Citiwire may 13 (2)


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Citiwire may 13 (2)

  1. 1. What is the Future forBond Funds?Rod Davidson, Head of Fixed IncomeStuart Steven, Investment ManagerMay 2013For investment professionals only
  2. 2. 2What is the future for bond funds?• After 20 years of very strong returns from various bond strategies, should we be optimistic aboutthe future?• Recently there has been a lot discussion about a flight to equities but we believe that there is stillplenty of room for bond fund investments, especially if the right strategies are chosen.• Key to this is that bond funds and strategies that have delivered in the past may not be best placedto do so in the future. With this in mind it has never been more important for investors to re-visittheir existing strategies.
  3. 3. 3Alliance Trust Investments
  4. 4. 4Alliance Trust PLC• Diversified global investment company• Managing investments since 1888 - one of the UK’s oldest investment trusts• Largest UK generalist trust on London Stock Exchange• PLC – Gross assets of £3.2billion*• 46 years of uninterrupted dividend growthLong-term strategic alignment between AT PLC and ATI*Source: Alliance Trust PLC as at 31/03/2013
  5. 5. 5Alliance Trust Investments• Specialist investment company, established in 2009– CEO Katherine Garrett-Cox– Focused, committed, entrepreneurial spirit• SRI team fundamental to ATI evolution– Shared underpinning investment ethos– Significantly develops ATI business• Strategic alignment with Alliance Trust PLC– FTSE 250 company, established in 1888– Gross Assets of £3.2bn*– Shared investment infrastructure with ATI* Source: Internal as at 31/03/2013** Includes Sustainable Future Pan European Fund assets of £75m under sub-advisement to Aviva InvestorsAUM* (£m)Global 195North America 77Europe 59Fixed Income 713SRI Equity** 1035
  6. 6. Holdings in bond funds versus yields6Traditional bond funds exposed to market correction• Bond markets have benefitedfrom a 20 year rally• Ownership has increasedthroughout this period• Life funds• Pension funds• Retail investors• Inflation is now a threat£ Corporate Bond FUM Vs UK 10Yr Gilt yieldsSource: IMA, Bloomberg, 31/12/2012
  7. 7. Target Return Funds versus traditional asset classes7• Target attractive relative to longterm equity and bond returns• Bond Yields still near historic lows• 3.98% ML Corp Allstock• 1.94% ML Gilt Allstock• Benign growth outlook underminesequity returns• Targeting lower levels of volatility6% return is historically attractive, particularly if delivered with low volatilityIndex20yrCap Rtn20yrTot Rtn16yrCap Rtn16yrTot RtnFTSE 100 4.10% 7.97% 2.43% 6.18%S&P 500 5.98% 8.07% 4.16% 6.06%ML £ Non Gilts n/a n/a 0.62% 6.90%ML £ Corps n/a n/a 0.50% 7.02%ML Gilts n/a n/a 1.19% 6.85%GBP 3mth n/a n/a n/a 4.17%Source: Bloomberg/Merrill Lynch: 31/01/2013
  8. 8. Product positioning for today’s bond markets8Bond market focused• Global investment universe• Physical assets and derivativesDiversified sources of return• Asset allocation to bond markets• Relative value overlay tradesLow correlation to bond marketsIncluded in Absolute Return sector
  9. 9. 9Key Requirements• Long/Short Total Return Bond Fund• Targeting attractive risk adjusted returns• Through allocation AND relative value trades• Low risk of negative returns over 12 month rolling periods• Defined parameters, including• Limitations on credit exposure• Restrictions on interest rate sensitivity• Clearly defined investable universeA strategy that does not depend on yields/market conditions
  10. 10. Why fixed income is suited to total return10Opportunities in all market conditions• No risk on/off biasGlobal opportunities• Diverse range of investments• Liquid markets/instruments• Highly derivatised marketLow correlation to bond marketsSuited to delivering consistent returns
  11. 11. Long/Short does not necessarily mean hedge fund11Consistent with market demand✔ Daily liquidity✔ Full transparency to clients✔ Attractive fee✔ UCITS regulated✖ Monthly or quarterly liquidity✖ Restricted portfolio transparency✖ Expensive fee structures✖ Offshore structuresDynamic Bond Fund Hedge Funds✔ Multiple investment skills required✔ Risk management processes critical✔ Sophisticated investment strategies….but does share some positive hedge fund characteristics
