High Yield Investment Process – An Integrated Approach 50% • High Yield Team are members & contributors to the Credit, Equity & Alternative Investment Tracks Beta Analysis • Objective of these tracks is to gauge "Risk-off" & "Risk-on" nature of the market Portfolio Construction • Opinions and conclusion reached arent necessarily approx. 100 issuers binding, as nature of the asset class would demand a varying Portfolio Strategy implemented by Lead PM 50% • Bottom up emphasis of 50% does not imply 50% time Credit spent on bottom up process, almost 80% of time consumed by High Yield team is on stock selection Analysis & trade idea generation; Equal emphasis applied to Top Down and Bottom up Process22© Swisscanto Asset Management AG
  23. 23. High Yield Investment Process – An integrated approach Bottom up Analysis & Credit Beta Ratification Execution Portfolio Construction• Apart from the Macro • In-depth Credit • Challenged by co-manager, • Solid platform strategy, the high-yield team analysis and sector specialist from • Best execution via trading are contributors within the Investment Grade side desk • Relative Value alpha tracks for the credit, during daily and weekly Analysis sector, equity and alternative reviews investments strategy(s) • Decisions are immediately• Pragmatic and systematic binding for HY portfolio & Investment grade PM’s holding High Yield bonds • Systematic documentation Simple, Systematic and Replicable23© Swisscanto Asset Management AG
  24. 24. High Yield Issuer AnalysisAn equal emphasis on bottom-up processManagement Experience managing leverage Reporting style – transparency, accessibility Quality and depth of experienceCompany Analysis Relative competitive position Key profitability drivers Cyclicality of businessFinancial Profile Free cash flow (FCF) generation (EBITDA – cash interest- taxes- working capital adjustments- capital expenditures-dividends; (FCF/Sales, FCF total debt), net debt to EBITDA, Interest cover ratios Liquidity and covenant analysis (average debt maturity, borrowing capacity, headroom within Covenants, bondholder protection Seniority of debtAsset Valuation Calculate asset values based on total enterprise value (TEV) to EBITDA, its comparability with to public comparables, near term market transactionsRelative Value Across capital structure, (loans, senior secured, senior sub, sub, holdco etcAnalysis Compare value vs market and vs peers, convexity of the bond Analysing default probabilities via assessing Compensation per turn of leverage & implied equity cushion Fundamental rating (analog rating agencies) - Trading recommendations (over-/underweight). In Depth & Traditional Credit Analysis24© Swisscanto Asset Management AG
  25. 25. Portfolio Surveillance – Adequate Resources to Systematically Cover 130-140 Issuers Global High Yield fund: 84 High Yield 13 Investment Grade Short Duration Global High Yield: 72 High Yield 10 Investment Grade Total High Yield Issuers: 96 Significant Overlap Total Investment Grade Issuers: 16 Significant Overlap Total Issuers: 112 HY and IG Issuers Investment Grade & Xover Coverage Stefan Eichenberger (autos): 5 (Xover Issuers) Blaise Roduit Pharma/Consumer Staple): 4 (Xover Issues) Jerome Benathan (Energy & Telecoms): 6 (IG/Xover Issuers) Daniel Bjork (IG Financials): 13 (IG/Xover Issuers) Total Issuer Coverage: 28 (25% of issuers) Roland Hausheer: 35-40 Issuers Ju Lee: 35-40 HY issuers S.O. Saeed: 30 HY issuers (Energy, Airlines, Transportation, HY (Basic Industries, Capital Goods, (TMT, Cyclical Consumer & Services, Autos) Commodities & Building Materials ) & Packaging)25© Swisscanto Asset Management AG
