aviva investors global credit absolute return (gcar) may 2013 montreux complied
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AVIVA INVESTORS
May 2013
This document is for professional clients and/or qualified investors only. The content is not to be viewed by or used with retail investors or pension scheme members.
GLOBAL CREDIT ABSOLUTE RETURN (GCAR) STRATEGY CITYWIRE EVENT - MONTREUX
Mark Wauton
AGENDA
– Why Credit Absolute Return?
– Investment Philosophy & Process
– Performance & Positioning
– Appendix
WHY CREDIT ABSOLUTE RETURN?
Global Credit Absolute Return
– Global fixed income investors face historically low absolute yields
– A global high yield focused strategy delivers incremental yield and less rate sensitivity
– Active hedging reduces volatility and minimizes downside during periods of market stress
– True global diversification and dynamic geographic exposure management expands the credit opportunity set
– Ability to deliver high returns with very attractive Sharpe ratios
3 Credit lends itself well to absolute return strategies
– Strong technicals continue to be supportive of credit due to net negative primary issuance, and continued inflows into the asset class
– Liquidity has been hampered due to regulatory change with dealers holding less inventory which will be a continued trend
– Despite the recent spread tightening credit spreads over a period of 50years have traded tighter to treasuries
THE ABSOLUTE RETURN CREDIT OPPORTUNITY - VALUATION
Global Credit Absolute Return
4 Source: Bloomberg, Federal Reserve Bank of New York, Moody’s, S&P, Citigroup Fixed Income Indices, Morgan Stanley Research: “What We’re Watching”, 15 April 2013.
0
100
200
300
400
500
600
700
1925 1935 1945 1955 1965 1975 1985 1995 2005
Spread (bps)
Average
US BBB Credit Spread to Treasury
Primary Dealer Holdings of Corporate Bonds
– High levels of cash that still reside on corporate balance sheets have reduced leverage from the pre-crisis levels.
– In addition projected default rates remain low
THE ABSOLUTE RETURN CREDIT OPPORTUNITY - FUNDAMENTALS
Global Credit Absolute Return
5 Note (1st Graph): Implied defaults calculated using 35 % recovery rate. Historic defaults calculated using Moody’s default data since 1970 and current index ratings composition. Source: Bloomberg, Moody’s, Company Data, Morgan Stanley Research: “What We’re Watching”, 15 April 2013.
Net Leverage
1.0 x
1.5 x
2.0 x
2.5 x
3.0 x
3.5 x
4.0 x
Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12
HY
IG
Credit vs. Historical Loss Rates
OUR EDGE
Global Credit Absolute Return
6
Global team with 9+ years
experience working together
on absolute return strategies
Minimize downside
by dynamically
hedging market,
sector and name
specific risk
Focus on issuers
with larger capital
structures to
maintain investment
flexibility
Active exposure
management based
on identified stop-
loss and target
levels and
quantitative inputs
Diligent
fundamental
research with an
extensive
quantitative
overlay
People
Deep Analysis
Active Hedging
Liquidity
Dynamic Trading
α
INVESTMENT FOCUS
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Global Credit Absolute Return
CMBS/RMBS
Collateralized Debt
Obligations
Credit
Indices
Sovereign
Bonds
IG Corps
(Bonds, CDS)
Financials
(Bonds, CDS)
HIGH YIELD
(Bonds, CDS)
Stressed
Credits
High
Liquidity
Risk - Low
Risk - High
Hybrid
Bonds
Distressed
Credits
Peripheral Corps
(Bonds, CDS)
Equities –
Cash, Options
Equity
Index
Options
Peripheral
Sovereigns
Our investment strategy is high yield centric and invests mainly in liquid senior and secured issues of
companies in the US and Europe
Reorg
Equity
Credit
Index
Options
Low
Liquidity
INVESTMENT STYLE
Global Credit Absolute Return
8
70 60
FUNDAMENTALS TECHNICALS
LONG TERM SHORT TERM 40 80
TOP DOWN BOTTOM UP 70 60
TEAM INDIVIDUAL
70 30
MOMENTUM VOLATILITY 65 70
TRADING BUY & HOLD 80 20
Our range
Current
INVESTMENT PROCESS SIX STEPS
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Global Credit Absolute Return
Step One Step Two Step Five Step Four
Cycle
analysis
Beta
positioning
Sizing
Timing
Scaling
Execution Ongoing
Risk
Management
Step Six
Alpha
Appraisal
Step Three
Constant Research & Development
STEP 1: TOP DOWN CYCLE ANALYSIS
– Reduce long bias
– Increase market hedges primarily via indices
– Reduce beta of longs
– Market neutral to net short bias
– Maintain index hedges
– Add single name and thematic sector basket hedges
– Increase net long position
– Reduce index hedges
– Take profit / unwind single name CDSs
– Increase beta of longs
– Long bias
– Strategic carry trades plus event driven tactical trades
– Selective tactical shorts
– Capital structure hedging Rising VolatilitySteady Volatility
Declining
Volatility
Market Stress
How do we identify the volatility regime we are in?
