increasing diversification and return potential global ... · benefits canada dc plan summit 2015 ....

GLOBAL MULTI-SECTOR FIXED INCOME STRATEGIES Terry A. Moore, CFA Benefits Canada DC Plan Summit 2015 February 18, 2015

Increasing Diversification and Return Potential

Why Should an Investor Consider Global Multi-Sector Bond Strategies?

Traditional bond strategies offer limited diversification and return potential

Growth in global fixed income across geographies and capital structure create opportunities

Global central banks have changed the playing field

POTENTIAL BENEFITS

Global multi-sector bond strategies may utilize the full opportunity set across countries, sectors and currencies

Agenda

Review survey results

– Investor concerns

– Asset allocation

Explore global fixed income markets

Analyze plan with global multi-sector bond allocation

Top Two Capital Markets Risks Facing Canadian Pension Plans

Rank 1 & 2 (%) Rank 1 (%)

Duration Risk 58 45

Geopolitical Risk 48 15

Credit Risk 25 8

Liquidity Risk 23 5

Currency/exchange rate risk 18 13

Inflation Risk 15 13

Other 15 3

Source: Rogers Insights Custom Research Group

Survey Results from November/December 2014

40 RESPONDENTS WITH ASSETS > C$500M

Asset Allocation of Canadian Pension Plans



AVERAGE ALLOCATION, 40 RESPONDENTS WITH ASSETS > C$500M

Canadian Fixed Income, 36.6%

Foreign Equity, 24.3%

Canadian Equity, 18.2%

Alternatives, 10.8%

Other , 4.3% Foreign Bonds, 2.9%

Cash, 1.0%

Equity, 42.5%

Canadian Fixed

Income, 36.6%

Foreign Bonds, 2.9%

Alternatives, 10.8%

Cash, 1.0% Other, 4.3%




Equity Allocations Are Well Diversified


Canadian Equity 18.2%

Fixed Income, 39.5%

Canadian Equity, 18.2%


Alternatives, 10.8%

Cash, 1.0% Other, 4.3%

Foreign Bonds, 2.9%



Fixed Income Allocations Are Undiversified


Canadian Fixed

Income, 36.6%

2015: Divergence in Policy Outlooks

Source: T. Rowe Price. For illustrative purposes only.

HYPOTHETICAL INTEREST RATE CYCLE December 31 2014

May 2005 – June 2006

Interest rates up

Interest rates down

Interest rates up Interest rates stable

New Zealand

U.S.

UK

Brazil

Europe

Australia

Canada

Indonesia

Poland

Global Government Bond Yields Can Dramatically Vary January 22, 2015

Sources: Barclays, JP Morgan and T. Rowe Price

0

1

2

3

4

Yiel

ds (%

)

10-YEAR SOVEREIGN YIELDS (%) Hedged yields using 3-month implied currency hedging impact

0

100

200

300

400

500

2004 2006 2007 2008 2009 2010 2011 2012 2013 2014

Spr

ead

(bps

)

Barclays Canada IG Corporate10 Year Average

Core Fixed Income Valuations Remain Stretched

(25)

0

25

50

75

100

125

150

175

200

2004 2006 2007 2008 2009 2010 2011 2012 2013 2014

Spr

ead

(bps

)

Barclays U.S. Agency MBS

10 Year Average

Agency Mortgage-Backed Securities 31 December 2004 – 31 December 2014

Sources: Barclays, T. Rowe Price

0

250

500

750

1,000

1,250

1,500

1,750

2004 2006 2007 2008 2009 2010 2011 2012 2013 2014

Spr

ead

(bps

)

Barclays CMBS10 Year Average

Commercial Mortgage-Backed Securities 31 December 2004 – 31 December 2014

0

100

200

300

400

500

600

700

2004 2006 2007 2008 2009 2010 2011 2012 2013 2014

Spr

ead

(bps

)

Barclays U.S. IG Corporate10 Year Average

U.S. Investment Grade Corporates 31 December 2004 – 31 December 2014

27 bps

10Y Avg. 57 bps

10Y Avg. 175 bps

10Y Avg. 251 bps

Canadian Investment Grade Corporates 31 December 2004 – 31 December 2014

10Y Avg. 126 bps

130 bps

98 bps

119 bps

As Markets Have Grown, Look for Value Beyond Domestic Core Bonds As of December 31, 2014

1 Canada, Mexico, and Chile 2 As of September 30 2014 Sources: Bank for International Settlements, Bank of America/Merrill Lynch, Barclays, CoreLogic, J.P. Morgan Chase & Co., S&P/LSTA, Haver Analytics, and T. Rowe Price.

