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Generating absolute returns withlow volatility using EmergingMarkets’ Bonds and currenciesMarkets’ Bonds and currencies
in a distinguishing way
Presentation prepared for June 20 th 2013
Epsilon Fund Emerging Bond Total Return LU0365358570
A transparent total return strategy with a low expected volatility
• Sharpe Ratio 3Y: 1,18
• Perf. S.I. (27/5/08): 28.59%
• Volatility 3Y: 1.70%
• Yield to maturity*: 3,75%
2Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
*Portfolio data as of May31 st 2013 Company data as of 31/03/13. Source:Epsilon SGR website
It’s an asset manager participated by Banca IMI with a 49% stake; this allows forthe use of risk management skills and investment protection methods that aretypical of investment banking.Assets under management and advisory of Epsilon SGR: 14.132 million eurosEpsilon funds: 517 mln€. Funds with proxy: 10.786 mln€. Institutional mandates:1.648 mln€. Assets under advisory: 1.180 mln€
•
• Duration*: 0,6
Management company :
The distinctive investment process ofEpsilon Fund Emerging Bond Total Return
70%
Performance Performance
Short Term
Emerging Bonds(Carry in €)
Hard currency core portfolio:
• Govies
• Semi-sovereign
• Corporate
Average duration < 1 year
A simple strategy that curbs emerging bonds’ volatility
3 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
30%Currency exposure via forex
Spread duration
Local debt
Performance drivers
since 2006*
Performance drivers
since 2006*
Active Risk(Tactical)
(Carry in €) Average duration < 1 year
Average rating: Investment Grade
Investment objective: to overperfom the Barclays Capital Euro Treasury Bills® Index+ 1,00% p.a. on a time horizon of 36 months
*Startegy performance from 20/03/06 to 31/05/13. Before 25/05/08 fund returns are based on the clone fund Enis Short Term Emerging Markets Bond
Head of Total Return and Discretional Investments
Luca Sibani, CFA
15 years of experience in emerging markets’ bonds
A structured investment team that integrates highly specialized competences
4 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
Corporate AnalystAndrea Mambretti, CFA
Corp & Em. Mkt TraderFrancesco Maiolo
Forex SpecialistGianluca Cagnazzo
• Analysis of currency markets and currency overlay strategies
• 15 years of experience in asset management
• Issuers’ quality analysis and bond picking
• 9 years of experience in asset management
• “sentiment” analysis and investor positioning
• 7 years of experience in asset management
The track record highlights total return, decorrelation and low volatility
Volatility1,70%3 years
Decorrelation
5 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013Source: internal elaboration on Bloomberg data as of 31/05/2013
Perf. 2010 = + 5,98% Perf. 2011 = + 2,25% Perf. 2012= + 4,76%
Source: Bloomberg on data 31/12/2009 – 31/05/2013
3 years
Since 2006, sharpe ratio and diversification in multimanager portfolios has increased
Excellent risk adjusted return: EF Emerging Bond Total Return
Sharpe Ratio+1,183 years
Epsilon FundEm. Bond TR IEpsilon FundEm. Bond TR I
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Em. Bond TR IEm. Bond TR I
*daily data from 20/05/2006 to 31/05/2013. Before 25/05/2008 the performances are based on the clone fund Enis Short Term Emerging Markets Bond
Epsilon Fund Emerging Bond Total Return Essential information
Strengths
• A solid team that has been working together for a long time(average work experience of 12 years)
• A distinctive investment process to achieve a flexiblestrategy
• A constant search for absolute returns through active and
A simple strategy that exploits the opportunities of emerging bondswith low volatility
7 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
Investment
objective
Strengths • A constant search for absolute returns through active anddecorrelated strategies
• The investment on short term bonds allows for a completeportfolio turnover 2-3 times per year
• A rigorous risk management and low volatility
• To overperfom the Barclays Capital Euro Treasury Bills®Index + 1,00% p.a. on a time horizon of 36 months
• VAR max 3% monthly with 99% confidence (max TEV 4,5%)
The investible universe ofemerging markets’ bonds
� 4 indices: EMBIG, CEMBI, GBI-EM, ELMI+
Asset Class Currency Index Market Cap Rating
Hard Currency DebtUSD EMBI <600 billion USD BBB-
Corporate Hard CurrencyUSD Cembi >600 billion USD BBB
Local Currency DebtLocal Currency GBI-EM 1500 billion USD BBB-
Currencies Elmi+
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� And possibility of global macroeconomic diversification
Fonte: JPMorgan
Currencies Elmi+
The market keeps gorwing
� Market cap development of “emerging” bonds
� EM Bonds and Equity funds are the largest beneficiaries of QE 3
Market cap. in USD of emerging market bond indices
9 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
Source: JPMorgan as of May 2013
What is happening to emerging bonds?