Qualitative perspective: We look at de-leveraging within the financial sector, sovereign/ banking sector solvency and assessment of traditional default cycle.
Quantitative perspective: We look at market correlation of risk assets and we use quantitative models that help us identify mean reversion vs. momentum
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Global Credit Absolute Return
“Due to the inherent leverage in the developed world’s financial system, the medium to long-term will be defined by shorter exaggerated spread volatility cycles embedded within the longer traditional credit default cycle. These spikes in volatility will often erode capital without a corresponding rise in defaults thereby placing a premium on quantitative analysis, skillful trading and beta management techniques to complement sound fundamental analysis.”
1 2 3 4 5 6
STEP 2: BETA POSITIONING
Strategic Holdings Tactical Holdings Indices
Investment
Characteristics
Higher quality, lower
volatility, stable to
improving credit profile,
generally secured or
senior
Higher volatility, special
situation names with a
substantial value gap and
identified catalysts
Broad market indices
consistent with market
volatility
Primary
Objective
Carry Capital Return Carry / Capital Return
Ratings BB/B, Investment Grade BB-CCC, Investment Grade
Direction Long Long + Short Long + Short
Instruments Primarily Cash Bonds,
some CDS
Cash, CDS Credit Indices, Index
Options, Equity
options, Rate Futures
Horizon 6-12 months up to 3 months 3-6 months
% Gross 60 to 80% 20% to 80% 0 to 50%
% NAV 60 to 80% -50 to 50% -25% to 25%
Strategic +
Tactical
Longs
Tactical
Shorts Net
Exposure
Credit
Indices
11
Global Credit Absolute Return
Credit Index trades are more tactical in nature and are generally layered in to change the beta
positioning and therefore directional bias of the strategy
1 2 3 4 5 6
STEP 2: CURRENT POSITIONING
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Global Credit Absolute Return
Short Subordinated
Spanish,
Italian Banks
Long
Subordinated
Financials
- Barclays T1s
- Axa T1s
- BNP T1s
- AIG UT2s
- Allianz T1s
Strategic Holding Tactical Holdings
Source: Aviva Investors as at 28 February 2013.
- BBVA
- Santander
- Intesa Sanpaolo
Cable Telecomm
Global HY
Strategic Names
- Charter
- Windstream
- Cablevision
- Dish
- Unitymedia
- Ziggo
Long US HY
Crossover Names
- Dollar General
- Ford
- Host Hotels
- Pioneer Natural
- Resources
Indices
- Short iTraxx
Senior Financials
Indices
TRADE IDEA: BUY HARLAND CLARK 9.5% SENIOR NOTES
13
Global Credit Absolute Return
Data is shown for illustrative purposes only.
Company: Harland Clarke (MFW) is a provider of integrated payment solutions, marketing services, and security solutions
Rationale: At the point of entry, MFW Senior Unsecured bonds were trading at c.16% YTW, a significant discount to
competitors and the market due to concerns about a secular decline in check printing and medium term maturities.
Fundamentals
– Strong 3Q12 results and reiteration of guidance for FY2012
– Price increases and a growth in Marketing Services offsetting secular volume declines.
– Improving earnings and positive FCF
– 50% excess cash flow sweep reducing secured leverage ahead of notes
Valuation
– Closest comparable Deluxe trading at 6X EV/EBITDA vs. 4.5X LTM leverage
– Positive transaction benchmark for Harland Financial Solutions division: Open Solutions was bought by FISERV for 10X EBITDA in January 2013.
Trading
– Upside for the bonds under a refinancing scenario in early/mid 2013 to June par call
– Significant decline in volatility post 3Q12 results and good technical entry point.
– Average entry price of 87.25
– Exited at a target price of 100 for an average total return of 16%
Entry post
strong Q3
numbers
Exit remaining
position at 100
target.
Added more to
existing position
FISERV buys
Open Solutions.
Sold 1/3 position
STEP 6: RISK MANAGEMENT
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Global Credit Absolute Return
1 2 3 4 5 6
Type of
Risk
Specific
Sector
Market
Risk Free
Instrument Investment
Objective
– Capital structure hedges
– Minimize idiosyncratic tail risk
– Maximize idiosyncratic Sharpe
– Hedge adverse sector risk
– Thematic short sector baskets
– Directional bias management
– Manage embedded rate risk
Ex-Ante Analysis: Our hedging framework ensures that the risk/return trade off is appropriate for idiosyncratic
and sector specific developments and prevailing market conditions. For tail risk events, the manager has an
analytical framework to take individual positions and/or the entire fund notionally back to cash
Proprietary
Analysis
– Amplitude beta analysis
– Equivalence
– Step-wise Analysis
– Capital structure hedging Model
– Net beta adjusted positioning analysis
– Scenario analysis
– Stress tests
– Index volatility analysis
In addition to traditional standard deviation, downgrade & liquidity risk monitoring, we have developed a
sophisticated proprietary risk analysis framework.