  26. 26. Investment Process:Sell discipline an Absolute Key Relative Value Target• Valuation of bond, meets or exceeds our fair value target• And/or the credit risk associated with holding a bond is no longer compensating for the expected returns ; − for e.g. entire CCC overweight sold on April 21st 2010 (5 days prior to the recent market sell-off relating to soverign debt fears); − During May-July 2011 we built upto c19% cash and government bonds, anticipating a sell-off Revised credit opinion• Analyst/PM changes his original premise that effects our fundamental valuation We outperformed the benchmark 4 out of 6 times during periods of market stress26© Swisscanto Asset Management AG
  27. 27. Investment Process:Strong Sell Discipline Evidenced by Outperformance during times ofMarket Stress Cumulative Outperformance 1.00% +7bps -58bps 31.00% 0.50% 0.00% 30.00% Feb 10 May 2010 Nov 10 Mar 2011 July-Oct Apr-Jun12-0.50% 2011 +22bps 29.00%-1.00% +325bps-1.50% 28.00% Alpha-2.00% -47bps 27.00%-2.50% +96bps-3.00% 26.00%-3.50% +15bps 25.00%-4.00% Benchmark (CHF 100% Swisscanto CH Inst Global Benchmark (CHF 100% hedged) Swisscanto CH Inst Global High Yield Fund hedged) High Yield Fund * Before fees & expenses* Before fees & expenses Strong Investment Process Ensures Greater Consistency in Outperformance during Periods of "Risk-off"27© Swisscanto Asset Management AG
  28. 28. Investment Process: Consistent Implementation of StrategyPortfolio Positioning Since April 2012 Lowered duration, increased cash levels , improved credit ratings and increased allocations to secured bonds28© Swisscanto Asset Management AG
  29. 29. Portfolio Construction• Optimal diversification – we target issuers concentration at about 100 issuers (+/- 10) with High Yield accounting for 85 names (+/- 10) with the remainder comprising of top 15 (+/- 5) picks in the investment grade space• Allocate 5%-7% of portfolio for tactical capital structure and relative value arbitrage trades on a monthly basis• Consistent implementation of the macro- and credit-strategy• Neutral positioning of currencies• Efficient implementation through state-of-the-art tools• Cost-efficient execution of trades through own execution desk Optimal Diversification, Consistent and Efficient Implementation29© Swisscanto Asset Management AG
  30. 30. Agenda1. High Yield at Swisscanto2. The Case for Short Duration Global High Yield3. Investment Process4. Product(s) and Performance5. Appendix – The Case For Global High Yield30© Swisscanto Asset Management AG
  31. 31. Swisscanto (CH) Institutional Bond Fund - Global High Yield I(Global High Yield Fund)31© Swisscanto Asset Management AG
  32. 32. Swisscanto (CH) Institutional Bond Fund - Global High Yield IProduct Strategy Benchmark:• Actively managed and well-diversified multi-currency global high-yield bond fund Customized Global High Yield Benchmark: 66.67% Merril Lynch European currency 2% constrained, excluding financials• No LeverageLynch US HY 2% constrained, excluding financials + 33.33% Merril• Fully hedged in CHF• Benchmark: Customized Global CHF (Q432) from 01.02.2010 66.67% Merril Lynch• Merrill Lynch Global High Yield hedged in High Yield Benchmark: European currency 2% constrained , excluding financials + 33.33% Merril• Lynch managed and well-diversified multi-currency Global High Yield bond fund Actively US HY 2% constrained, excluding financials• Merrill Lynch Global Corp. hedged in CHF (Q432) from 01.02.2010• Minimum average ratings allowed : B-/B3• Minimum average ratings allowed : B-/B3• Min. 85% invested in high yield bonds (non-sovereign and non-government issuers)• Min. 85% invested in High Yield bonds (non-sovereign and non-government issuers)• Maximal bond weight: Weight in the benchmark index + max 3.0% (max 1% if rated CCC and below)• Maximal bond weight: Weight in the benchmark index + max 3.0% (max 1% if rated CCC and below)• ISIN:CH0030955865• Tracking Error ex ante <3%-4%• Tracking Error ex ante <3%-4%32© Swisscanto Asset Management AG