Reta

il 9

%

Tele

com

17%

Ener

gy 8

%

Ener

gy 1

4%

Ener

gy 1

7%

Cabl

e/Sa

telli

te 9

%

Gam

ing/

Leisu

re 9

%

Gam

ing/

Leisu

re 7

%

Fina

ncia

l 10

%

Heal

thca

re 9

%

0%

5%

10%

15%

20%

1995 2000 2005 2010 2014

Largest industry2nd largest industry

Energy names represent a significant proportion of high yield debt

Plummeting oil prices have driven a sell-off across the entire sector, improving valuations

Outside of Energy names, fundamentals remain solid and defaults likely range bound

Media & Telecom remains an area of focus; Energy is cheap, but oil prices need to stabilize

Opportunities Exist – High Yield

HIGH YIELD LARGEST INDUSTRIES 1995 - 2014

5

6

7

8

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14

Yie

ld (%

)

HIGH YIELD – YIELD TO WORST (%) 1 January 2014 – 31 December 2014

Yield

3Y Avg. 6.5%

Sources: JPMorgan, T. Rowe Price

-8.85%

HIGH YIELD ENERGY - YTD CUMULATIVE RETURNS 1 January 2014 – 31 December 2014

-15

-10

-5

0

5

10

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14

YTD

Cum

ulat

ive

Tota

l Ret

urn

(%)

7.4%

13

EM IG SOVEREIGNS VS. DM IG CORPORATE December 31, 2011 – December 31, 2014

0.0

1.0

2.0

3.0

4.0

5.0

2004 2014

U.S

. $, t

rillio

ns

EM Corporate

EM $/Euro Sovereign

EM Local

EMERGING MARKET GROWTH 2004 ─ 2014

AVERAGE RATING OF THE JPMORGAN EMBI GLOBAL INDEX December 1999 – December 2014

Source: Barclays, T. Rowe Price

Emerging Market Debt – Selective Opportunities…

1999 2002 2004 2006 2008 2010 2012 2014

EMBIG S&P Ratings

EMBIG Moodys RatingsBBB | Baa2 BBB- | Baa3 BB+ | Ba1 BB | Ba2 BB- | Ba3 B+ | B1

Relative value remains attractive in EMD hard currency

Many EM countries today have strong liquidity buffers, free-floating currency regimes and relatively low debt burdens

Major EM concerns: Petrobras scandal, Russian credit, Chinese property, Venezuela, Oil related credits

The question for 2015: when to rotate from oil importers to oil exporters?

-100

-50

0

50

100

150

200

Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14

Spre

ad (b

ps)

EM Sov IG vs. US IG

EM Sov IG vs. EU IG

Bank Loans are Uniquely Positioned within Fixed Income

U.S. Aggregate

Bank Loans

10-Year U.S. Treasuries European Corporate

Bonds

Emerging Markets-Sovereign (Local)

High Yield

Emerging Markets-Sovereign (USD)

Emerging Markets Corporates

Global Aggregate-CAD

Canadian IG Corp

Global Corp

0

2

4

6

8

0 1 2 3 4 5 6 7 8 9 10

Yiel

d to

Wor

st (%

)

Option-Adjusted Duration (years)

Source: Barclays, JP Morgan, S&P/LSTA, T. Rowe Price Past performance cannot guarantee future results

Risk and Return for Fixed-Income Sectors 31 December 2014

As of December 31, 2014

Emerging and/or developed non-dollar cash bonds may be either unhedged or currency-hedged. If unhedged, the portfolio weight will be included in both the cash bond and the FX categories. FX includes unhedged cash bonds plus the direct notional currency exposure taken through forwards, futures, and options contracts. The representative portfolio is an account in the composite we believe most closely reflects current portfolio management style for the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from those of the composite and of the other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite is available upon request. Supplemental information.

