fixed income markets – then and now chartwell investment partners jason b. stewart, cima regional...
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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
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0
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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