allianz global floating rate notes plus...2018/08/16 · allianz global floating rate notes plus...

Value. Shared.

July 2018

Active is: Staying afloat when

interest rates rise

Allianz Global

Floating Rate

Notes Plus

For fund distributors and

professional investors only

#happyfloating

2 Source: Allianz Global Investors

What are Floating Rates Notes?

Plain vanilla (fixed) bonds

Fixed coupon until maturity

Sensitivity to rising interest rates

Rate risk defined through duration

Duration: 6 years

Rates:

+1%

Price:

-6%

Floating Rate Notes (FRNs)

Variable coupons, resetting periodically

Coupons linked to interest rates

Protection against rising rates

~

Rates and

FRN Coupon:

+1%

Price:

stable

FRN Coupon:

+1%

3

FRNs can provide protection from rising rates

Source: AllianzGI, Bloomberg, 30 April 2018

-2

0

2

4

6

8

10

12

1990 1995 2000 2005 2010 2015

Yie

ld %

US Germany

UK Japan

Core government 10 year yields

Will yields continue to fall for another 25 years?

Our projections for US rates

Rates set to rise, with the US ahead of others

We forecast a 2.75% terminal Fed Funds rate, implying a further 4x

rate hikes in this cycle

Europe and other economies are expected to catch up in terms of

rate rises, over the next 2-3 years

0

1

2

3

4

5

6

7

8

9

10

1990 1995 2000 2005 2010 2015 2020

Rate

(%

)

Fed Funds 5-year UST

30-year UST

4

Allianz Global Floating Rate Notes:

Strategy overview

Source: Allianz Global Investors

Global approach

Not beholden to benchmarks

Superior opportunity set and diversification benefits

versus a domestic strategy

Crossover focus

Focus on BBB/BB/B securities to exploit dislocations between

IG & HY, to benefit from the historically superior risk/return

payoff in this space

Expansive investment universe

Benefit from access outside of corporate markets, into

securitised assets and fixed interest securities using interest

rate hedges to achieve floating exposure

What we do

Objectives

Return: Cash +150bp per annum, on average, over a cycle

Risk: < 3% volatility per annum

Investment Grade

Corporate FRNs

High Yield

Corporate FRNs

Synthetic FRNs

(fixed bonds + swaps)

Securitised FRNs

(ABS / MBS)

Global FRN investment universe

5

A team of expert credit investors managing

Allianz Global Floating Rate Notes Plus

Allianz Global Investors has more than 30 years experience in managing global floating rate notes, with currently USD 2.35

bn AuMs.

The team is directly in charge of Credit selection (IG/HY) and has not

experienced a single default since 1999.

Malie Conway Chief Investment Officer

– Global Fixed Income

Jonathan Yip CFA

Head of Investment

Grade Credit – Global Fixed Income

« The risk profile of the fund is investment grade, with an overarching winning-by-not-losing credit philosophy ».

Jonathan Yip

Source: Allianz Global Investors, June 2018

6

Why Allianz Global Floating Rate Notes?


Earn more than

cash

Attractive risk / return profile vs

traditional bonds strategy

Active diversification for reducing risks

Upgrade your

bond portfolio

We are late in the credit cycle. High

yield strategies could be vulnerable to

volatility – search for quality & be active

Benefit from rising

interest rates

Avoid the traditional interest rate risk of

fixed strategies and capitalise from

interest rate hikes by using FRNs

7

01 Upgrade your bond

portfolio

8

Why upgrade your bond portfolio?


Active is… avoiding the blowups.

1. We are past 6 o‘clock in the credit cycle

2. BUT cycles vary by industry and geography

3. Most sectors have robust fundamentals

4. Credit risk is still there to be harvested, but

the beta trade is over

Credit outlook

The "typical"

Credit Cycle

The credit cycle

Maximum

risk

9

Upgrade your bond portfolio

Source: Allianz Global Investors, as of 30 June 2018. This is for guidance only and not indicative of future allocation. A performance of the strategy is not guaranteed and losses remain possible.

of the portfolio has an

Investment Grade

rating

86%

The plus: high yield bonds

Additional diversification

The core: high quality bonds

Stable returns

Low volatility

Investment Grade

High Yield

Average rating of the portfolio IG

Focus on BBB/BB/B securities to exploit dislocations between investment grade and high yield, to benefit from the historically superior risk/return payoff in

this space

Target return : Cash +150bp per annum, on average, over a cycle

Target volatility: < 3% volatility per annum

10 Source: Allianz Global Investors, as of 30 June 2018; This is for guidance only and not indicative of future allocation. A performance of the strategy is not guaranteed and losses remain possible.

