Learn how you can defend your portfolio in times of heightened market volatility and explore the different types of fixed-income investments with Paul Chin, Head of Investment Strategy and Research at Jamieson Coote Bonds.
5. Quality defence in a late-cycle environment – High Grade Bonds
November 2018
JCB is an active manager of High Grade Bonds. We
are active duration management specialists with
security selection expertise.
Who
we are
To deliver true-to-label defence and superior risk-
adjusted returns for investors.
Our aim
Netwealth Webinar
Paul W. Chin, SF Fin
Director, Head of Investment Strategy & Research
Jamieson Coote Bonds
6. 6
Agenda
The market environment: Late-cycle dynamics
Assets in portfolios: The dangers of being unbalanced
High Grade Bonds: Can they defend & protect given rate levels?
Portfolio construction: Considerations in a late cycle environment
7. 7
This presentation has been prepared by the Investment Manager, Jamieson Coote Bonds Pty Ltd ACN 165 890 282 AFSL 459018 (‘JCB’) and its distribution
partner, Channel Capital Pty Ltd ACN 162 591 568 (‘Channel’). Channel Investment Management Limited ACN 163 234 240 AFSL 439007 (‘CIML’) is the issuer
of units in the CC JCB Active Bond Fund ARSN 610 435 302 (‘the Fund’). This presentation is supplied on the following conditions which are expressly accepted
and agreed to by each interested party (‘Recipient’).
The information in this presentation is not financial product advice and has been prepared without taking into account the objectives, financial situation or needs
of any particular person. The presentation may contain forecasts and projections. Readers are cautioned to not place undue reliance on these forecasts and
projections. While due care has been used in the preparation of this presentation, actual results may vary in a materially positive or negative manner.
The information is not intended for any general distribution or publication and must be retained in a confidential manner. Information contained herein consists of
confidential proprietary information constituting the sole property of JCB and respecting JCB and its investment activities; its use is restricted accordingly. All
such information should be maintained in a strictly confidential manner.
This presentation does not purport to contain all of the information that may be required to evaluate JCB or the Fund and the Recipient should conduct their own
independent review, investigations and analysis of JCB and the Fund and of the information contained or referred to in this presentation.
Neither JCB, Channel, CIML or their representatives and respective employees or officers (collectively, ‘the Beneficiaries’) make any representation or warranty,
express or implied, as to the accuracy, reliability or completeness of the information contained in this presentation or subsequently provided to the Recipient or
its advisers by any of the Beneficiaries, including, without limitation, any historical financial information, the estimates and projections and any other financial
information derived there from, and nothing contained in this presentation is, or shall be relied upon, as a promise or representation, whether as to the past or
the future. Past performance is not a reliable indicator of future performance. The information in this presentation has not been the subject of complete due
diligence nor has all such information been the subject of proper verification by the Beneficiaries.
Except insofar as liability under any law cannot be excluded, the Beneficiaries shall have no responsibility arising in respect of the information contained in this
presentation or subsequently provided by them or in any other way for errors or omissions (including responsibility to any person by reason of negligence).
An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice,
having regard to the investor’s objectives, financial situation and needs. For further information and before investing, please read the offer document which is
available upon request.
Disclaimer
9. 9
Global debt pileup – hits over US$237 trillion
Global debt is becoming a bigger worry as the global policy tightening cycle takes hold.
0
20
40
60
80
100
120
140
160
180
200
220
240
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
TotaldebtlevelsUS$trillion
Non-f inancial
corporates
Gov ernment
Financial
corporates
Households
Source: Institute of International Finance, as at Dec 2017.
Lehman Brothers collapse
10. 10
We are in a deep late-cycle stage:
investors are taking enormous risk for limited upside
Increasing (Hidden or Silent) Risk
◼ Risk additions to portfolios
− Are they correctly priced for risk?
◼ Real estate
− Rise in non-core real estate
◼ Credit
− Covenant Lite Loans
− Complex credit/FI portfolios
◼ Illiquid assets
− Rising exposure to illiquids
− Excessive capital chasing returns
◼ Hidden leverage
− Rising leverage in some investments
◼ Complexity
− Diversification good/complexity?