…. after having benefitted from spread compressionin the last years
Annualized Total Return last 1, 3 and 5 years
Emerging bonds have becomevery sensitive to“core” rates…
Total Return YTD*
10 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
Source: DataQuery* As of June 13 th 2013
In 2013 the correlation of emerging bonds withcore rates has increased a lot
� Strong correlation increase of all emerging indices with core rates in the second quarter of 2013
� From negative («carry trade») to positive (risk hedging) correlation
Flight from risk
Yield search
Correlation with US Treasuries
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Flight from risk
Source: internal elaborations on Bloomberg data as of 31/5/2013
Is it a short term movement or a ten-year trend reverse?
• Soundness of macro fundamentals:
� growth rates
� public finance indicators
� trade balance
� Check up or risks and opportunities present in the asset classes that make up emerging bonds
12 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
� trade balance
• Contribution to portfolio diversification
• Relative returns:
� Hard currency sovereign debt
�Corporate bonds
�Local currency debt
�Currencies
• Technical factos
More positive than negative aspectsin growth levels
� Economic activity: emergingcountries have increased theircontribution to world GDP
� 2013 Contribution: also in 2013 the contribution is above 70%.
Punti di forzaContribution toworld GDP growth
Strengths
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� GDP growth: below expectationsin 2012
� 1st quarter 2013: disappointinggrowth data in China (7%), Braziland South Africa
Source world gdp: IMF, data as of April 30 th 2013Source picture on the right: datastream – Thomson Reuters as of May 13
Weaknesses
Public finance balances: debt loadsremain under control
� Fiscal balance: thanks to high growth rates, richness of commodities but most of all toimprovement in tax collection, fiscal balances are near break even
� Debt/GDP Ratio: debt stock has been considerably reduced
Fiscal balanceDebt/GDP Ratio
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Source IMF, data as of April 30 2013
Current account balance is still positivebut decreasing, in particular in Asia
� Reserves’ accumulation that hasinvolved almost all emergingcountries
� Total value is higher than $8000bln (of which $3500bln in China)
Punti di forzaForeign reserves in
billion USD Strengths
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� With respect to the past the currentaccount balance of emerging countries isdeteriorating
� Trend is worsening in India, Indonesia and South- East Asia in general
Current account/GDP balance
Source Thomson reuters as of April 2013
Weaknesses
Investing in emerging bonds contributes toportfolio diversification
� Risk/return analysis supports the investment in emerging bonds
� Sovereign bonds, corporate bonds and currency exposure contribute to improve the construction of a bond portfolio
Sharpe Ratio at 10 YrsEMBIG
16 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
Source: our elaborations on data DataQuery –JP Morgan and BofA as of 31/05/2013
CEMBI
GBI-EM
� The comparison with BBB US corporates still appears favorable for the emergingmarkets’ bond index
� During 2013 the differential increased for about 40 bps
Yield: is there still value in sovereign bonds?