Active diversification for reducing risks

Active sector allocation to use additional return opportunities and diversify risks

The fund invests in different regions of the world, and in highly liquid currencies (USD, EUR and GBP)

2%

15%

46%

23%

10% 4%

Breakdown by Rating

AAA AA A BBB BB B

42%

9%

26%

12%

2% 9%

Breakdown by Geography

USA & Canada UK

Europe Asia Pacific

Latin America Other

45%

1% 4% 6%

10%

8%

1%

2%

6%

16%

Breakdown by Sector

Financials Basic Industry

Capital goods Communications

Consumer cyclical Consumer non cyclical

Energy Technology

Other Securitized

11

02 Benefit from rising

interest rates

12

Why invest in Floating Rates Notes now?

Source: Allianz Global Investors, Bloomberg

1,50

1,75

2,00

2,25

2,50

2,75

3,00

3,25

3,50

Mrz 18 Jun 18 Sep 18 Dez 18 Mrz 19 Jun 19 Sep 19 Dez 19 Mrz 20 Jun 20 Sep 20 Dez 20

Fe

d F

un

ds R

ate

(%

)

We are here

1-2 years of hikes

Fed wants policy

rate >3%

???

Expected path of US cash interest rates

How FRNs behave during a rate

hiking cycle ?

Benefit from protection against rising rates,

given that FRN coupons increase with rates

Avoid one of the traditional sources of

drawdown risk in fixed income investing

Hedge against inflation, which typically rises

with interest rates

+ potential for other central banks to follow the Fed…

13

Benefit from rising interest rates

Source: Allianz Global Investors, Bloomberg, BoAML. Index returns are based on a blend of Investment Grade & High Yield indices: 25% USD IG + 25% EUR IG + 50% Global HY. Fixed index constituents: ER00, C0A0, HW0C; FRN

index constituents: LEF1TRUH, BFRNTRUU, HFLT. All index returns reported in USD-hedged terms. Past performance is not a reliable indicators of future results.

-3,5%

-3,0%

-2,5%

-2,0%

-1,5%

-1,0%

-0,5%

0,0%

0,5%

1,0%

Attractive income potential even in a challenging

environment for conventional fixed rate bonds

Floating Rate Note (FRN) coupons are linked to interest

rates and therefore increase when rates rise

FRNs can provide protection from rising interest rates

FRNs outperform fixed rate bonds when interest rates

rise

1,5%

1,8%

2,0%

2,3%

2,5%

2,8%

3,0%

Dez 12 Dez 13 Dez 14 Dez 15 Dez 16 Dez 17

+3.50%

Floating Rate Note index return

Fixed bond index return

+2.25%

+1.25%

US 10y treasury yield

1 2 3

Outperformance of FRNs vs Fixed bonds when rates rise Event Date

1 Taper tantrum May-Jun 2013

2 Trump election Oct-Nov 2016

3 Inflation Rebound Jan-Feb 2018

3 Inflation Rebound Jan-Feb 2018

14

03 Earn more

than cash

15

A unique, differentiated offering versus the broader market

While traditional cash-like options offer very low or in some currencies negative yield, Allianz Global Floating Rates Notes Plus is able to deliver positive yields for different kinds of investor needs and currencies with an investment grade risk profile.

Source: AllianzGI, yields are quoted in USD-hedged terms using Yield-To-Maturity expectations. This is no guarantee of present or future characteristics of the investment strategy. Data as of

June 2018.

Earn more than cash

Money

Market

FRN

Short

Term

Bond

Mortgage

FRN HY FRN

Bank

Loans

Allianz Global

Floating Rate

Notes Plus Lower expected

yield

Higher

expected

yield

Investment-Grade FRNs

feature high quality and short

durations and are therefore

defensive in nature.

High-Yield FRNs offer spreads

similar to fixed-rate high-yield

bonds but without the associated

duration risk.

