high total returns and attractive income from bonds · (h0a0), the bofa ml 1-10 year us corporate...
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Q&A roadshow 2016
June 2016 | For professional advisers only. This material is not suitable for retail clients
High total returns
and attractive income
from bonds
Michael Scott | Portfolio Manager
#QAroadshow2016
Questions
Why is high yield a strategic opportunity?
What is your outlook for high yield?
What opportunities do you see currently and going forward?
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Why is high yield a
strategic
opportunity?
European HY – a natural income generating asset class Generating high income and low volatility returns
3
Source: Schroders, Bloomberg as at 29 April 2016. Cash, gilts, stock yields, fund are gross of fees. Yield on the Fund is effective yield. The Fund is Schroder Monthly High Income Fund. RPI is
UKRPYOY, Cash is 1 Month GBP LIBOR (BP0001M Index), Gilts are 10 Year UK Government Bond (GUKG10 Index), Stocks are FTSE All Share (ASX Index) *European High yield = LF88TREU
Index, European Equities = SX5E Index, UK Equities = ASX Index, European Government = QW1A Index, EM Local Currency Bonds = JGENVUUG Index.
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0.5
1.6
4.2
7.1
0
1
2
3
4
5
6
7
8
Cash Gilts Stocks Fund
RPI 1.6 %
Asset Class Performance Risk stats
1 y
ear
3 y
ear
(p
.a.)
5 y
ear
(p
.a.)
10
ye
ar (
p.a
.)
Max
dra
wd
ow
n (
5
yr)
Shar
pe
(5
yr)
Re
turn
Vo
l (9
0
day
s)
European HY
-1.50% 5.50% 7.40% 7.80% -14.6 0.9 5.0
European Equities
-16.20% 3.70% 0.10% -2.30% -30.4 0.3 18.0
UK Equities -9.00% 0.30% 1.60% 1.10% -19.8 0.4 18.7
EUR Govt. 1.10% 5.30% 6.70% 5.20% -6.3 1.4 3.3
EM Debt (Local)
-2.00% -7.00% -2.40% 4.90% -32.7 -0.1 12.3
Yield %
Real GDP Growth of +1-2%: “sweet spot” for Credit
Average quarterly total return at various ranges of real GDP growth
Slow growth and low inflation is the “sweet spot” for high yield If we avoid recession, high yield should remain solid
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Data reflect the 111 quarter period of the modern HY era from 3Q 1988 to 3Q 2015. Sources for total returns of asset classes under different speeds of economic growth: BofA ML US High Yield Index
(H0A0), the BofA ML 1-10 Year US Corporate Index (C5A0), and the BofA ML 1-10 Year US Treasury Index (G5O2); Bloomberg for S&P500 returns, assuming reinvestment of dividends in the index.
US Real GDP data reflect the official figures from the US Bureau of Economic Analysis of the quarter-over-quarter seasonally-adjusted annualized rate of real chain-weighted GDP. Of the 111
quarterly observations from 3Q 1988 to 3Q 2012, there were 22 quarters of real GDP growth less than +1%, 18 quarters of growth between +1% and +2%, and 21 quarters of growth in excess of +2%
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Consistent and high level of income High income and low volatility returns – it's what bonds were made for
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Source: Morningstar; Bloomberg as at 29 February 2016. Dividend yield is the most recently announced gross dividend, annualised on the dividend frequency unique to the fund, then divided by the
current market price. Fund uses effective yield. Abnormal dividends are not included in this yield calculation. Maximum drawdown percentage is in absolute terms and is the largest drop from a peak
to a bottom in a sub-period over the time period. Dividend yield and maximum draw-downs are average figures calculated across the peer group. Peer Groups: IMA £ High Yield; UK Equity Income;
UK Equity and Bond Income; Morningstar EAA OE Global Bond
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%
What is your outlook
for high yield?