  12. 12. Investment philosophy12Philosophy• Macro orientated process• Team based approach• Diversified sources of returnObjectives• Targeting returns over the cycle• Aim to minimise volatility of returnsFocus on macro orientated strategiesSecurityRisk• Structure &Covenants• Liquidity• Multi-currencyMarketRisk• Duration• AssetsAllocation• CrossMarketCreditRisk• Business& industry• Financials• Sustainability• PremiumVolatility
  13. 13. 13Risk BudgetingDefined aggregated VaR Limit* Source: Barra 28 Mar 2013VaR Positions (bps)020406080100GovtInflationRelativeValueCreditRates• Limits set by strategy type• Diversified portfolio• Ensures risk is consistent with fundobjectives• Risk allocation will vary over time• Scenario and stress tests used tovalidate risks
  14. 14. 14Extending the efficient frontier• Total Return Bond Funds canimprove the efficient frontier• Higher returns than gilts withlower levels of volatility• Alternative for traditional bondallocations• Particularly compelling in avery low yield world• Mitigates the risk of a “bubblein bond markets”Attractive risk adjusted returnsAlliance TrustDynamicBond FundEfficient Frontier Since LaunchSource: Internal as (28/09/2012 to 11/04/2013)0.00%2.00%4.00%6.00%8.00%10.00%12.00%0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70% 0.80%FTSE + GILTS + DBFFTSE + GILTS
  15. 15. 15PerformanceStrategy complements existing/planned product* Source: Bloomberg 30 /04/2013 Past Performance is not a guide to future performanceTotal Return – Normalised Since Inception96.0098.00100.00102.00104.00106.00108.00Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13Dynamic Gilt Allstock GBP Corp Allstock
  16. 16. Dynamic Bond Fund characteristics16• 6% Target Return over rolling three year periods (gross)• Risk and Volatility management central to proposition• Diversified, liquid portfolio investing across global bond marketsFund Managers Stuart Steven & Juan ValenzuelaInception Date 28th September, 2012Fund Size £57.5m as at 30/04/2013Benchmark No Benchmark (Absolute Return Global Bond Asset Class)Performance Objective 6.0% p.a. over rolling three year periods (gross of fees)Expected Volatility <5%Investable Universe Global Fixed Income Markets (Clearly defined parameters)Derivatives Mainstream Fixed Income derivative instrumentsStructure OEICCredit Leverage 75% max (normal range +/-35%)
  17. 17. 17Summary• No reliance on market conditions oryield backdrop• An alternative to traditional bondmandates• Product is consistent with teamsize/skills and boutique investmenthouse• High levels of capacityStrategy consistent with market demandsTotal ReturnBond FundThreats toTraditionalBond Funds
  18. 18. 18Important information• This presentation is intended for investment professionals only. It must not be distributed to, or relied upon by, retail investors.• Past performance is not a guide to future performance. The value of investments may go down as well as up and is notguaranteed. You may not get back the amount invested.• Some of the funds have underlying holdings which are denominated in currencies other than Sterling and therefore may beaffected by movements in exchange rates. Consequently, the value of these investments may rise or fall in line with exchangerates.• Where a fund invests in derivatives, this may lead to greater volatility in the price of a fund as the value of these instrumentscan fluctuate significantly.• Where annual management charges or performance fees are taken from capital, this may have the effect of constrainingcapital growth and may lead to capital erosion. Investors may be subject to tax on distributions.• Whilst care has been taken in compiling the content of this presentation, no representation or warranty, express or implied, ismade by Alliance Trust Investments as to its accuracy or completeness. Some slides may been compiled from externalsources. Whilst these sources are believed to be reliable, the information has not been independently verified and therefore norepresentation is made as to its accuracy or completeness.• The opinions expressed are those held by Alliance Trust Investments at date of issue and are subject to change. Thispresentation is for information only. It does not represent an inducement to buy or sell investments and does not constituteinvestment advice.• Alliance Trust Investments Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC330862,registered office,8 West Marketgait, Dundee DD1 1QN; is authorised and regulated by the Financial Conduct Authority, firm reference number479764. Alliance Trust Investments gives no financial or investment advice.Alliance Trust Investments8 West Marketgait, Dundee DD1 1QNT 01382