  33. 33. Performance – Remains Comfortably Top Decile (in local currencyterms) versus peers Minimum 10.7% is the cumulative differential in interest rates & hedging costs b/w CHF & USD Implying Our Returns Ahead of Lipper leader33© Swisscanto Asset Management AG
  34. 34. Performance –Performance vs Relevant European Peers (in LC terms), Since Takeover High Yield - Total Return Profile Minimum40% 3.0% Cumulative interest35% rate & hedging30% cost difference b/w CHF & EUR25% & GBP20% Implying we15% Rank #210% 5% 0%-5%-10%-15% 01.02.2010 01.04.2010 01.06.2010 01.08.2010 01.10.2010 01.12.2010 01.02.2011 01.04.2011 01.06.2011 01.08.2011 01.10.2011 01.12.2011 01.02.2012 01.04.2012 01.06.2012 01.08.2012 SWISSCANTO CH INS BD-GL HY-J ALLIANZ EURO HIGH YIELD-C ABERDEEN GL-SL EURO HY BD-A2 PICTET-EUR HIGH YIELD-P UBS LUX BOND FUND-EU HI YD-P BLUEBAY-HIGH YIELD BOND-B€ NEWTON GLBL HI YLD BD-£-INC F&C MAXIMUM INCOME BD-1-INC ING L RENTA-GL HI YLD-PC€H HSBC GIF-EURO H/Y BOND-IC ROBECO HIGH YLD BD-E€ KAMES HIGH YIELD GLOBL BD-A€ 34 © Swisscanto Asset Management AG
  35. 35. Swisscanto (CH) Institutional Bond Fund - Global High Yield IConsistent Investment Style and Strategy7th October, 2012 • Better than benchmark credit ratings in our fund:Key Portfolio Statistics Global High Yield Benchmark Fund BB- vs Benchmark B+Cash 7.30% 0.00% • Shorter duration than the benchmark, 0.4yrs-0.5yrs, allowing to reduce volatility & retain pull to parInvestment Grade 8.10% 0.00% featureBB 27.80% 49.00% • Retain a greater security and recovery profile for ourB 44.50% 37.50% fund. The benchmark consists of 30% secured bonds,CCC+/CCC 12.30% 13.50% we maintain circa 41% secured bonds (exceeding ourAverage Credit ratings BB- B+ 35%-40% targeted range)Average Duration Maturity 3.53yrs 4.17yrs • Retain NO active exposure to toxic & illiquid high yield rated financial tier-1 securitiesAverage Yield to Maturity 8.20% 7.20%Par weighted coupon 8.22% 7.67% • Retain a running yield of approx 50bps-75bps above the benchmark coupon of 7.65% we plan to maintainSecured bonds 40.70% 31.50% this level, implying a cumulative income of approxCumulative Performance** 30.11% 26.86% 8.5% on a cumulative basis (unhedged);Tracking ex-Post (ex-ante) 2.25% (1.1%) • Strong Information ratio of >0.5 (before costs)**since internal implementation of new benchmark internally 1st feb 2010 & before costs, fees, Higher Quality, Higher Carry, High Security & Yet Market Beating Performance35© Swisscanto Asset Management AG
  36. 36. Swisscanto (CH) Institutional Bond Fund - Global High Yield IKey Sector Positioning Sector Breakdown• Emphasis still primarily based upon issuer selection and bottom-up analysis Paper & Forestry; Aerospace & 4.7% Investment Grade• Overweight TMT, Transport, Defense; 1.5% Financials; 5.0% Consumer & Services cyclical, Paper & Metals & Mining; Chemicals; 3.3% Packaging, Building Materials & IG Packaging; 2.5% 1.9% Retailers; Utilities; 1.7% subordinated (Tier-1, UT2, LT2) 6.6% Building Materials; 8.0% Healthcare; 5.2% financials with short calls (<=2 years) Machinery; 2.7% Real Estate; 0.0%• Retain underweight Energy & Utilities, Basic Industries, Real Estate, Housing Transport; 6.9% Automotive; 3.9% & construction sectors Consumer Energy; 4.6% Staples; 4.7%• Current emerging markets exposure Technology; 2.5% Telecoms; 15.5% Cyclical services; (on a commercial basis) of approx 8.5% 20%, (main exposures to South Africa, Media; 2.8% Latin America, Russia, China/HK,)36© Swisscanto Asset Management AG
  37. 37. Swisscanto (CH) Institutional Bond Fund - Global High Yield IKey DataName Swisscanto (CH) Institutional Bond Fund - Global High Yield ICurrencies CHF (global portfolio all currencies are hedged)Tranches I (Institutional)Security number 3095586ISIN CH0030955865Domicile SwitzerlandDistribution DistributingRegistration CHAll-in fee 0.80% p.a.37© Swisscanto