– Rates analysis
– Single Name CDS
– Subordinated Debt
– Equity + Options
– Credit Indices
– Equity Indices
– Index Options
– Futures
– Cash
GLOBAL CREDIT ABSOLUTE RETURN PERFORMANCE & RISK
Source: Lipper Hindsight & Aviva Investors, as at 30 April 2013. Data is provided net of fees in EUR. Benchmark: 3 Month EURIBOR. Past performance is not a guide to future performance. 15
Global Credit Absolute Return
Risk Statistics
Annualised volatility
since inception 3.58%
Net Beta Adjusted
Exposure 58%
1 Year Sharpe Ratio 4.24
As at 30 April 2013
2.2
4.4
4.9
0.1 0.1 0.3
0.8
0
1
2
3
4
5
6
7
3 Months 6 Months 1 Year Since Inception
Retu
rns (
%)
Global Credit Absolute Return
3 Month EURIBOR
GLOBAL CREDIT ABSOLUTE RETURN FUND POSITIONING
Source: Aviva Investors as at 30 April 2013. 16
Global Credit Absolute Return
8
9
12
28
44
GCAR Longs – Asset Allocation
Cash 8%
Investment Grade - US 9%
Investment Grade - EU 12%
High Yield - US 28%
High Yield - EU 44%
56 37
8
GCAR Longs – Geographic Distribution
Europe 56%
US 37%
Cash 8%
3%
6%
29%
14%
25%
3% 0%
5%
10%
15%
20%
25%
30%
AA A BBB BB B CCC
GCAR Longs – By Ratings
-0.4%
-1.3%
-10.0%
-1.3%
-11.0%
-9.0%
-7.0%
-5.0%
-3.0%
-1.0%
AA A BBB BB
GCAR Shorts – By Ratings
APPENDIX
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Global Credit Absolute Return
Aviva Investors Global Credit Absolute Return
Investment policy / objective Aim to achieve a positive return under all market
conditions by investing in global corporate bonds with an
emphasis on high yield, CDS, loans and equities.
Performance target 3.5% to 5% above 3 month EURIBOR, Net*
Bloomberg Ticker AVGCIIE LX
Leverage Up to 2.5X
Base currency EUR, with hedged share classes in GBP and USD
Legal structure Sub-fund of Aviva Investors SICAV
Country Registration Luxembourg, UK, Switzerland
Liquidity Daily
Minimum investment € / $ / ₤ 500,000
Annual management fee 0.50%
Performance fee 20% of performance above 3 month EURIBOR
High Watermark Yes
Administrator JP Morgan Bank Luxembourg
Auditor Ernst & Young
Legal Counsel Elvinger, Hoss & Prussen
KEY INVESTMENT TERMS
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Global Credit Absolute Return
*This is an internal target only. It does not form part of the fund objective.
PROPRIETARY RISK ANALYSIS
Global Credit Absolute Return
19
Source: Aviva Investors. Data is shown for illustrative purposes only.
PROPRIETARY RISK ANALYSIS
Global Credit Absolute Return
20
Source: Aviva Investors. Data is shown for illustrative purposes only.
BIOGRAPHY
Mark Wauton Head of Credit After a six year career in the Army, Mark joined investment industry in 1986
Main responsibilities Mark is responsible for our high alpha capabilities in investment grade, high yield and credit absolute return fixed income capabilities, while also ensuring that we deliver for more traditional active mandates. Experience and qualifications Mark joined Aviva Investors in April 2009. Prior to joining Aviva Investors Mark was Head of Strategic Credit trading at ABN AMRO. Mark has held Head of Fixed Income roles at Commerz International and Dunedin Fund Managers as well as Head of European Fixed Income at UBS Asset Management. He also co-managed the AlphaGen Credit Hedge Fund at Gartmore. Mark successfully completed the AIIMR in 1994 and is now an ASIP. He holds an MSc in Investment Analysis from Stirling University.