− But larger complex portfolios
“Covenant-lite” share of outstandings,
U.S. leveraged loans.
0%
10%
20%
30%
40%
50%
60%
70%
80%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Covenant-liteshareofoutstandingloans
CAGR since 2010: 52%
Covenant-lite share of outstandings,
U.S. leveraged loans
Source: Emerging Policy (LCD – an offering of S&P Global Market Intelligence).
11. 11
Credit spreads fully valued?
Spread cushion vastly diminished after credit rally
Source: JCB team analysis based on data from Bloomberg.
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
USCorpBBB/Baa-Treasury10YearSpread(%)
US BBB rated ‘’investment grade’’ spreads vs
US Treasury Bonds
12. 12
Returns
Risks Diversification
◼ Temper return expectations
◼ Use growth assets for returns
◼ Use defensive assets for
protection
◼ Focus on risk allocations
◼ Consider left tail risk outcomes
◼ Diversify against thematic
unintended risks
Portfolio construction:
What should you be concerned about?
14. 14
Observation: Australian portfolios tend to be tilted too heavily
to the same risk stack
Portfolio consequences:
High unintended bank risk
and Low allocations to
“High Grade” defence
Term Deposits
Hybrids
Credit
Negatively Geared
Property
Banking shares (e.g.
Big Four)
Government
State Governments
Supra Nationals
A well-diversified portfolio?
A different risk stack which derives its
return from different drivers
Source: JCB team analysis, based on analysis of ATO and FSC estimates and Investment Trends reports.
15. 15
SMSF’s relative concentration can lead to wider outcomes
Source: JCB team analysis, based on data sourced from Bloomberg, the FSC and Investment Trends.
Asset Allocations for SMSFs have been sourced from the FSC and mapped to relevant asset class benchmarks. Aus securities selected (the most prominent portfolio component)
were done as part of a monte carlo simulation involving 2000 samples. Past performance is not an indicator of future performance.
Distribution of possible Returns for a typical SMSF portfolio (simulations: 2000)
100
120
140
160
180
200
220
240
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
5th - 95th percentile
Balanced
Growth
MedianReturn%-cumulative(base=Dec2003)
16. 16
Source: JCB team analysis, based on data sourced from Bloomberg, the FSC and Investment Trends.
Asset Allocations for SMSFs have been sourced from the FSC and mapped to relevant asset class benchmarks. Aus securities selected (the most prominent portfolio component)
were done as part of a monte carlo simulation involving 2000 samples. Past performance is not an indicator of future performance.
In times of stress, SMSFs typically show higher fluctuations
Spread of Risk for a typical SMSF Portfolio (simulations: 2000)
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Balanced
Growth
Median
5th - 95th percentile
Risk%-rolling24months
17. 17
Hybrids (and low grade credit) can tend to become equity-like
in stressful markets
Source: Macquarie Research.
Notes: Past performance is not an indicator of future performance.
18. 3. High Grade Bonds:
Can they defend & protect
given current interest rate
levels?
19. 19
How do bond prices react to interest rate changes?
Interest
Rates
Bond
Prices
Interest
Rates
Bond
Prices
Rate
Rise
Rate
Fall
20. 20
Global rates have fallen to record lows…
Reversing the secular bull market
The path of 10yr yields (rates) for Australia, US and UK
Source: Bank of America Merrill Lynch, March 2017, based on the original methodology from August 2016. Simulated total returns, assuming interest rates reverse their 30y
historical evolution. http://rsch.baml.com/r?q=Rw1BoyM3mPc220bQZXKc7g&e=phear.sam%40baml.com&h=0hXxRg&ps=true&pv=validated BofA Merrill Lynch indices total return
series for Treasuries (G0Q0), Gilts (G0L0) and ACGBs (G0T0). ACGB Index (G0T0) includes all government bonds excluding linkers. For illustrative purposes only.