  38. 38. Swisscanto (LU) Bond Invest Short Duration Global High Yield HCHF/EUR/USD B and J38© Swisscanto
  39. 39. Swisscanto (LU) Short Duration Global High Yield HKey Investment GuidelinesName Swisscanto (LU) Bond Invest Global High Yield H (Short Duration)Portfolio Final Maturity 3 years – 4years (Current 2.3years)Total Single Positions Max 10% > 4 yearsPortfolio (credit) spread duration Benchmark 1.9years +/- 0.5years and <2.5 yearsPortfolio Instruments Fixed & Floating rate notes + CDSTarget Issuers Minimum 70 issuersReference Index 50% Merril Lynch US HY (1-3 year) + 50% Merril Lynch EU HY (1-3 year), ex-financialsCurrent Yield to Maturity 7.6% (dynamic)Average Credit Ratings Strictly maintained minimum BB- (Benchmark B+) Per Issuer BB & B max 5% Per Issuer >CCC max 2.5%Secured Bonds Exposure >30% of portfolioSectors Max weight per sector 20% Max weight Financials 10% (incl: Max weight subordinated financials 5%)Risk Tracking error ex ante >3%-4% ex-post (4%-5%)39© Swisscanto
  40. 40. Swisscanto (LU) Short Duration Global High Yield HConsistent Investment Style & Strategy 7th October, 2012 Key Portfolio Statistics Short Duration High Yield Fund Benchmark Cash (CDS adjusted) (+8.30%) 0.00% Investment Grade 7.00% 0.00% BB 28.00% 56.20% B 48.30% 31.00% CCC 8.40% 12.80% Average Credit Ratings BB- B+ Credit Spread Duration (Maturity) 1.86yrs 1.89yrs Average Yield to Maturity 7.60% 6.20% Secured bonds 41.0% 20.80% EU High Yield 39.0% 50.0% US High Yield 61.0% 50.0% Total Positions 115 275 Cumulative Performance* 12.39% 9.13%CHF J *H initiated 31st January 2011 before fees, hedging costs Higher Quality, Higher Carry & High Security Yet Market Beating Performance40© Swisscanto Asset Management AG
  41. 41. Swisscanto (LU) Short Duration Global High Yield HPull to Par Effect – "Hard-Wired" Commitment to Lower Credit SpreadDuration to 1.5yrs from 1.8yrs by YE 2012  Pull to Par effect to become very strong in 15.2% the next 6 months; Credit Spread Duration <1 year (incl Cash/CDS) 29.1% Credit Spread Duration 1-2  Investors entering in the strategy now, are 9.7% years effectively entering the sweet-spot of the Credit Spread Duration 2- portfolio --- >80% of portfolio will have a 2.5 years duration less than 2 years over the next 2 Credit Spread Duration 2.5- quarters; 17.2% 3 years Credit Spread Duration >3  Volatility in the fund is likely to decrease 28.8% years further and the highest yield amongst peers of 7.6% will allow superior risk adjusted returns; *As at October 7th 2012  Focus is to maintain our superior track record of ZERO defaults and ZERO near defaults; Investors Taking Exposure Now Are Entering The Sweet Spot of the Portfolio 41 © Swisscanto Asset Management AG
  42. 42. Swisscanto (LU) Short Duration Global High Yield H Sector Diversification - Financials - Senior ; Real Estate; 0.80% Financials - 1.80% Paper & Forestry; Subordinated; 3.00% 4.20% Metals &Cash (CDS adjusted); 8.30% Chemcials; Minings; 2.40% 2.70% Key Highlights: Packaging; 0.25% Cyclical Services; 10.25% Building Materials;  Portfolio consists of 86 issuers, 8.30% diversified in 15 sectors; Transport; 8.80% Machiney; 2.00%  51% of sector positioning is defensive;  Financial subordinated issues exposure well below the max 5% limit;Telecom/Media; Auto; 6.60%  No sector exposure beyond 20% 12.70% Retailers; 5.30% Energy & Utilities; Pharma/HealthCare; 5.90% 13.60% Consumer Staples; 3.10% 42 © Swisscanto Asset Management AG