Emerging vs Us Corporate BBB
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Note: indices are EmbiGlobal and Juli All ex EM
Source: DataQuery
40 bps
Great selectivity is necessary to seize valueon single sovereign issuers
3500CDS Spread
(on 5 year maturities)
� The comparison with developed countries shows the need of a high selectivity amongemerging countries to seize the opportunities on “outlier” countries
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Source: Bloomberg, data as of May 31 st 2013
� Corporate emerging global bonds have significantly grown in the last years and kept a high credit standing(BBB): over 75% of issues is IG
� The spread with corporate US BBB is stable for corporate emerging bonds IG and it’s between 50 and 75bps
� The spread of corporate HY is stable since the beginning of the year
Corporate emerging bonds keep a yield pickup, but…
Spread Corporate Emerging
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Source: DataQuery, data as of May 31 st 2013
� Net emerging corporate issues are increasing up to over $300 bln expected in 2013
� Only partly absorbed by the launch of dedicated funds (moreover exposed to possibleredemptions)
…technical factors are not very favorable
Corporate issuesConcentration of inflows on corporate
emerging bond funds
20 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
Source: JP Morgan, data as of May 2013
Emerging bonds in local currencyare interesting only on a nominal level
� Asset growth also thanks to local investors
� Volatility of local currency bonds is almost twice as high as that of hard currencybonds
� Nominal yield of local currency issues appears to be higher than the global one in hard currency, but that difference is due to inflation
Higher Yield only on a nominal level
21 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
Source: DataQuery and IMF
3,5%
Inflation
3,5%
Nominal yields
Bonds in local currency are vulnerable whenthe main driver is carry
� Double risk factor: interest rate and exchange rate
� Central banks’ behaviour constrained by current instability
Turkey
2013
2012
South Africa
2013
22 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
Source: our elaboration on Bloomberg data as of May 31 st 2013
2012
Poland
2013
2012
2012
Brazil2013
2012
The dependence on foreign investors makessome countries more vulnerable
� The weight of foreign investors has grown in particular in the past 4 years
� The securities more subject to volatility/ sell off risks are those of emerging countries more exposed toforeign investors
Attention level
Percentage held by foreign investors
23 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
Source: CityBank as of April 30 th 2013
Emerging currencies allow to create valueand diversify asset allocation
� The emerging forex market is sufficiently liquid to manage volatility and carry of the asset class
� Potential increase in value with respect to hard currencies thanks to the seculartrend of higher growth and investments in emerging economies
� Currency investment requires a selective and tactical approach
� We create value by combining fundamental aspects, «carry» and investors’ positioning
Gap from equilibrium price of cross exchange rates
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Source: our elaborations on Bloomberg and Jp Morgan data as of31/5/2013
� 2012 registered a new record of incoming flows (97 billions)
� In 2013 flows are more concentrated on local debt
� In June 2013 first significant outflow
There are outlier opportunities on emergingbonds, but attention on potential sell offs
Hard currency Local currency
Inflows on funds and ETFs dedicated to emerging bonds
25 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
Source: EPFR and JPMorgan
The second semester 2013 strategy of Epsilon Fund Emerging Bond Total Return
� We expect more volatility and a less search for yield approach from now on
� We will keep finding value mainly from carry of short term bonds
� The liquidity of instruments and of the fund represent a reference point in
portfolio management
� A lot of outlier opportunities : the flexible total return strategy exploits all the
emerging markets’ asset classes (government, corporate, forex, local currency
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emerging markets’ asset classes (government, corporate, forex, local currency
and hard currency):
� The sovereign component in hard currency will retain a relevant role
� We will invest on semi-sovereigns and corporates, in particular
“national champions”
� Selective investment in emerging countries’ currencies based more
on tactical views rather than long term views
CCY EXPOSURE
EMERGING MARKET EXPOSURE
Epsilon Fund Emerging Bond Total ReturnPortfolio Allocation
YtM 3.75%
Duration 0. 60
Volatility 1Y = 1.13%
YtM 3.75%
Duration 0. 60
Volatility 1Y = 1.13%
RATING WEIGHT
AAA 1.50%
AA 0.82%
A 6.39%
BBB 44.09%
BB 33.17%
B 4.65%
27
CCY EXPOSURE
Source: internal elaboration on data as of May 31 st 2013
ISSUERS
Sovereign 41.04%
Semi- Sovereign 9.02%
Finance 14.07%
Corporate 26.49%
Cash 9.38%
GENERAL CHARACT.