See slide 27 for additional representative portfolio information.

Example of Tactical Allocation Across Global Multi-Sector Fixed Income

Diversification Benefits Arise From Low Correlations

TMX US Treas German Sovs MBS US Credit Global

Credit EM Dollar EM Local High Yield

Bank Loans TSX MSCI

ACWI

TMX Canada Universe

100%

US Treasuries 78% 100%

German Sovereigns 68% 74% 100%

US MBS 70% 81% 58% 100% US Credit 61% 43% 30% 57% 100% Global Credit 47% 19% 15% 41% 95% 100%

Emerging Market Dollar Bonds

39% 21% 0% 47% 79% 83% 100%

Emerging Market Local Bonds

16% 6% -17% 25% 56% 64% 81% 100%

Global High Yield 10% -21% -29% 11% 67% 83% 82% 69% 100%

Bank Loans -9% -47% -42% -14% 41% 60% 52% 39% 85% 100%

TSX Canada Equity

-6% -29% -40% -9% 39% 53% 57% 60% 69% 59% 100%

MSCI ACWI 3% -23% -38% -11% 36% 50% 48% 53% 61% 48% 68% 100%

Source: Barclays, FTSE, JP Morgan, MSCI, S&P, T. Rowe Price

Based on monthly index returns from Jan 1 2005 to Dec 31 2014

Hypothetical Portfolios

1 2 PORTFOLIO 1

Assume simple asset allocation

30% Canadian Equities (TSX)

30% Foreign Equities (MSCI ACWI)

40% Canadian Fixed Income (TMX)

PORTFOLIO 2

Add global multi-sector bonds to allocation

30% Canadian Equities (TSX)

30% Foreign Equities (MSCI ACWI)

20% Canadian Fixed Income (TMX)

20% Global Multi-Sector Bonds

Hypothetical Portfolios

Portfolio 1 Portfolio 2

Average Return (annualized) 9.00% 9.84%

6 Year Cumulative Return 67.75% 75.62%

Standard Deviation (annualized) 6.22% 6.74%

Sharpe Ratio 1.31 1.33

Statistics based on monthly gross returns. Returns would have been lower as the result of the deduction of applicable fees. Past performance cannot guarantee future results. Supplemental information.

Analysis Period Jan 2009 – Dec 2014

ADDING A GLOBAL MULTI-SECTOR BOND ALLOCATION MAY INCREASE RETURN POTENTIAL

Extending the Efficient Frontier

Portfolio efficiency gains through enhanced geographic and capital structure

Expanded opportunity set extends the manager’s ability to add alpha through tactical sector allocation and bottom-up security selection

Bottom up security research is critical for success

POTENTIAL BENEFITS

The integration of a global multi-sector bond portfolio may increase return, reduce risk and improve Sharpe ratios

The Case for Global Multi-Sector Fixed Income

The global fixed income market has experienced tremendous growth over the past 10 years

Global fixed income has appealing investment attributes

– Attractive relative value characteristics

– Correlation benefits to Canadian fixed income markets

Offers the widest opportunity set for investors seeking attractive total returns

INCREASING DIVERSIFICATION AND RETURN POTENTIAL

QUESTIONS?

APPENDIX

Performance

1 Net of fees performance reflects the deduction of the highest applicable management fee (“Model Net Fee”) that would be charged based on the fee schedule appropriate to you for this mandate, without the benefit of breakpoints. Please be advised that the composite may include other investment products that are subject to management fees that are inapplicable to you but are in excess of the Model Net Fee. Therefore, the actual performance of all the portfolios in the composite on a net fee basis will be different and may be lower than the Model Net Fee performance. However, such Model Net Fee performance is intended to provide the most appropriate example of the impact management fees would have by applying management fees relevant to you to the gross performance of the composite. Monthly composite performance is available upon request. Past performance cannot guarantee future results. Supplemental information. See “GIPS® Disclosure” for additional performance information.

