Vanguard

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  • Let’s start by noting how the global market for Treasuries has expanded over  the past three years. Here we see the Barclays Global Aggregate Index broken into sectors, with global treasuries on top. Over just the past year there has been a 27% increase in the amount of outstanding global treasuries in the index. Given the size of the budgets deficits across the globe, which resulted from slower economic growth and a variety of fiscal stimulus programs, this should hardly come as a surprise. 
  • Looking at the same three-year period, we’ve seen corporate spreads (as represented in the gray line) widen to as much as 500 basis points over U.S. Treasuries, followed by a rapid reduction in spreads as the market became more confident. April and May of this year brought concerns about sovereign risk, particularly in the so-called PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain). Then spreads compressed again with news of support for Greece from the IMF and EU, and we started to see some stability in the marketplace.
  • Now focusing on excess returns relative to Treasuries, the year got off to a strong start, with corporates outperforming their treasury counterparts by  1.5%, as measured by the Barclays Global Aggregate Index sectors. However, as the risk environment deteriorated with the sovereign debt crisis, we gave that all back in a month and a half. We dug ourselves into a hole and now we are starting to see signs of recovery.
  • Vanguard

    1. 1. Managing fixed income funds in today’s markets <br />This presentation is directed at investment professionalsand should not be distributed to, or relied upon by retail investors. <br />Samuel LópezBriceño<br />Senior Credit Research Analyst<br />Vanguard Asset Management<br />For professionalinvestorsonly. Not for public distribution.<br />
    2. 2. Introduction to the Vanguard Group<br />2<br /> Vanguard Asset Management, Limited - Confidential<br />
    3. 3. Vanguard Group – vital statistics<br />The Vanguard Group launched 1975 <br />£1.1 trillion Assets Under Management as at 31 December 2010<br />More than 6,700 institutional clients<br />20 million customers in 80 countries<br />Offices in 15 countries and a total of 12,500 employees<br />57% under management in index funds<br />43% under management in active funds<br />Share of US index fund and ETF assets<br />Assets under management data as at 31 December 2010. $/£ exchange rate 0.63460. Source: Vanguard Group. <br />Share of US Index fund and ETF assets data as at 30 September 2010. Source: Strategic Insight.<br /> Vanguard Asset Management, Limited - Confidential<br />
    4. 4. Vanguard’s investment management approach resultsin a balanced asset mix delivered through a global platform.<br />£1.1 trillion <br />43%<br />57%<br /> Vanguard Asset Management, Limited - Confidential<br />
    5. 5. A very different and new sort of investment company in the UK<br />First step in the UK<br />Initial line up of index funds in the UK launched in June 2009<br />A range of diverse investment products in the pipeline<br />Our scale delivers lower costs and transparency<br />You can access our fund range with TERs between 0.15%-0.55%<br />Vanguard does not pay commission – fee based advisers<br />No surprises and no hidden costs. Our AMC equals our TER<br />Our expertise helps us get it right<br />30 years’ continuous experience managing index portfolios<br />Some of the tightest tracking errors in the field of indexing<br />Scale and experience together result in a highly disciplined and robust risk management processes<br /> Vanguard Asset Management, Limited - Confidential<br />
    6. 6. Managing fixed income funds in today’s markets<br />6<br />Vanguard Asset Management, Limited - Confidential<br />
    7. 7. Growth of global bond markets<br />Global Treasury issuance has accelerated<br />20<br />15<br />+32%<br />USD trillions outstanding<br />10<br />5<br />0<br />Jan<br />-<br />11<br />Mar<br />-<br />08<br />Jul<br />-<br />08<br />Jan<br />-<br />09<br />Jul<br />-<br />09<br />Jan<br />-<br />10<br />Jul<br />-<br />10<br />Global treasury<br />-<br />Global government<br />related<br />Global corporates<br />Global securitized<br />Source: Barclays Capital.<br /> Vanguard Asset Management, Limited - Confidential<br />
    8. 8. Risk spreads vary across broad sectors<br />Broad sector option-adjusted spreads, Barclays Capital Global Aggregate Index<br />Option-adjusted spread (basis points)<br />Global government<br />Global corporate<br />Global securitized<br />Source: Barclays Capital.<br /> Vanguard Asset Management, Limited - Confidential<br />
    9. 9. Sector returns versus treasuries<br />Broad sector excess returns, Barclays Capital Global Aggregate Index<br />Excess returns (percentage)<br />Global government<br />-<br />related<br />Global corporates<br />Global securitized<br />Source: Barclays Capital.<br /> Vanguard Asset Management, Limited - Confidential<br />