AUM (mln €) 511.87
Duration 0.60
YTM (carry portfolio) 1.78%
YTM 3,75%
Average rating BBB-
MATURITIES
Cash 9.38%
2013 42.06%
2014 27.38%
2015 and over 21.18%
JPY -4.50%
Other -1.93%
HUF -1.96%
EUR -0.43%
SGD -2.00%
USD 1.87%
TRY 1.89%
KRW 1.92%
RUB 2.34%
BRL 2.44%
2013 scenario highlights the differential value of our total return strategy
� In this market reflexive phase the flexibility and the focus on total return with low volatility allow for an exposure to the opportunities that remain on the emerging marketsasset class as well as capital protection
Trend of Emerging Bond Eur Hdg funds
28 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013Source: Morningstar from 02/01/2013 to 13/06/2013
Eurizon Capital s.a. Documento ad uso esclusivo dei clienti Professionali. Vietata la diffusione al pubblico. Giugno 2013
Eurizon Capital s.a. Documento ad uso esclusivo dei clienti Professionali. Vietata la diffusione al pubblico. Giugno 2013
Total return, decorrelationand low volatility
EF Emerging Bond Total Return I LU0365358570
3Y
• Total Return +10.27%
• Volatility 1,70%
• Sharpe Ratio 1,18
• Jensen’s Alpha +0,53%
Decorrelation
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• Jensen’s Alpha +0,53%
• YTM 3.75%
• Duration 0.60
• A.U.M. 512 mln
Perf. 2010 = + 5,98%Perf. 2010 = + 5,98% Perf. 2011 = + 2,25%Perf. 2011 = + 2,25% Perf. 2012= + 4,76%Perf. 2012= + 4,76%
Source: internal elaboration on Bloomberg data as of 31/05/2013 * See disclaimer in the end notes
AttachmentGeneral fund information
Fund name Epsilon Fund Emerging Bond Total Return I
Benchmark Barclays Capital Euro Treasury Bills Index in € +1.00% (gross of fees)
Domicile Luxembourg UCITS III, FCP
Launch date 27/5/2008
Dealing & Valuation daily
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Fees (%) •Fees: 25 Bps
• Perf. fee: 20% of extra performance (max 50 bps)
Codes •Isin: LU0365358570•Bloomberg: EURBDTR LX
Risk constraints •Max TEV : 4.5%•99%VaR: 3% monthly
Epsilon Fund Emerging Bond Total Return is a subfund that aims to achieve a performance at least equal to the Barclays Capital Euro TreasuryBills® Index expressed in Euro + 100 basis points, over a time horizon of 36 months.The performance of the subfund is generated by a combination of investments in short-term government and corporate bonds, issued in EmergingCountries. The subfund can take positions in the currencies of these countries and implement spreading strategies among their interest rates. Theportfolio duration is limited and does not represent a source of value.
Attachment - Performance: distribution of monthly returns since inception consistently total return
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Monthly data from 31s Dec 2009 to 31st May 2013, before 25 May 2008 fund returns based on the previous fund
Attachment – Investment process:active risk pyramid
TRADING
20% - 30%
Quantitative indicators
TACTICAL VIEWS
RELATIVEVALUE
MEDIUM TERM
Weekly / daily
Max 3 months
TIME HORIZON INVESTMENT VIEWS
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30% - 40%
SENTIMENT & POSITIONING
TECHNICAL ANALYSIS
STRATEGIC VIEWS
40% - 50%
MEDIUM TERM TREND
LONG TERM TREND
Max 3 months
6 – 12 months
Attachment – Investment process
TOP DOWN
Portfolio Construction
4 sources of total return
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BOTTOM UP
Security
SelectionExposure
CountryCountrySelectionSelection
IssuerSelection
Attachment – Investment processExposure
Exposure
Spread
Macroeconomic
• Macro trends
• Correlation and relative value analyses
Security
SelectionExposure
CountrySelection
IssuerSelection
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Macroeconomicscenario
Valuations
Technical aspects
• Correlation and relative value analysesbetween EM Bond and other assetclasses
• Net Issuance and positioning
Widening
Tightening
Attachment – Investment processCountry Selection
Country Selection
• Focus on 20-25 most relevant issuers representing over 70% of the sovereign
risk in the emerging markets arena
Security
SelectionExposure
CountrySelection
IssuerSelection
35 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
+ Overweight vs bmk
- Underweight vs bmk
risk in the emerging markets arena
• Ranking/scoring based on fundamentals (Ability to pay)
• Qualitative and Political Analysis (Willingness to pay)
• Meeting/research, sell-side analysis
Attachment – Investment processIssuer Selection
Issuer Selection
Sovrani +
Latam -
Asia +
CEEMEA -/2
Semi-Sovereign -� Three different categories:
Security
SelectionExposure
CountrySelection
IssuerSelection
Relative value analysis amongissuers - example
36 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
Semi-Sovereign -
Latam -
Asia =
CEEMEA =
Corporate -
Latam -
Asia =
CEEMEA =
� Three different categories:
Sovereign, Semi-Sovereign, Corporate
� Internal Rule: Sovereign & Semi-Sovereign >67% portfolio allocation
� Relative value analysis among country issuers.
