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Bny mellon

  1. 1. Presentation on: 4 horsemen of the bond apocalypse….and how to survive Paul Brain – Investment leader, fixed income September 2011 Presentation on:
  2. 2. 4 horsemen <ul><li>INFLATION </li></ul><ul><li>DEFAULT </li></ul><ul><li>MONETARY TIGHTENING </li></ul><ul><li>PRICE MANIPULATION </li></ul>
  3. 3. Themes into portfolio positioning Ageing western populations supportive of fixed income in developed markets. Large unemployed and disaffected youth populations in parts of developing world give potential for social unrest. Steep yield curves remains attractive with rates to stay ‘lower for longer’. Increased volatility will fuel investors’ demand for ‘safe-haven’ sovereigns, and global diversification from ‘domestic’ bond markets. Western economies continue their adjustment to “all change” world of deleveraging, lower growth and low inflation. Increased volatility and government involvement in economy with leverage having transferred from private to public sector. Currency opportunities from developing governments reluctance to tighten, and intermittent ‘safe-haven’ exposure (e.g. Swiss franc). Maintain exposure to western bond markets as they’re underpinned by increased demand . Developing world remains attractive in terms of growth and fiscal positions relative to the west. Low western interest rates will continue to encourage capital flows into these developing economies. Selective Asian currency positions as interest rates rise. Emerging market sovereign bond exposure, once rate rises are priced in and as financial markets mature. Strong Asian-led (particularly Chinese) growth and tightness of hydrocarbon fuel supply will ensure energy prices remain elevated. Buy energy-related currencies such as the Norwegian krone, Mexican peso and the Canadian dollar. Exposure to index-linked bonds when inflation expectations are not priced in. Source: Newton, August 2011
  4. 4. Inflation is the pariah for bond investors … but things could get better Emerging market inflation is high, but not catastrophic US inflation (although rising) is set to peak Source: Datastream, 31 March 2011 Source: Datastream, Newton, 31 July 2011
  5. 5. …. do the authorities need to respond? Western wage growth Source: Newton, June 30, 2011
  6. 6. Default is the other destroyer of bond value Trigger levels 2011 GDP Source: Bloomberg, Newton 23 Aug 2011 2011 DEFICIT TOTAL DEBT/GDP
  7. 7. ZIRP (or LIRP) and money printing here to stay Lending to individuals YoY change Bank lending to individuals Source: Newton June 30, 2011
  8. 8. Price Manipulation… not as bad as it seems if you assume a slowdown is coming Source: Bloomberg, August 23, 2011 10yr US Treasury vs NAPM PMI index
  9. 9. …… how to survive <ul><li>Opportunistic bond allocation with a cash benchmark </li></ul>Government Bonds Investment Grade Corporates Emerging Market Sovereigns High Yield Corporates
  10. 10. Global Dynamic Bond strategy <ul><ul><ul><li>An unconstrained, actively managed multi-asset fixed income strategy </li></ul></ul></ul><ul><ul><ul><li>Maximum flexibility at the asset allocation level. </li></ul></ul></ul><ul><ul><ul><li>100% in Corporates or 100% in Sovereigns </li></ul></ul></ul><ul><ul><ul><li>Emphasis placed on long term investing </li></ul></ul></ul><ul><ul><ul><li>Single portfolio approach to globally managing different fixed income asset classes </li></ul></ul></ul><ul><ul><ul><li>Mixing Asset classes in keeping with desire for diversification and risk control </li></ul></ul></ul><ul><ul><ul><li>Investment universe defined by expertise of the team and not based on how much an issuer borrows </li></ul></ul></ul>Target Strategy type £ 1 month LIBOR +2% Absolute/Target return <ul><ul><ul><li>Government Bonds </li></ul></ul></ul><ul><ul><ul><li>Emerging Market Bonds </li></ul></ul></ul><ul><ul><ul><li>Investment Grade Corporate Bonds </li></ul></ul></ul><ul><ul><ul><li>High Yield Corporate Bonds </li></ul></ul></ul><ul><ul><ul><li>Cash </li></ul></ul></ul><ul><ul><ul><li>Derivatives </li></ul></ul></ul><ul><ul><ul><li>Currencies </li></ul></ul></ul>Can invest in: Allowable assets
  11. 11. Global Dynamic Bond strategy Conceptual representation Source: Newton <ul><ul><ul><li>Emphasis on traditional fixed income asset classes </li></ul></ul></ul><ul><ul><ul><li>A return seeking core with particular security characteristics </li></ul></ul></ul><ul><ul><ul><li>Risk offsetting positions for dampened volatility and downside protect </li></ul></ul></ul>
  12. 12. Our absolute return credentials Global Dynamic Bond strategy Low High * Net of fees Figures are based on sterling returns. Past performance is not a guide to the future Please remember that the value of shares and the income from them can fall as well as rise and investors may not get back the full amount originally invested Source: Newton, weekly data, total return, gross of management fees, gross income reinvested Risk versus return since inception 1 May 2006 to 30 June 2011 <ul><ul><ul><li>Evolution of our proven global multi-fixed income asset approach </li></ul></ul></ul><ul><ul><ul><li>Absolute return in every calendar year </li></ul></ul></ul><ul><ul><ul><li>Achieved with absolute volatility closer to investment grade bonds </li></ul></ul></ul>