16

An attractive risk / return profile

in USD hedged terms

Source: Allianz Global Investors, Bloomberg. US ST = ICE BofAML1-3 Y US Broad Market Index (US01); US Credit = ICE BofAML US Corporates Index (C0A0); US AGG = ICE BofAML US Broad Market (US00); Global HY = ICE

BofAML Global HY Constrained hedged in USD (HW0C). As at 30 June 2018

-1

0

1

2

3

4

5

6

7

0 1 2 3 4 5 6 7 8 9 10 11

Allianz Global FRN

US Agg

US Credit

Global HY

US Short Term Bond

Exp. Return in %

Exp. Risk in %

Allianz Global FRNs targets

an attractive risk-adjusted

return versus traditional bond

strategies

Expected risk based on historical

volatility of asset classes (over past

10 years), and using max volatility

limit for Allianz Global FRN

Expected returns based on current

yields in USD hedged terms

17

Performance and

positioning

18

Allianz Global Floating Rate Notes Plus IT USD

Performance

Past performance is not a reliable indicator of future results. Data gross of fees; calculation at the net asset value (BVI method) based on the assumption that distributions are reinvested and excluding initial charges. Individual costs such as

fees, commissions and other charges have not been taken into consideration and would have a negative impact on the performance if they were included.

Source: Allianz Global Investors, 31 July 2018

Key Features

Objective: Cash +150bp per annum, over a cycle

Risk: less than 3%

Investment Universe: Investment Grade, High

Yield, Emerging Market Corporates & Securitised

Fund

Inception date Feb 2018

AUM $154m

Performance comparison Since fund inception

Allianz Global FRNs +0.94 %

Performance (gross of fees cumulative returns)

-0,40%

-0,20%

0,00%

0,20%

0,40%

0,60%

0,80%

1,00%

Jan Feb Mrz Apr Mai Jun Jul

19


Portfolio positioning

Currency of Bonds* % Invested

EUR 17.7

GBP 3.5

USD 78.3

Characteristics

Weighted Average Tenor 4.1 yr

Weighted Duration 0.2 yr

Weighted Average Rating A-

1LIBOR spread = asset swap spread / discount margin, adjusted for FX hedging basis impacts 2Reference rate = 1 year forward expectations of local cash rate, derived using YTM of 1 year fixed swaps 3Yield equivalent = approximation of the 1-year-forward-looking income characteristics of the fund, considering both the spread and cash rate levels in each local market

Source: Allianz Global Investors, 30 June 2018. * All FX exposures are fully hedged to base currency through FX Forward hedges

20


Opportunities and risks

Opportunities Risks

Source: Allianz Global Investors; data as per 30.06.2018

Prospect of yield above money market rates, above-average yield potential of ABS/MBS

Relatively high degree of price stability through short duration

Broad diversification across numerous securities

Possible extra returns through single security analysis and active management

Currency gains possible in share classes not hedged against investor currency

High-yield bonds and ABS/MBS entail above-average risk of volatility, illiquid markets and capital loss. The volatility of fund prices may be strongly increased

Limited return potential due to short duration

Limited participation in the yield potential of single securities

Success of single security analysis and active management not guaranteed

Currency losses possible in share classes not hedged against investor currency

21

A Appendix

22

Team and investment

process

23

18-1504 – Global Fixed Income

Richard House

Head of Emerging Markets

24 years

Oleksiy Soroka, CFA

Emerging Market Credit

21 years

Naveen Kunam

Local Currency Sovereigns

16 years

Shahzad Hasan

Hard Currency Sovereigns

14 years

Eoghan McDonagh

Emerging Market Credit

13 years

Daniel Ha

Emerging Market Corporates

11 years (HK)

Julian Le Beron, CFA

Head of Developed Markets

21 years

Brian Tomlinson

Developed Markets

28 years

Sam Hogg, CFA

Developed Markets

7 years

Jay Mistry

Developed Markets

5 years

John Makowske

Product Specialist

34 years (NY)

Andrew Curran

Senior Product Specialist, EMD

28 years

Raj Jadav, CFA

Senior Product Specialist

21 years (NY)

Matthew Chaldecott, CFA

Product Specialist

11 years

Luke Copley, CFA

Product Specialist

7 years

Dennis Baas, CAIA

Product Specialist

7 years

Priyanna Shah

Product Specialist Associate

5 years

David Newman

Head of Global High Yield

30 years

Frits Lieuw-Kie-Song*

31 years (NY)

Mark Wade*

24 years

Brian Abdelhadi*

16 years

Jonathan Yip, CFA

Head of Investment Grade

Credit

21 years

Daniel Delaney, CFA

Investment Grade Credit

16 years (NY)

Oliver Sloper*

6 years

An experienced portfolio management team of global

specialists

Global Fixed Income Portfolio Management

Global Sovereign Global Credit

Emerging Markets Developed Markets Investment Grade High Yield

Applied Analytics

Malie Conway

Chief Investment Officer, 32 years

Product Specialists

David Gillard

Head of Applied Analytics

24 years

Yin Tse Loh, FIA

Portfolio Manager, LDI

11 years

Floris De Vries

Associate Portfolio Manager, LDI

3 years

Dedicated Global Credit Research

Dedicated Global Sovereign Research

3 Investment Professionals

15 Investment Professionals

Organisation by team function is illustrated; reporting lines may be different. NY = New York, HK = Hong Kong. Data as of June 2018