21. 21
A rise in rates (mirroring the secular decline) is positive…
Periods Annual returns %
2017-2020 4.47
2021-2025 2.85
2026-2030 9.04
2031-2035 8.43
2036-2040 7.65
2041-2045 9.28
Average annualised returns for future
periods:
Albert Einstein called compound interest the “Eighth Wonder of the World’’.
“He who understands it earns it, he who doesn’t pays it’’
Projected performance of holding 10yr bonds for extended periods: Australia
Source: Bank of America Merrill Lynch, March 2017, based on the original methodology from August 2016. Simulated total returns, assuming interest rates reverse their 30y historical evolution.
http://rsch.baml.com/r?q=Rw1BoyM3mPc220bQZXKc7g&e=phear.sam%40baml.com&h=0hXxRg&ps=true&pv=validated BofA Merrill Lynch indices total return series for Treasuries (G0Q0),
Gilts (G0L0) and ACGBs (G0T0). ACGB Index (G0T0) includes all government bonds excluding linkers. For illustrative purposes only.
22. Australian High Grade Bonds are considered to be
self-rebalancing & long-term beneficial
22
-5.7%
18.8%
11.9%
12.5%
-1.7%
12.5%
4.5%
9.2% 6.8%
5.5%
2.4%
19.1%
-2.3%
5.2%
13.4%
5.5%
0.3%
10.3%
2.3%
2.5%
3.5%
-40%
-20%
0%
20%
40%
60%
1994
1995
1996
1997
1999
2000
2001
2002
2004
2005
2006
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
CalendarYrIndexReturn%
RBA +275bps
in 1994
RBA +150bps
in 1999 period
US FOMC
+425bps
RBA +75bps
in 2009
14.3%
p.a. 8.7%
p.a.
9.2%
p.a.
Source: JCB team analysis based on data sourced from Bloomberg – index refers to Bloomberg AusBond Treasury Bond 0+yr index.
Past performance is not an indicator of future performance.
23. 23
Index: Bloomberg AusBond Treasury (0+ Yr) Index
Actively navigating the interest rate cycle:
Modified duration (vs index) – JCB Active Fund (Wholesale)
Note: the above information is for the JCB Active Fund, a wholesale fund launched on 31 December 2014 and offered under an Information Memorandum dated 11 January 2016
(not the CC JCB Active Bond Fund which launched on 1 August 2016) to illustrate the results achieved. Past performance is not an indicator of future performance.
5.3
3.8
3.5
2.9
4.4
5.1
3.3
4.0
4.2
3.2
5.5
4.2
4.7
5.0
4.9
5.2
6.4
3.9
4.6
5.2
5.8
6.1
4.6
4.8
3.7
4.4
4.0
5.3
4.5
5.9
5.4
4.7
5.7
4.2
4.8
5.4
5.65.65.65.5
6.2
6.4
5.4
4.7
4.9
6.1
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Jul-18
Sep-18
Modifiedduration(years)
Index
JCB average
24. High Grade Bonds have defended in down markets
24
The key reason why portfolios need genuine defensive holdings.
Indices Selected fundsIndices Selected fundsIndices Selected fundsIndices Selected funds
-14.7%
8.8%
10.0%
9.6% 9.4%
-38.4%
11.2%
19.1%
14.9%
10.6%
-33.3%
-10.5%
10.1%
13.4%
11.4% 11.3%
2.0%
5.9%
-13.7%
1.8%
4.2%
3.0%
4.8%
2.2%
-3.7%
2.6%
-40%
-30%
-20%
-10%
0%
10%
20%
return%
May 15-Feb 16:
Greece & China concerns
2011 US downgrade2008 Global Financial CrisisMar 02-Feb 03: dot.com
Indices Selected fundsSelected fundsIndicesIndices Selected fundsIndices Selected funds
Source: JCB team analysis and Morningstar Direct. Morningstar reports on an after-fees basis. Past performance is not an indicator of future performance.
25. 25
High Grade Bonds have protected in down equity markets
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
CalendarYearReturns%
Aus Shares
Intl Shares
Aus High Grade
Source: JCB team analysis based on data sourced from Bloomberg – High Grade Bonds refers to Bloomberg AusBond Treasury Bond 0+yr index. Aus Shares is the S&P/ASX 300
Index TR and Intl Shares is the MSCI World ex-Australia TR in A$. Past performance is not an indicator of future performance.