21
Jiten Joshi Portfolio Manager Joined investment Industry in 1994
Main responsibilities Jiten is managing our Global Credit Absolute Return strategy along with Mark Wauton and Dinesh Pawar. Experience and qualifications Jiten was previously a special situations analyst at Pali Capital responsible for idea generation across the capital structure of stressed and distressed credits. Prior to Pali, he was an Executive Director responsible for managing the US exposure of a global prop desk at ÅBN AMRO. Prior to ABN, he was part of a team managing the Gartmore AlphaGen Credit Hedge Fund for 3 years. Prior to joining Gartmore, Jiten was a Vice President and senior analyst covering Cable, Media and Energy for investment grade, high yield and distressed securities at JP Morgan Fleming Asset Management. Jiten’s sell side experience includes High Yield Origination at Chase Securities and Restructuring at Houlihan Lokey. He holds an MBA in Finance from the Columbia Business School and a BA in Economics from Columbia University.
Global Credit Absolute Return
BIOGRAPHY
Dinesh Pawar Head of Credit Flow Trading Joined investment Industry in 2002
Main responsibilities Dinesh is responsible for credit flow trading and has over 10 years of investment experience. Dinesh has an overview of all the trading strategies within each of the credit portfolios and provides analysis on hedging, trading tactics, and the use of derivatives. Experience and qualifications Prior to joining Aviva Investors he was the Market Risk Manager for Deutsche Bank financial markets responsible for managing the banks Loan Book, Loan Trading, Credit Origination and Global Risk Syndicate. Prior to this Dinesh was a Director and worked at ABN AMRO as part of the Credit prop team focusing on EU and GBP credits. Before joining ABN AMRO, Dinesh was a Credit Trader for the AlphaGen Credit Hedge fund, and was the co-manager of the Gartmore High Yield Retail fund. Dinesh has a BA Hons in Business Finance and an MSc in Banking and International Finance from Cass Business School
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Global Credit Absolute Return
IMPORTANT INFORMATION
Property
&
Casualty
Insurance
Life
Insurance &
Annuity
Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (“Aviva Investors”) as at 30 April
2013. Any opinions expressed are based on the internal forecasts of Aviva Investors and they should not be relied upon as indicating any
guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to the
future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original
amount invested. Portfolio holdings are subject to change at any time without notice and information about specific securities should not be
construed as a recommendation to buy or sell any securities.
Aviva Investors Global Credit Absolute Return fund is a sub-fund of Aviva Investors SICAV, an open-ended investment company
incorporated as a Société d'Investissement à Capital Variable in Luxembourg. It is authorised by the Commission de Surveillance du Secteur
Financier (CSSF) and qualifies as an Undertaking for Collective Investment in Transferable Securities (UCITS) under Part I of the law of 17
December 2010 relating to undertakings for collective investment. The Management Company is Aviva Investors Luxembourg. Investment
Manager is Aviva Investors Global Services Limited, regulated and authorised by the FSA. The distribution and offering of shares may be
restricted by law in certain jurisdictions. This document should not be taken as a recommendation or offer by anyone in any jurisdiction in
which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. The content of this
document does not purport to be representational or provide warranties above and beyond those contained in the legal documentation and
subscription documentation of the Funds. The legal documentation and the subscription document contain the full terms, conditions,
representations and warranties in respect of the Fund. Nothing in this document shall be construed as forming any part of those terms,
conditions, representations or warranties. The legal documentation and the subscription documents should be read before an investment is
made. ICVC investments should not be regarded as short-term and should normally be held for at least five years. The Prospectus and Key
Investor Information Document (KIID), are available, together with the Report and Accounts of the SICAV, free of charge from Aviva
Investors Luxembourg, 2 rue du Fort Bourbon 1st Floor.L-1249 Luxembourg, Grand Duchy of Luxembourg R.C.S. Luxembourg B25708,
Aviva Investors, No.1 Poultry, London EC2R 8EJ or relevant office below. The Prospectus is available in English, French, German, Italian
and Spanish. The KIID is available in the official language(s) of your jurisdiction and currently produced in Dutch, English, Finnish, French,
German, Italian, Latvian, Norwegian, Spanish and Swedish. Austria: The "Raiffeisen Zentralbank Österreich AG", Am Stadtpark 9, 1030
Vienna, has been appointed as paying agent within the meaning of § 34 InvFG. The redemption of shares and requests for the prospectus,
the articles of association and the last annual and semi-annual reports, once published, can be made via the paying agent. Spain: Copies of
the Prospectus and KIID together with the Report and Accounts of the UCITS which are approved by and registered with CNMV are
available free of charge from the offices of distributors in Spain. The UCITS is authorised by the CNMV and registered on the relevant
CNMV register with registration number 7.
Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: No. 1 Poultry, London EC2R
8EJ. Authorised and regulated in the UK by the Financial Services Authority and a member of the Investment Management Association.
Contact us at Aviva Investors Global Services Limited, No. 1 Poultry, London EC2R 8EJ.
Compliance ref: 13/0527/310813
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Global Credit Absolute Return