  43. 43. Swisscanto (LU) Short Duration Global High Yield HGlobal Strategy & Expertise Allows For us to Efficiently Invest AcrossGeographic Areas; Geographic Strategy at Geographic Strategy Geographic Strategy at Present Launch (31st January 2011) (Dec 2011 – March 2012) (May – September 30th 2012) EU High EU Yield US US High 43% High EU High Yield; US Yield High Yield ; 39% High 57% Yield; 45% 55% Yield ; 61% Sovereign related stress &  Prior to LTRO1 program  Since April 2012 , tight recession in peripheral implementation, on the 19th valuations and profit taking Europe = underweight EU December 2011, we cut our entire on EU short duration high- overweight in US HY and moved yield positions , move back overweight in EU HY to underweight EU43© Swisscanto Asset Management AG
  44. 44. Swisscanto (LU) Short Duration Global High Yield HPerformance vs Peers Present at Launch Swisscanto Short Duration High Yield vs Peers (Euro (Inst) Tranche) 15% 10% 5% 0% -5% -10% 14.02.2011 14.04.2011 14.06.2011 14.08.2011 14.10.2011 14.12.2011 14.02.2012 14.04.2012 14.06.2012 14.08.2012 SWISSCANTO LU BD-GL H/Y-H€J AXA IM FIIS-US SH DUR HY-EH€ MUZINICH SHORT DUR HG YD-H€A PETERCAM L-BONDS EUR HY ST-F UBS LUX-SH DUR H/Y $-€HPA WFA SHRT TRM HI YLD-INV Maintain zero exposure in GIP, , significant underweight in peripheral Europe (companies earnings range 15%-28% on domestic regions), zero defaults & zero near defaults in our portfolio Relative underperformance during stress period purely due to differences in product & geographic area of focus (peers are focusing on >B and 100% US HY short duration benchmarks; 44 © Swisscanto Asset Management AG
  45. 45. Swisscanto (LU) Short Duration Global High Yield H Superior Alpha Generation versus Peers +318bps vs BM14.00%12.00%10.00%8.00%6.00%4.00%2.00%0.00% US HY (BB-B) 1-3 year 2% Cap (EUR H) EU High Yield (ex financial) 2% Cap (EUR Swisscanto Short Duration HY Swisscanto Global HY Short Duration H) Benchmark (ex-financial) 2% cap (EUR H) FUND (EUR J Tranche H) * Before Fees & Expenses  Substantiates our Superior Alpha Generation Capacity versus Competitors Globally  100% of our investments reported earnings better than and/or in line earnings results during Q1 2012, showcasing our superior stock selection capacity 45 © Swisscanto Asset Management AG
  46. 46. Swisscanto (LU) Short Duration Global High Yield H Quality of Excess Performance Tracking Error Decomposition ex-ante* ex-post**Tracking Error 1.1 3.77  Information ratio as per tracking error ex-post is circa 0.50 * Before Fees & ExpensesForex 8%Duration 17%Spread 75%  Tracking error ex-post within* Migration to Risk Metrics IV effective 1st October 2012 stipulated >3%-<4% range** valid till 30.09.2012 since inception 46 © Swisscanto Asset Management AG
  47. 47. Swisscanto (LU) Bond Invest Short Duration Global High Yield H Performance vs More Recent & European Short Duration Peers Swisscanto Short Duration High Yield vs Nordea Short Duration High Yield Swisscanto Short Duration High Yield vs Axa EUR Short Duration High-Yield 15% 20% 15% 10% 10% 5% 5% 0% 0% -5% -5%-10% -10% 09.03.2011 09.05.2011 09.07.2011 09.09.2011 09.11.2011 09.01.2012 09.03.2012 09.05.2012 09.07.2012 09.09.2012 19.08.2011 19.10.2011 19.12.2011 19.02.2012 19.04.2012 19.06.2012 19.08.2012 SWISSCANTO LU BD-GL H/Y-H€J NORDEA 1 LOW DUR US HY-HBI€ SWISSCANTO LU BD-GL H/Y-H€J AXA IM FIIS-EUR SH DUR H-B€I Swisscanto Short Duration High Yield vs WLB Short Duration (Euro (Inst) Tranche) Swisscanto Short Duration High Yield vs Pictet EUR Short Term (Euro (Inst) Tranche)15% 10% 9%10% 8% 7% 5% 6% 5% 0% 4% 3%-5% 2%-10% 1% 0%-15% -1% 01.02.2012 01.04.2012 01.06.2012 01.08.2012 01.10.2012 29.07.2011 29.09.2011 29.11.2011 29.01.2012 29.03.2012 29.05.2012 29.07.2012 29.09.2012 SWISSCANTO LU BD-GL H/Y-H€J WESTLB-EUR CRED SH DUR-RF-B SWISSCANTO LU BD-GL H/Y-H€J PICTET-EUR SHRTRM HI YLD-P 47 © Swisscanto Asset Management AG