26. 26
JCB 2018 Scenario Analysis for high grade bonds
Updated to February 2018
Source: JCB team analysis. Index relates to the Bloomberg AusBond Treasury (0+yr) Index Data sourced from Bloomberg, Yield Broker rate sheet dated 5 Feb 2018.
RBAcash
3yr yield
10yr yield
30yr yield
Expected 2018
Index Return
1. Continued
risk-on
2. Markets are
steady
3. A mild risk-off
4. Extreme risk-
off
Markets:
running hot
Goldilocks:
Cycle top
approaching
End of the
cycle
1.50
2.52
3.22
3.87
1.1%
1.50
2.18
2.80
3.50
3.4%
1.50
1.86
2.40
3.05
5.7%
1.50
1.53
1.99
2.64
8.0%
RBAno change in 2018 – remains at 1.50%
1.5 Std Dev
cheap
1.0 Std Dev
cheap
0.5 Std Dev
cheap
Fair
Value/Mean
Relative
Valuation=
1. More hikes
expected
2. RBA neutral
Fed hikes
3. Steady RBA /
Fed neutral
4. The next
move: a rate cut
Markets:
running hot
Goldilocks:
Cycle top
approaching
End of the
cycle
2.00
2.68
3.30
3.95
0.4%
2.00
2.36
2.89
3.59
2.7%
2.00
2.03
2.49
3.14
5.0%
2.00
1.63
2.15
2.80
7.1%
RBA HIKEStwice in H1 2018 to 2.00%
1.0 Std Dev
cheap
0.5 Std Dev
cheap
Fair
Value/Mean
Ave spreadto cash
of last 3 cycles
ScenarioA: ScenarioB:
27. 27
Australians are underweight in bonds
Global Pension Aggregate Bond Allocations (at 2017)
21%
35% 34%
50%
56%
31%
27%
14%
0%
10%
20%
30%
40%
50%
60%
US
UK
Switzerland
Netherlands
Japan
Canada
P7
Australia
%bondallocationineachmarket
Source: Global pension aggregate bond allocations from Willis Towers Watson 2017 Global Pension Report. P7 = US, UK, Switzerland, Netherlands, Japan, Canada and Australia.
The depicted allocation is an example balanced portfolio and is for illustrative purposes only and shows how high grade bonds could fit within a balanced portfolio.
29. 29
Being well balanced in portfolios
Economy &
Markets
High Grade
Bonds
Portfolio
Construction
Manager
selection
Beware of complacency
during this late-cycle
phase: conditions are
evolving.
Focus on robust
portfolio construction –
be clear on what assets
are growth vs defensive.
High Grade Bonds can
play a strong role in
defending your portfolio
over different conditions:
few other assets can
consistently do this.
Understand what you
are investing in:
transparency, liquidity
30. 30
Jamieson Coote Bonds at a glance – 30 September 2018
$1.1bn 2014
◼ Founded in 2014
◼ Offices in Melbourne &
Singapore
◼ Specialise solely on managing
high grade bonds
◼ Assets under
management
◼ Retail, HNWI and Institutional
clients
◼ Number of years of combined
investment experience of the
JCB team
◼ Deep offshore experience
520
◼ 20 specialist staff looking
after distribution, client
service & operations via
Channel Capital
◼ <80% of market beta#
◼ Outperformed down bond
market months: >95%#
◼ 1.1% p.a. gross alpha#
◼ High quality Advisory board
members:
− Mark Burgess (ex CEO
Future Fund), Saul Eslake
(noted career economist),
John Kean, Lynda O’Grady,
Neil Tritton
~75-80%
of index
vol
101
* Includes CC JCB Active Bond Fund (APIR:CHN0005AU), JCB Active Fund (Wholesale) and Institutional mandates.
# Source: JCB performance data and analysis for JCB Active Fund (Wholesale) which launched on 31 December 2014. Past performance is not an indicator of future performance.