Outlook for high yield
Macro
Global growth is slowing in both EM and DM but we don’t expect a recession
Low inflation is supportive for the consumer, and for income
Fundamental
European companies remain ‘bondholder friendly’ and focused on preserving cash
Default trends picking up but they are concentrated to specific sectors and issuers
Technicals
Very low supply and attractive valuations are very supportive of high yield
Pockets of volatility fuelled by short-term sentiment create great opportunities
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Eurozone Solid growth in Germany and Spain; Italy looks increasingly vulnerable
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Source: Bloomberg, Schroders, as at June 2016
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High Yield Net Leverage
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Source: Morgan Stanley, Dec 2015; Leverage is Net Debt / EBITDA
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2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
Mar 03 Jan 04 Nov 04 Sep 05 Jul 06 May 07 Mar 08 Jan 09 Nov 09 Sep 10 Jul 11 May 12 Mar 13 Jan 14 Nov 14 Sep 15
US EU
Technicals Positive for the European high yield market
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Sources: Morgan Stanley as of May 2016
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European High Yield net supply by calendar year
Moody’s default rate expectations in Europe High yield spreads by region
Spreads are attractive given fundamentals and valuations
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Source: Moody’s; Bloomberg as at 31 January 2016. Forecast risk warning: Please refer to the important information slide at the end of this presentation.
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While default risk expectations increased in problematic areas (US Energy and Metals & Mining in particular)…
… prospects for Pan European high yield remains solid and now even more attractively priced!
The current premiums available are ample compensation for the interest and credit risk if one can pick the right bonds!
What opportunities
do you see currently
and going forward?
Risks and opportunities
Brexit and other political risks
Brexit is still not likely however it is almost fully priced into sterling banks and credit now
Potential volatility from upcoming elections, separatist movements and right wing parties
ECB buying corporate bonds
Supportive on the short term but may have unintended consequences on the long term
Some high yield BBs will be eligible
Interest rates
No hikes on the horizon in Europe for a long time
The Fed may be close to hiking again
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RBS 7.64% 03/29/49 Callable Allied Irish 4.125% 11/26/25 Unicredit 9.375% 07/29/49 Callable
Opportunities Attractive compensation in selective financials
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Source: Bloomberg as at 31 March 2016. Tickers: RBS 7.64 03/29/49 Corp; AIB 4 ⅛ 11/26/25 Corp; UCGIM 9 ⅜ 07/29/49 Corp. Based on weekly prices.
Stocks shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell
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Entry level
@ 103c Entry level
@ 88c Entry level
@ 97.5c
Gaz Capital 8.625% 04/29/2034 YPF Sociedad Anonima 8.5% 07/28/2025
Opportunities Some out of favour issuers look very interesting after recent developments
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Source: Bloomberg as at 31 March 2016. Tickers GAZPRU 8 ⅝ 04/28/34 Corp; YPFDAR 8 ½ 07/28/25 Corp. Based on weekly prices.
Stocks shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell
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Entry
level @
117c
Entry level
@ 96.50c
Schroder Monthly High Income Fund A strategic and tactical investment opportunity for 2016
THEMES
BASED Investment style
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UNCONSTRAINED high conviction idea
*Only funds with Sterling as the base currency are included. ** Michael Scott became lead portfolio manager on July 1st 2012. Inception date: 14 February 2000. Performance Source: Morningstar, bid to bid, net income
reinvested, Basic Rt Tx, GBP. Past performance is no guarantee of future results. The value of an investment may go down as well as up and is not guaranteed.
Aims for equity-like returns for bond-like risk
RESEARCH focused stock selection
1st Quartile 1st Quartile 1st Quartile 1st Quartile
2.9% 3.6%
6.2% 8.9%
1.5%
-0.4%
2.6% 5.1%
1.4% 4.0% 3.5% 3.8%
-6%
-2%
2%
6%
10%
6 Months 1 Year 3 Years Since July 2012**Schroder Monthly High Income Acc £ High Yield Relative performance
Relative Fund performance vs. IMA £ High Yield Sector*
For professional advisers only. This material is not suitable for retail clients.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get
back the amount originally invested. Schroders has expressed its own views and these may change.
The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. This presentation is intended to be for
information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial
instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be
reliable but Schroder Unit Trusts Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or opinion. This does not exclude or
restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance
should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
The forecasts included in this document should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions
which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and
assumptions may be affected by external economic or other factors.
As a result of the fees being charged to capital, the distributable income of the fund may be higher but there is the potential that performance or capital value may be eroded. The fund
invests in higher-yielding, or non-investment grade, bonds. The risk of the issuer defaulting on the capital repayment is higher than with investment grade bonds.
Issued in June 2016 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct
Authority. UK10799
Important information
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