  13. 13. Newton Global Dynamic Bond Fund Long term performance as at 19 August 2011 26.8% Cumulative return since inception (%) Source: Lipper as at 19 August 2011. Please note that sector returns are likely to vary, depending on the timing of data extraction from Lipper Fund performance calculated as total return net of 1.25% AMC including income net of UK tax, no initial charge, in GBP The impact of the initial charge can be material on the performance of your investment. Performance figures including the initial charge are available upon request. Past performance is not a guide to future performance 47.9%
  14. 14. Global Dynamic Bond investing Controlling the risks Portfolio objectives (cash +2% target) Risk control (portfolio guidelines) Ensuring risk is appropriate, consistent and intended Risk monitoring * Based on long term volatility statistics Fundamentals Proprietary research Price Single portfolio approach Perspective Global Dynamic Bond strategy Risk parameters Target volatility 6% – 8%* Portfolio diversification Max 5% in any corporate issuer at purchase Portfolio concentration Max 50% in any sector. Quantitative risk assessment How much risk? – (bond weights, correlation, volatility) What kind of risk? – (currency, credit, interest rate) Is risk consistent? – (strategic views, economic cycle) Portfolio construction Bottom up risk management Themes Fixed Income Asset Class selection
  15. 15. Global Dynamic Bond Fund Duration exposure by asset class Duration by asset class Source: Newton, as at end July 2011
  16. 16. Newton Global Dynamic Bond Fund S trategic positioning as at 15 August 2011 <ul><li>Overall duration 3.8yrs (High yield 0.8yrs) </li></ul><ul><li>Return enhancing assets </li></ul><ul><ul><li>High Yield </li></ul></ul><ul><ul><ul><li>High yielding corporates benefiting from global growth and attractive spread levels </li></ul></ul></ul><ul><ul><ul><li>Selective convertibles exposure at attractive yields </li></ul></ul></ul><ul><ul><li>EM </li></ul></ul><ul><ul><ul><li>Exposure to improving sovereign credit stories and global growth correlated emerging markets </li></ul></ul></ul><ul><ul><li>Currency </li></ul></ul><ul><ul><ul><li>Ex-sterling exposure to attractively valued global growth correlated currencies: CNY (against short USD), and SEK and NOK (against short EUR) </li></ul></ul></ul><ul><li>Risk offsetting positions </li></ul><ul><ul><li>Derivatives </li></ul></ul><ul><ul><ul><li>Short US 5yr Treasury Note Future providing downside protection if US treasuries sell-off </li></ul></ul></ul><ul><ul><ul><li>Short Euro bobl Future options providing protection if bund market sells-off </li></ul></ul></ul><ul><ul><li>Roll down govts </li></ul></ul><ul><ul><ul><li>‘ Buy and hold’ short and intermediate dated govt positions in markets which already price in future interest rate rises </li></ul></ul></ul><ul><ul><ul><li>FRNs </li></ul></ul></ul><ul><ul><ul><li>To guard against a rising interest rate environment </li></ul></ul></ul><ul><ul><ul><li>Index-Linked </li></ul></ul></ul><ul><ul><ul><li>Providing protection against rising inflation expectations </li></ul></ul></ul><ul><ul><li>Currency </li></ul></ul><ul><ul><ul><li>Ex-GBP exposure to safe haven currencies (eg Japanese Yen) </li></ul></ul></ul>Source: Newton, 15 August 2011 3.21 Africa Allocation   GOVERNMENT BONDS   % US Yield Curve 9.14 Roll down 18.85 FRN 5.68 Index-Linked 4.10 Derivatives -12.32 Total 25.45 EM   Latin America 4.10 Europe 7.66 Asia 0.98 Total 15.95 INVESTMENT GRADE   AAA FRN 1.15 Financials 8.23 Non-Financials 9.11 Total 18.49 HIGH YIELD   Convertibles 1.56 High Yield FRN 1.96 High Yield 20.16 Total 23.68 CASH 16.43 100.00 Ex GBP exposure 4.17
  17. 17. Newton Global Dynamic Bond Fund Positioning Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations Source: BNY Mellon Asset Management as at end July 2011 Currency exposure (%) Top duration exposure (years) Top 5 holdings (%) US 5 Year Treasury Note September Future -7.22 Usa Treasury Notes 0.75% 15/6/2014 Usd100 5.33 Euro - Bobl Future Sep 2011 Future -4.68 New Zealand Government 6.5% Bds 15/04/2013 Nzd '413' 2.92 South Africa (republic Of) 7.5% Bds 15/01/2014 Zar1 R206 2.84 Credit quality breakdown (%) AAA 38.06 AA-BBB 35.12 BB-CCC 23.68 OTHER 3.13 Modified duration (Years) Newton Global Dynamic Bond Fund 3.26
  18. 18. Newton Global Dynamic Bond Fund (£) Strategic positioning Source: Newton, 31 July 2011 Evolution of fund positioning since launch showing min/max and current exposure