Attachment – Investment processSecurity Selection
Security Selection
� Single issuer curve analysis: stand alone and compared to sector/rating:
Security
SelectionExposure
CountrySelection
IssuerSelection
37 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
� Single issuer curve analysis: stand alone and compared to sector/rating:
� Currency of issuance (€, USD GBP,....)
� Liquidity analysis
This task is jointly performed with the execution desk that does the price discovery and the market positioning analysis
Attachment- Portfolio construction: a summary onEF Emerging Bond Total Return
Performance targets
Style bias
To overperform the Barclays Capital Euro Treasury Bills Index +100 basis points p.a.
Active, pursued through the overlay of tactical uncorrelated strategies on a short term emerging
market bonds portfolio
38 Document for Institutional Client’s exclusive use.Disclosure to the public is forbidden. June 2013
Tracking error range
Constraints
4,5% TEV Max 3% monthly VAR (99%)
Average rating above Investment GradeAverage maturity below 18 months
market bonds portfolio
The content of this document is for information purposes only and is targeted solely to institutional investors.
To the best of the knowledge, information and belief of Eurizon Capital S.A., all information contained herein is accurate as at thedate of publication and is provided on an "AS IS" basis and without any warranties of any kind, either expressed or implied.However, neither Eurizon Capital S.A. nor its affiliates nor any directors or employees can or does warrant, guarantee or represent,either expressly or by implication, the accuracy, validity or completeness of such information.
This document contains information covering different Luxembourg-domiciled UCITS III umbrella funds, managed and registered inmany locations worldwide. In particular the Funds are registered for marketing in some, but not all EU countries. As such, access tothe information contained herein may be restricted by laws and regulations applicable to the user. This information is not intended tobe published or made available to any person in any jurisdiction where doing so would result in breach of any applicable laws orregulations. In particular, marketing of certain Funds is restricted to certain jurisdictions only.
The user should ensure that the use of this information and any investment made as a result does not breach any such restrictions.
Disclaimer
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The user should ensure that the use of this information and any investment made as a result does not breach any such restrictions.It is the user's responsibility to be informed and to observe all applicable laws and regulations of any relevant jurisdiction.
In particular, the information contained in this document does not constitute investment advice or an offer to sell or the solicitationof any offer to buy any securities or services in the United States to or for the benefit of any United States persons (being residentsof the United States or partnerships or corporations organised under the laws of the United States). The Funds have not beenregistered in the United States under the Investment Company Act of 1940 and units or shares of the Funds are not registered in theUnited States under the Securities Act of 1933.
The document is not directed at investors in Hong Kong and its content has not been approved by the Hong Kong Securities andFutures Commission.
Under no circumstances may the information contained herein, or any part thereof, be copied, reproduced or redistributed withoutthe express permission of Eurizon Capital S.A.. Neither Eurizon Capital S.A. nor its affiliates, or any directors or employees shall beliable for any damage arising from any person's reliance on such information and shall not be liable for any errors or omissions(including but not limited to errors or omissions made by third parties) in such information.
The information provided herein is subject to change without further notice.