  48. 48. …Spread tightening assessedWhat Swisscanto short duration global high yield customised benchmark spread implies for future default rates:Actual Spread - Excess Spread* Default loss par- recovery rate Default Rate 525 bps - 250 bps = 275 bps / (100%-40%) = 4.6%*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps (For Regular High Yield) *as of 30th September 2012 At present our strategy offers a spread carry of 660bps, hence significant tightening potentialLets assume conservatively a recovery rate of 35% and a 4% default rate, our spread forecast:Default Rate x par-recovery rate = Default loss + Excess Spread* Forecast 4.0% x (100% - 35%) = 260 bps + 250 bps = 510 bps*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps (For Regular High Yield) *as of 30th September 2012 Swisscanto Forecasts Fair Value for Short Duration high yield market approx 500bps-550bps48© Swisscanto Asset Management AG
  49. 49. We Forecast Our Short Duration High Yield Fund GeneratingTotal Returns of circa 8% p.a. (EUR hedged) During The Next 12Months Total Return Forecast for 12 months Running income unhedged 6.20% Swisscanto short duration HY benchmark Yield (September 30th 2012 onwards) Interest rate differential + hedging transaction Hedging costs + yield differential -0.25% costs of 12bps p.a. Current Positive carry over benchmark +1.40% Typically averages 100 bps + benchmark Running income EUR hedged 7.35% Expected impact of change in 2yr treasury Assume 2 year treasury/bunds yields rise a -0.20% yields further 10 bps (0.25% on wt average) That is 50bps tightening of portfolio x duration of Expected impact of change in spreads +0.90% the benchmark (1.85 yrs) to 610 bps Expected return before fees 8.00% Source: Swisscanto49© Swisscanto Asset Management AG
  50. 50. Why Swisscanto High Yield?• Swisscanto has transformed into a Top Quartile High Yield Manager in Europe AUM wise and Top Quartile Globally Performance wise;• Experienced Manager with a strong track record of consistent alpha generation --- lead managers solid track record of generating only 1 default and 1 near default in 13 years;• A well diversified portfolio a result of a implementing a strong investment process;• Portfolio Strategy geared towards consistently maintaining higher quality, higher carry, higher security bias, and still generate higher returns than its benchmark; An Unrivalled Investment Philosphy and Product Strategy at Present50© Swisscanto Asset Management AG
  51. 51. Swisscanto (LU) Short Duration Global High Yield HKey DataName Swisscanto (LU) Bond Invest Global High Yield HCurrencies CHF / EUR / USD (global portfolio all currencies are hedged)Tranches B (Retail) J (Institutional)Security number H CHF B: 11963041 H CHF J: 12353466 H EUR B: 11963062 H EUR J: 12353467 H USD B: 12353464 H USD J: 12353468ISIN H CHF B: LU0556184884 H CHF J: LU0582724935 H EUR B: LU0556185345 H EUR J: LU0582725072 H EUR A: LU0830970272 H EUR I :LU0830970603 H USD B: LU0582725312 H USD J: LU0582725403Domicile LuxemburgDistribution ReinvestingRegistration CH, FL, D, A, LUXAll-in fee B-Tranche: 1.30% p.a. / J-Tranche: 0.80% p.a.51© Swisscanto
  52. 52. Agenda1. High Yield at Swisscanto2. The Case for Short Duration Global High Yield3. Investment Process4. Product(s) and Performance5. Appendix – The Case For Global High Yield52© Swisscanto Asset Management AG
  53. 53. High Yield versus Equities Even after big gains, returns historically remain healthy in subsequent years 46.2 29.0 25.6 19.2 17.4 15.7 17.1 15.1 12.5 11.4 12.8 11.1 11.9 9.7 5.0 5.3 10.5% 1.9 2.4 2.7 1.9 3.0 0.8 -1.0 -1.4 -5.9 -9.6 84‘ 85‘ 86‘ 87‘ 88‘ 89‘ 90‘ 91‘ 92‘ 93‘ 94‘ 95‘ 96‘ 97‘ 98‘ 99‘ 00‘ 01‘ 02‘ 03‘ 04‘ 05‘ 06‘ 07‘ 08‘ 09‘ 10‘ 11‘ Stabile Phase Stabile Phase Stabile Phase Stabile Phase Source: Barclays, J.P. Morgan, S&P/LCD 6 Market Crisis and 27 years on, High Yield asset class has experienced 5 negative returns only53© Swisscanto Asset Management AG