*Providing Portfolio Management support

Extended

AllianzGI

Resources:

Trading

56 Traders,

24 hour service

Fixed Income Resource

99 Fund

Managers/Analysts

Global Sovereign

Research & Strategy

Equity Research

Over 80 Analysts with

2,100 stocks covered

Portfolio Construction

Lydia Wagenmann

Head of Portfolio Construction

23 years

Steven Grieve

Portfolio Analyst

2 years

William Whyte

Portfolio Analyst

1 year

Alexander Robey

Portfolio Analyst

1 year

Independent Portfolio

Risk Management Team

24

Global credit investment process


Economic Research

Global Growth

Inflation Outlook

Interest Rate Outlook

Event Risk

Proprietary Indicators

Geopolitical Views Sector Selection Event Risk

Issuer Analysis

Industry Dynamics

Quantitative Screens

Capital Structure and Collateral Analysis

Covenant Analysis

Step 1

Relative Value Analysis

Step 3

Security Selection

Step 2

Portfolio Structure

Currency denomination of Issues

Yield Curve

Country of Risk

Rating Migration

Quality Tiers

Step 4

Implementation

Monitor and review

Trade Modelling

Best Execution

Credit Conditions

Supply & Demand

25

Credit research:

Financial and qualitative analysis | Relative value


Research

Focus

~ 350

Investment

Grade

~ 350 High

Yield

Research

Output

Quarterly

sector

overview

Issuer

profiles

Ad-hoc

market

updates

Qualitative Company Analysis

Transparency of business, strategy

Quality of management

Ownership & Creditor Structure

Identify positive/negative credit catalysts

Sector Analysis

Sensitivity to Economic Cycle, Competition, External influences

Financial Company Analysis

Revenue & cost structure

Income & cash flow trends

Financial leverage & debt service coverage

Liquidity

Structural Assessment

Capital structure

Covenants

Jurisdictional implications

Relative Value Assessment

Quantitative Filters

Credit Watch Model

ESG Screening and High Yield Credit Filter

26

18-1504 – Global Fixed Income

We have employed a proprietary quantitative “Credit Watch” model as part our

investment grade credit selection process since 1999

Since implementation, it has protected our portfolios from all investment grade corporate

defaults and it has also protected against severe rating transitions and distress

The model uses equity market signals as a leading indicator to predict future “Fallen

Angels”

A rigid sell discipline is crucial for success

* Event = default, multi-notch downgrades, doubling of spreads or bonds trading on price

Source: Allianz Global Investors.; data as at February 2018 This is no recommendation or solicitation to buy or sell any particular security.

A performance of the strategy is not guaranteed and losses remain possible.

Credit Watch Model: our proprietary early warning

system

Main inputs

Credit Watch Model

Signals

Equity price

movement

Company

size

Equity price

volatility

Company

leverage

Watch The positions may

not be initiated or

added to

Sell The position must

be sold

Clear Security may be

purchased

Issuer Model Sell Date Event Date*

1 KPN Aug-00 Sep-01 2 Marconi Feb-01 Aug-01 3 Enron Jun-01 Nov-01 4 ABB Jun-01 Apr-02 5 Qwest Jul-01 Feb-02 6 WorldCom Jan-02 Apr-02 7 Sprint Jan-02 Jun-02 8 El Paso May-02 Aug-02 9 Household Jul-02 Oct-02 10 Bombardier May-04 Nov-04 11 GM Oct-04 Mar-05 12 Ford Jan-05 Mar-05 13 Delphi Jan-05 Mar-05 14 Boston Scientific Jun-06 Jul-07 15 Northern Rock Jun-07 Jul-07 16 Lennar Jun-07 Oct-07 17 Countrywide Jun-07 Aug-07 18 Centex Aug-07 Oct-07 19 Washington Mutual Oct-07 Sep-08 20 Sprint Dec-07 Feb-08 21 Lehman Brothers Feb-08 Sep-08 22 Dexia Apr-10 Oct-11 23 Nokia Jun-11 Apr-12 24 MF Global Sep-11 Oct-11 25 Cliffs Natural Resources May-12 Sep-14 26 Dell Nov-12 Jan-13 27 Tesco Aug-14 Sep-14 28 Raiffeisen Bank International Oct-14 Jan-15 29 Freeport-McMoRan Jan-15 Aug-15 30 Teck Resources May-15 Sep-15 31 Anglo American Jun-15 Dec-15 32 ONEOK Partners Jun-15 Nov-15 33 Barrick Gold Jul-15 Aug-15 34 RWE Aug-15 Sep-15 35 Plains All American Aug-15 Nov-15 36 Volkswagen Sep-15 Sep-15 37 Williams Partners Sep-15 Nov-15