    10. 10. Some European states remain in sovereign crisis mode…<br />Source: Vanguard analysis based on CMA Group via Thompson Reuters Datastream.<br />Note: The credit default swap spread can be viewed as the relative cost of insuring a debt security against a default or restructuring event. Here we show CDS spreads for five countries versus Germany. Probabilities are calculated as the break-even rates, for each level of CDS spread, at which investors are indifferent between investing in a German 5-year bond and investing in a Greek 5-year bond plus a Sovereign CDS on that security.<br /> Vanguard Asset Management, Limited - Confidential<br />
    11. 11. … as funding requirements mount for banks…<br /> 12 months of bank debt maturing at monthly increments, as percentage of total outstanding<br /> 30<br />25<br />20<br />15<br />10<br />5<br />0<br />Source: IMF, Global Financial Stability Report, October 2010.<br /> Vanguard Asset Management, Limited - Confidential<br />
    12. 12. …and sovereign debt<br />Sovereign gross funding requirements as percentage of projected 2011 GDP<br />Source: IMF, Global Financial Stability Report, October 2010.<br /> Vanguard Asset Management, Limited - Confidential<br />
    13. 13. Legacy of Financial and Sovereign crisis: Fiscal crisis?<br />Gross government debt (percentage of GDP)<br />Sources: International Monetary Fund (IMF) World Economic Outlook, October 2010 and The Vanguard Group Inc.<br />
    14. 14. Sovereign risk dashboard<br />Sources: The Vanguard Group, Inc., with data from IMF, Global Financial Stability Report, Oct, 2010.<br />
    15. 15. How do we get out of this fiscal mess?<br />Debt and deleveraging cycle: Four ways out<br />“Belt tightening”Debt growth < GDP growth<br />50% of time<br />“High inflation” Mostly in emerging markets<br />25% of time<br />“Massive default” Currency and/or fiscal crisis<br />22% of time<br />“Luck”Grow out of debt<br />3% of time<br />Sources: Vanguard Group, Inc. Reinhardt and Rogoff, (2009) This Time is Different: Eight Centuries of Financial Folly; McKinsey Global Institute; IMF; <br /> Vanguard Asset Management, Limited - Confidential<br />
    16. 16. Recoveries from financial crises are longer<br /> Shape of recovery (real GDP)<br />Typical V-shape recovery<br />Expected US recovery in 2011–2012<br />Typical U-shape recovery after financial crises<br />Sources: IMF, OECD, and The Vanguard Group, Inc., as of March 2011.<br /> Vanguard Asset Management, Limited - Confidential<br />
    17. 17. Emerging economies projected to lead global growth<br />The world is experiencing modest economic growth<br />(quarterly percentage change, annualised)<br />1 Comprises China, India, Russia, South Africa, Turkey,Indonesia, Malaysia, Philippines, Thailand, Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. <br />2 Includes only economies that report quarterly data.<br />3 Australia, Canada, Czech Republic, Denmark, euro area, Hong Kong SAR, Israel, Japan, Korea, New Zealand, Norway, Singapore, Sweden, Switzerland, Taiwan Province of China, United Kingdom, and United States.<br />Source: IMF, World Economic Outlook, Oct. 2010.<br /> Vanguard Asset Management, Limited - Confidential<br />
    18. 18. Unemployment remains elevated<br />Unemployment rates <br />Sources: IMF World Economic Outlook, Oct. 2010.<br />For professional investors only as defined under MiFID. Not for public distribution.<br /> Vanguard Asset Management, Limited - Confidential<br />
    19. 19. Conclusion<br />Key Points<br />Global economic risks<br /><ul><li>Sovereigns face double trouble: crisis recovery and avoidance of future banking crises
    20. 20. Implementing solutions is not simple: it will take years to complete
    21. 21. Adequate diversification in fixed income allocations are key for long-term success</li></ul>European debt crisis<br />Timeless investment principles<br /><ul><li>Strategic asset allocation is key
    22. 22. Conservative return expectations and global diversification are critical
    23. 23. Focus on what you can control: Asset allocation, rebalancing, low costs
    24. 24. Minimising cost is vital for long-term success </li></ul>Potential investment boom<br /> Vanguard Asset Management, Limited - Confidential<br />
    25. 25. Important Information<br />The opinions expressed in this presentation are those of individual speakers and may not be representative of Vanguard Asset Management, Limited. This presentation is designed only for use by, and is directed only at persons resident in, the UK. The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information on this presentation does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this presentation when making any investment decisions. Vanguard Asset Management ,Limited only gives information on products and services and does not give investment advice based on individual circumstances.<br />Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Services Authority.<br />© 2011 Vanguard Asset Management, Limited. All rights reserved.<br /> Vanguard Asset Management, Limited - Confidential<br />

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