  54. 54. ….and returns have been generated with significantly lower volatility At 35% exposure to Swisscanto’s customised High Yield benchmark allows credit only or credit/equity portfolios to maximize the sharpe ratio of the fund and boost weighted total returns by 50bps Realized returns 8.0 Cust High Yield SW BM JCNF is US HY 7.0 HPIC1 is EUR HY 6.0 5.0 JCNF CHF hedged 4.0 HPIC1 CHF hedged 3.0 GOBC CHF hedged 2.0 Hedged Russell 2000 TR USD 1.0 0.0 -1.0 Cust Aktien Schweiz -2.0 100% Global -3.0 Investment Grade -4.0 Hedged MSCI North America Hdg USD -5.0 Hedged MSCI UK GBP -6.0 Hedged MSCI EMU EUR -7.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 22.0 Standard Deviation (Risk) Source: Swisscanto An efficient portfolio should have consistently higher allocations to the High Yield asset class54© Swisscanto Asset Management AG
  55. 55. High-Yield versus Equities, Similar Returns at 50% Volatility Stabile Phase High-Yield offers an Attractive Risk Reward 55 © Swisscanto Asset Management AG
  56. 56. High Yield versus Interest Rate Sensitive Products Source: J.P. Morgan; S&P/LCD High Yield Serves as a Hedge against Rising Treasury yields56© Swisscanto Asset Management AG
  57. 57. High Yield versus Investment Grade High Yield performs well versus Investment Grade in a rising rate environment High Yield bonds total Investment-grade bonds total 12 months ending 10 Year Treasury yield move returns (CHF hedged) returns (CHF hedged) Sep 87 220 bps 3.93% -3.74% Feb 89 117 bps 6.87% 0.97% Dec 1994 204 bps -0.19% -2.74% Dec 1999 179 bps -1.58% -5.67% May 2004 130 bps 11.65% 1.49% Jun 06 120 bps 2.80% -4.80% Sep 10- Apr 2011 approx 90bps 5.35% -1.05% during the past 25 years High Yield has out-performed investment grade bonds in each treasury rate hike cycle by 630bps on a CHF hedged basis Source: Swisscanto, Bloomberg, Merril Lynch High Yield has Consistently Outperformed Investment Grade Over the Past 6 cycles of Treasury Yield Increases57© Swisscanto Asset Management AG
  58. 58. Lending Standards a Primary Indicator for Default OutlookLooser Lending Conditions to Keep a Lid on Default Rates 18% Default Rates (%) Net Tightening to 100 Large/Medium 16% Corporates 80 14% 60 12% 10% 40 8% 20 6% 0 4% -20 2% 0% -40 99 00 01 02 03 04 05 06 07 08 09 10 11 12 US_Spec Europe_Spec C&I Loans, Large and Medium (RHA) Central Banks Globally via Respective Liquidity Programs to Aid Lending Standards Continue to Improve & Corporate Defaults Remain Low58© Swisscanto Asset Management AG
  59. 59. Outlook for Recoveries – Strong Correlation to ISM Index 70 65 70 60 60 60 55 50 50 Recovery Rate (%) 50 40 40 45 30 30 40 ISM Manufacturing (LHS) 20 20 Recovery Rate (%) (Lagged 6m, RHS) 35 10 10 30 35 40 45 50 55 60 65 30 0 Jun 97 Jun 99 Jun 01 Jun 03 Jun 05 Jun 07 Jun 09 Jun 11 ISM Manufacturing Global ISM Data to Remain Soft or sub 50 Level Corresponding to Recovery Values Ranging 35%-40%59© Swisscanto Asset Management AG
  60. 60. ..recoveries to be further aided as corporates offer new issuancesincreasingly with better security packages 120% 100% 12% 20% 23% 26.7% 30.4% $335bn $400bn $450bn 33% 34.5% 80% 60% 40% 20% 0% avg b/w 1982- 2008 2009 2010 2011 2012E 2013E 2007 Unsecured Bonds Secured Bonds Source: Swisscanto Resulting in greater protection and significantly higher and sustainable recovery rates through a default cycle60© Swisscanto Asset Management AG
  61. 61. High Yield Fundamentals In Far Better Shape, Despite an on-going EUZone Recession • Corporate balance sheets are in solid shape, cash to debt ratios well above average • Cash levels can cover all debt maturities for 2012, however from H2 2013 - 2015 a maturity wall does exist in Europe • Fundamental Picture amongst US High Yield Corporates remains solid61© Swisscanto Asset Management AG