38 Vale Nov-14 Feb-16

39 Southwestern Energy Dec-14 Feb-16

40 Glencore Jul-15 Aug-15

41 Macy’s Nov-15 Feb-16

42 CF Industries Dec-15 Oct-16

43 Deutsche Bank Jan-16 Feb-16

44 Unicredit Jan-16 Feb-16

45 Noble Corp Jan-16 Jul-16

46 Banco Popular Jan-16 Jun-17

47 Teva Nov-16 Aug-17

48 AA Jan-18 Feb-18

27

Risk management

and risk systems

28

Managing risk is key to success


Key risks in credit

Liquidity risk:

ability to sell in an orderly fashion

Market risk:

beta exposure vs benchmark

Idiosyncratic risk:

event / shock / default

Our approach

Limits on issue and issuer

concentration

Limits on smallest issues and issuers

in the market

Weighted Duration Times Spread

(WDTS) key metric of credit risk

Set and monitor WDTS vs. index

Analyse exposure by region /

industry / rating / issuer

In-depth credit analysis

Proprietary risk systems

Prudent position sizing to control

drawdown risk and ensure

diversification

Independent monitoring

Monitoring portfolio and idiosyncratic risk

Senior management notified of any divergence from thresholds

29

Proprietary state of the art risk systems


Tailor-made, exclusively designed for Fixed Income

Integrated into the investment process

Range of decision support tools within system:

Live exposure monitoring

Flexible risk environment indicators

Scenario analysis

Try-before-you-buy functionality

On demand attribution analysis

Stop-loss flags

Portfolio construction wizards for corrective actions

Powerful ex-ante and ex-post risk analytics

Integrated Portfolio Management System

Exposures

and

OMS

Compliance

Operations (STP)

Monitoring

and Reporting

Counterparties

Electronic Platforms

30


Disclaimer

Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Investing in fixed income instruments may

expose investors to various risks, including but not limited to creditworthiness, interest rate, liquidity and restricted flexibility risks. Changes to the economic environment and market conditions may affect

these risks, resulting in an adverse effect to the value of the investment. During periods of rising nominal interest rates, the values of fixed income instruments (including short positions with respect to

fixed income instruments) are generally expected to decline. Conversely, during periods of declining interest rates, the values of these instruments are generally expected to rise. Liquidity risk may possibly

delay or prevent account withdrawals or redemptions. Allianz Global Floating Rate Notes Plus is a sub-fund of Allianz Global Investors Fund SICAV, an open-ended investment company with variable

share capital organised under the laws of Luxembourg. Past performance is not a reliable indicator of future results. If the currency in which the past performance is displayed differs from the currency of

the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local

currency. This is for information only and not to be construed as a solicitation or an invitation to make an offer, to conclude a contract, or to buy or sell any securities. The products or securities described

herein may not be available for sale in all jurisdictions or to certain categories of investors. This is for distribution only as permitted by applicable law and in particular not available to residents and/or

nationals of the USA. The investment opportunities described herein do not take into account the specific investment objectives, financial situation, knowledge, experience or specific needs of any

particular person and are not guaranteed. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data

used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any

direct or consequential losses arising from its use, unless caused by gross negligence or wilful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or

concluded, shall prevail. For a free copy of the sales prospectus, incorporation documents, daily fund prices, key investor information, latest annual and semi-annual financial reports, contact the

management company Allianz Global Investors GmbH in the fund’s country of domicile, Luxembourg, or the issuer at the address indicated below or www.allianzgi-regulatory.eu. Please read these

documents, which are solely binding, carefully before investing. This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited

liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by

Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). This communication has not been prepared in accordance with legal requirements designed to ensure the impartiality of investment

(strategy) recommendations and is not subject to any prohibition on dealing before publication of such recommendations. The duplication, publication, or transmission of the contents, irrespective of the

form, is not permitted; except for the case of explicit permission by Allianz Global Investors GmbH.

Source: Allianz Global Investors; data as per 30.06.2018 Internet: www.allianzgi.com

allianz global floating rate notes plus...2018/08/16 · allianz global floating rate notes plus...

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