  19. 19. Why Newton Global Dynamic Bond strategy? A higher yielding addition to global government bonds <ul><li>Government bond yields at new lows </li></ul><ul><li>Investors looking to work their bonds harder – looking to invest in a wider bond universe </li></ul><ul><li>Defaults on a declining path. Corporate credit still attractive. </li></ul><ul><li>Plenty of individual credit stories – they don’t all move together </li></ul><ul><li>Emerging market debt a serious alternative – credit story improving </li></ul><ul><li>NEWTON GLOBAL DYNAMIC BOND STRATEGY invests wherever there are fixed income opportunities </li></ul><ul><li>Investing in a diversified universe of generally high yielding securities: </li></ul><ul><ul><li>Government bonds </li></ul></ul><ul><ul><li>Emerging market sovereigns </li></ul></ul><ul><ul><li>Corporates – high yield and investment grade </li></ul></ul><ul><li>Currency overlay </li></ul><ul><li>Derivatives – principally to manage duration </li></ul>Going forward a dynamic fixed income asset allocation is required The present The future Last updated:
  20. 20. Appendix
  21. 21. Paul Brain 5 years at Newton 25 years’ investment experience Stage II Candidate – Chartered Institute of Bankers Qualifications Investment leader – fixed income Chairman of the bond/FX strategy group Member of the macro strategy group Member of the asset class strategy group Member of the global investment meeting Member of the investment committee Responsibilities Paul came to the investment industry in 1984 and now has 24 years experience managing complex fixed income portfolios. He has held a number of senior fixed income positions within the industry which gives him a wide breadth of knowledge and experience in managing fixed income portfolios His early career was spent investing in high grade bonds with Credit Suisse and Barings. As head of retail fixed income at Investec Guinness Flight, Paul led the team that won the International Money Marketing “Fixed Interest Manager of the Year” in 2000 Paul is Investment Leader of the Fixed Income Team and joined Newton in 2004 2004 to date Newton Investment Management 2001 – 2004 MSG & Partners (Partners Asset Management) – Chief investment officer, fixed income 1995 – 2001 Investec Asset Management (formerly Guinness Flight) – Head of retail fixed income 1991 – 1995 Credit Suisse Asset Management – Head of currency overlay and European fixed income Biography Curriculum Vitae
  22. 22. Newton Global Dynamic Bond Fund Performance to 30 June 2011 (net of fees) 1 25%, Govt, 25% Emerging, 25% L-G, 25% HY Source: Newton 30 June 2011
  23. 23. Newton Global Dynamic Bond Fund Historical analysis of c urrency positioning <ul><ul><ul><li>Currently 91% in Sterling </li></ul></ul></ul><ul><ul><ul><li>US Dollar linked exposure includes commodity currencies and Asian </li></ul></ul></ul><ul><ul><ul><li>European linked currency allocation is made up of Swedish krona and Norwegian krone (against a short euro position) </li></ul></ul></ul>Global Dynamic Bond Fund currency exposure since inception Source: Newton, as at end July 2011 Dynamic currency positions
  24. 24. Important information <ul><li>Past performance is not a guide to future returns. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested. The value of overseas securities will be influenced by fluctuations in exchange rates. If part of the portfolio is invested in sub-investment grade bonds, which typically have a low credit rating and carry a high degree of default risk, then please be aware that this can affect the capital value of your investment. If the portfolio has exposure to hedge funds, gold, private equity and property via publicly quoted transferable securities, then there are additional risks associated with these sectors. The information contained within this document should not be construed as a recommendation to buy or sell a security. It should not be assumed that a security has been - or will be - profitable. There is no assurance that a security will remain in the portfolio. </li></ul><ul><li>The opinions expressed in this presentation are those of Newton Investment Management and should not be construed as investment advice. In addition the information contained in this presentation should not be construed as a recommendation to buy or sell a security. </li></ul><ul><ul><li>Registered office: as above. </li></ul></ul><ul><ul><li>Both firms are authorised and regulated by the FSA, are members of the IMA and are Bank of New York Mellon Companies SM </li></ul></ul><ul><li>Also at </li></ul>Newton Edinburgh Capital House 2 Festival Square Edinburgh EH3 9SU Newton Leeds 1 Whitehall Riverside Leeds West Yorkshire LS1 4BN Newton Investment Management Limited BNY Mellon Centre 160 Queen Victoria Street London EC4V 4LA Tel: 020 7163 9000 Registered in England No. 1371973. BNY Mellon Fund Managers Limited BNY Mellon Centre 160 Queen Victoria Street London EC4V 4LA Tel: 020 7163 9000 Registered in England No. 1998251