fixed income markets – then and now chartwell investment partners jason b. stewart, cima regional...

Fixed Income Markets – Then and NowChartwell Investment Partners

Jason B. Stewart, CIMARegional Director, Managed Accounts

December 4, 2015

Pacific Region Investment Conference

Chartwell Investment PartnersInstitutional and Private Asset Management

Municipal Credit Ratings

Government Coupon Rates

Corporate Maturities

Mortgage-Backed Duration

Asset-Backed Yields

TIPS Call Features

CDs Capital Structure

Chartwell Investment PartnersInstitutional and Private Asset ManagementBond Types and Considerations

Chartwell Investment PartnersInstitutional and Private Asset ManagementGlobal Bond Market Today

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

• Geopolitical Considerations• Accounting Practices• Currency Fluctuations• Liquidity• Quality

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

Chartwell Investment PartnersInstitutional and Private Asset ManagementOverall Bond Demand Remains Strong

Chartwell Investment PartnersInstitutional and Private Asset ManagementU. S. Bond Market Spectrum

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

• All bonds are debt securities issued by organizations to

raise capital for various reasons

• High Yield bonds are issued by companies that do not

qualify for “investment grade” ratings by one or more of

the major ratings agencies (Moody’s, S&P, and Fitch)

• These issuers must pay a higher interest rate in order to

attract investors to compensate them for the risk

associated with investing in organizations of lower credit

quality

Chartwell Investment PartnersInstitutional and Private Asset ManagementHigh Yield Bonds Defined

Investment Grade

High Yield

Risk/Yield

Lower

Higher

Moody's S&PAaa AAA Aa AAA A

Baa BBB

Ba BBB B

Caa CCC C D

Chartwell Investment PartnersInstitutional and Private Asset ManagementU. S. High Yield Bond Market

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

Highly LeveragedHigh Risk/Return

Troubled CreditTakeover Potential

Source: J.P. Morgan

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

Chartwell Investment PartnersInstitutional and Private Asset ManagementU. S. High Yield Bond Market Overview

• “Fallen Angels” – formerly investment grade

• “Rising Stars” – small or newer companies

• High Debt Companies – refinancing debt, takeovers

• Capital Intensive Companies (cable TV, telecom)

• Foreign Governments and Corporations

Source: SIFMA

Chartwell Investment PartnersInstitutional and Private Asset ManagementWho Issues High Yield Bonds?

Energy Exploration & Production gets all the headlines

Chartwell Investment PartnersInstitutional and Private Asset ManagementThe High Yield Bond Market by Sector

• Sprint Corp

• First Data Corportation

• Chrysler Group LLC

• Reynolds Group Tenet Healthcare

• Softbank Corp

• Royal Bank of Scotland

• Dish DBS Corp

• Rite Aid Corp

• Hilton Worldwide

• Caesars Entertainment

• Wynn Las Vegas

• MGM Resorts

• Alcoa

Chartwell Investment PartnersInstitutional and Private Asset ManagementWho Issues High Yield Bonds?

Source: iShares HYG Holdings

• A high rate of income due to the higher interest rates of

the bonds

• Low correlation with other parts of the bond market

• Often perform well in a rising interest rate environment

– Investment Grade bonds trade on interest rates and rate

expectations. HY tends to trade on credit and economic sensitivity.

• The potential for capital appreciation if the bond is

upgraded or if tendered at a premium by the issuer

Chartwell Investment PartnersInstitutional and Private Asset ManagementInvesting in High Yield - Benefits

Source: JP Morgan Guide to the Markets 9/30/15

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

Chartwell Investment PartnersInstitutional and Private Asset ManagementCorrelations in the Bond Market

High YieldCorrelation to 10-Year

-.24

Yield 8.04%

Source: J.P. Morgan

25 Year High-Yield/ High Grade Trade-Off

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

Chartwell Investment PartnersInstitutional and Private Asset ManagementDiversification Benefit of Investing in High Yield

Chartwell Investment PartnersInstitutional and Private Asset ManagementHistorical Composition by Quality (MV%) – Trailing 5 Years

84%BB or B

10% 20% 30%7%

8%

9%

10%

11%

BB

B

CCC

Standard Deviation

Avg

. Ret

urn

(1985-2013)

Higher Returns with Less Risk

Source: Bloomberg

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

Chartwell Investment PartnersInstitutional and Private Asset ManagementHigh Quality vs. Lower Quality

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

Chartwell Investment PartnersInstitutional and Private Asset ManagementQuality Matters – Esp. in Energy Exploration & Production

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

Chartwell Investment PartnersInstitutional and Private Asset ManagementQuality Matters Throughout the Index

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

Chartwell Investment PartnersInstitutional and Private Asset ManagementReturns and Volatility Vary - CCC

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

Chartwell Investment PartnersInstitutional and Private Asset ManagementReturns and Volatility Vary – BB – A Smoother Experience

1985

1986

1987

1988

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

0

10

20

30

40

50

60

70

Defaults by Credit RatingBB B CCC

Perc

ent

Source: Moody’s

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

Chartwell Investment PartnersInstitutional and Private Asset ManagementHigh Quality vs. Lower Quality

R E S E A R C H Q U A L I T Y C O N S I S T E N C Y

Chartwell Investment PartnersInstitutional and Private Asset ManagementHigh Yield Now

The US High Yield Bond Market Offers:

• A large opportunity set

• High current income

• Low correlation to other bonds

• Historical performance when interest rates rise

• Portfolio diversification benefits

• Attractive total return potential

– Absolute and risk adjusted (Sharpe Ratio)

• Compelling returns with manageable risk

– Credit research, duration management, quality constraints, sector

diversification, active management

Chartwell Investment PartnersInstitutional and Private Asset ManagementConclusion