  62. 62. High Yield Fundamentals in Far Better Shape, despite an on-going EU ZoneRecession• High Yield issuers credit quality still improving upgrades still outpacing downgrades• Stress levels in covenants are very low compared to prior recessions62© Swisscanto Asset Management AG
  63. 63. Post 2009, Where do High Yield Primary Issues Stand From a CreditQuality Perspective? High Yield issuer leverage 25% lower and proportion of CCC’s 50% lower than peak for new issues63© Swisscanto Asset Management AG
  64. 64. From a Structural Perspective?• New issuance has secured bonds 2x higher than 2006 providing downside protection;• Defaults will be low as excessive LBO style lending experienced during 2004-2007 did not take place since 2009, i.e. four times lower64© Swisscanto Asset Management AG
  65. 65. Expect More of the Same Over the Next 2 years European Leverage Finance Market is estimated to generate yearly cash flows (coupons & redemptions) of approx. e20bn not enough to cover itself the refinancing needs b/w H2 2013 – H1 2016 US Leverage Finance Market no longer has a "Maturity wall" but rather a "hump in 2014" plus yearly cash flows (coupons + redemptions = est $120bn) more than adequate Above average primary issuance required between 2012-2013 to fund the maturity wall between 2013-201565© Swisscanto Asset Management AG
  66. 66. And be Paid a Significant New Issue Premium66© Swisscanto Asset Management AG
  67. 67. However Draghis Inspired Rally Limits the Asset Classes SpreadTightening PotentialWhat today’s Swisscanto global high yield customised benchmark spread implies for future default rates:Actual Spread - Excess Spread* Default loss par- recovery rate Default Rate 620bps - 375 bps = 245 bps / (100%-40%) = 4.1%*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps * Forecasts as of 30th September 2012 Our fund generates a spread carry of 720bps, reflecting a significant tightening opportunityLets assume conservatively a recovery rate of 35% and a 4% default rate, our spread forecast:Default Rate x par-recovery rate = Default loss + Excess Spread* Forecast 4.0% x (100% - 35%) = 260 bps + 375 bps = 635 bps*Excess spread = past 25 year premium for liquidity & volatility ranges between 150bps-380bps * Forecasts as of 30th September 2012 Swisscanto forecasts fair value for high yield spread to range between 600bps-650bps67© Swisscanto Asset Management AG
  68. 68. A Sustainable Volatility Premia Has to Sustainably Compensate Investors • With shorter business cycles and a prevailing debt crisis volatility likely to remain elevated for the medium term; • We assume a VIX level average mid 20s over the coming years on an average basis; • Therefore, minimum excess spread investors should be compensated for should range average 350bps-420bps (2x the 26 yr historical average or 14bps of excess spread per unit of VIX)68© Swisscanto Asset Management AG
  69. 69. Best Case: We Forecast Our Medium Duration High Yield Funds Total Returns ofcirca 8%-9% p.a. (CHF Hedged) Total Return Forecast for 12 months Running income unhedged 7.20% Swisscanto customised benchmark yield (September 30th, 2012 onwards) Interest rate differential + hedging transaction Hedging costs + yield differential -0.30% costs of 12 bps Positive carry +1.00% To approximate 100 bps + BM Running income CHF hedged 7.90% Expected impact of change in 5-7yr treasury Assume 7year bunds/US treasuries rise a further -1.60% yields 40bps to 1.5% US treasuries That is 50bps tightening x duration of the Expected impact of change in spreads +1.75% benchmark (3.5 yrs) to 670 bps Expected return before fees 8.10% Bear Case: We Forecast +2% for the next 12 months September 2012 onwards Source: Swisscanto69© Swisscanto Asset Management AG

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