31. 31
Aspect CC JCB Active Bond Fund (APIR CHN0005AU) and JCB Active Bond Master Strategy
Benchmark ◼ Bloomberg AusBond Treasury 0+ Year Index
Objective ◼ To outperform the Bloomberg AusBond Treasury 0+ Year Index over rolling 3 year periods
Instruments ◼ Australian Commonwealth Government Bonds, e.g. CGS
◼ Semi-Government Bonds, e.g. Treasury Corp Victoria (TCV)
◼ Supranational Bonds, e.g. World Bank, Inter American Development Bank – indicative standard
◼ Interest Rate Futures – for hedging purposes, e.g. 3, 10, 20yr bond futures
◼ Cash: JCB prefers to remain invested in bonds over cash due to the credit risk in holding cash >A$250,000
Typical # of holdings ◼ ~15-25 securities of various maturities
Constraints Individual security holdings:
- Will not usually exceed 20%
- Must have AAA (or AA minimum rating) from either Moodys or Standard and Poor’s
- Must be issued in AUD
- Must be explicitly backed by a Government or Public Finance Agency
Duration target ◼ Maintain index position with duration movement ±3 years
Portfolio management ◼ JCB’s Investments Team use both domestic and global macro-economic factors to adjust duration and risk exposures to generate
excess return and maximise outcomes for our clients.
◼ Futures positions and curve trades will be used to adjust duration (using technical analysis)
◼ Supply dynamics and global curves play a significant role in determining portfolio duration exposures and have a material impact
on the shape of the AUD term structure
Portfolio management – investment strategy
A conservative approach to managing money
32. CC JCB Active Bond Fund (APIR:CHN0005AU)
32
Portfolio snapshot – as at 30 September
Credit Rating Allocation Sector Allocation (duration weighted)
Fund overview
Fundamental
Analysis
Technical
Analysis
Risk
Management
JCB
Investment Strategy
Source: JCB Investment Team and Channel Capital, as at September 2018. The benchmark is the Bloomberg AusBond Treasury Bond Index 0+yrs. Past performance is not an
indicator of future performance.
Characteristic Fund Benchmark
Modified Duration (years) 5.35 6.12
Yield to maturity (%) 2.67 2.42
Weighted average credit rating AAA AAA
33. Mezzanine Debt
High Yield /
Junk Debt
Bank Loans
High Grade
Corporate Debt
Mortgage Backed
Securities: RMBS
Supra Nationals e.g.
World Bank
State Government
Bonds: Semis
Australian Commonwealth
Government: ACGB
Default
Risk
Level of
Liquidity
33
As at September 2018. Average of Retail TD investment rates over a 6 month period (TDs) – source, RBA at September 2018. Returns are before fees. Performance shown here relates to JCB Active Fund, a
wholesale fund launched on 31 December 2014. Monthly NAV data is from the fund administrator and analysed by the JCB team. Performance is gross of fees and assumes reinvestment of distributions (i.e. total
return). From 31/12/2014 (inception) to 31/12/2015, the benchmark applied is the Bloomberg Australia Sovereign Bond Index. From 31/12/2015 to present, the index used is the Bloomberg Ausbond Treasury 0+yr
index. Past performance is not an indicator of future performance. The index used is the Bloomberg Ausbond Treasury 0+yr index.
Comparing JCB Active Bond Master strategy vs Term Deposits
Term Deposits vs JCB active bond master strategy (gross)
(Index + Excess Return)
The defensive hierarchy
◼ Daily liquidity vs potentially long lock-up
◼ Superior credit quality over $250k
◼ JCB has an average AAA credit quality rating across
the portfolio (no corporate or credit exposure).
◼ JCB distributes income semi-annually with a
targeted distribution of 2% p.a.
2.58% 2.51%
3.49%
2.26%
2.89%
2.37%
0.47%
1.19%
0.03%
1.08%
2.49%
2.16%
2.01%
1.50%
2.18%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2015 2016 2017 2018 YTD Sep Since Inception
p.a.
TermDeposits
IndexExcessReturn
4.94%
2.99%
3.97%
Total JCB Fund Return
4.68%
2.29%