2 The Value Added is shown as Emerging Markets Corporate Bond Composite (Gross of Fees) minus MSCI J.P. Morgan Corporate Emerging Market Bond Index Broad Diversified. Information is being provided pursuant to a specific request and is supplemental to the composite’s Global Investment Performance Standards compliant data.

Periods Ended 31 December 2014 Figures Shown in U.S. Dollars

GLOBAL MULTI-SECTOR BOND STRATEGY

Annualized

Three Months

Year to Date

One Year

Three Years

Since Inception 31 May 2011

Global Multi-Sector Bond Composite (Gross of Fees) -0.76% 4.98% 4.98% 5.78% 8.49%

Global Multi-Sector Bond Composite (Net of Fees)1 -0.86 4.59 4.59 5.38 8.09

Barclays Global Aggregate ex Treasury Bond USD Hedged Index 1.68 6.94 6.94 4.52 5.59

Value Added2 -2.44 -1.96 -1.96 -1.26 2.90

Global Multi-Sector Bond Composite Fee Schedule Global Multi-Sector Bond Composite

As of 31 December 2014 Figures Shown in U.S. Dollars

The Global Multi-Sector Bond Composite seeks high income and some capital appreciation primarily through investment in sectors abd securities within the Barclays Global Aggregate Bond Index. The strategy may also invest in high yield, emerging markets, converts, and non-dollar bonds (hedged and unhedged). (Created December 2008).

First $50 Million 37.5 Basis Points

Next $50 Million 32.5 Basis Points

Above $100 Million 30 Basis Points on all assets1

Above $250 million 27.5 Basis Points on all assets1

Minimum account size $100 million

1A transitional credit is applied to the fee schedule as assets approach or fall below the breakpoint.

1Reflects deduction of highest applicable fee schedule without benefit of breakpoints. Investment return and principal value will vary. Past performance cannot guarantee future results. See below for further information related to net of fee calculations.

T. Rowe Price (“TRP”) has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®). TRP has been independently verified for the 10‐year period ended June 30, 2014 by KPMG LLP. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm‐wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the U.K. Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S., international, and global strategies but excluding the services of the Private Asset Management group. The minimum asset level for equity portfolios to be included in composites is $5 million and prior to January 2002 the minimum was $1 million. The minimum asset level for fixed income and asset allocation portfolios to be included in composites is $10 million; prior to October 2004 the minimum was $5 million; and prior to January 2002 the minimum was $1 million. Valuations are computed and performance reported in U.S. dollars. Gross performance returns are presented before management and all other fees, where applicable, but after trading expenses. Net of fees performance reflects the deduction of the highest applicable management fee that would be charged based on the fee schedule appropriate to you for this mandate, without the benefit of breakpoints. Gross and net performance returns are net of non-reclaimable withholding taxes on dividends, interest income, and capital gains. Effective June 30, 2013, portfolio valuation and assets under management are calculated based on the closing price of the security in its respective market. Previously portfolios holding international securities may have been adjusted for after‐market events. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Dispersion is measured by the standard deviation across asset‐weighted portfolio returns represented within a composite for the full year. Dispersion is not calculated for the composites in which there are five or fewer portfolios. Some portfolios may trade futures, options, and other potentially high‐risk derivatives which generally represent less than 10% of a portfolio. Benchmarks are taken from published sources and may have different calculation methodologies, pricing times, and foreign exchange sources from the composite. Composite policy requires the temporary removal of any portfolio incurring a client initiated significant cash inflow or outflow greater than or equal to 15% of portfolio assets. The temporary removal of such an account occurs at the beginning of the measurement period in which the significant cash flow occurs and the account re‐enters the composite on the last day of the current month after the cash flow. Additional information regarding the treatment of significant cash flows is available upon request. The firm's list of composite descriptions and/or a presentation that adheres to the GIPS® standards are available upon request.

Global Multi-Sector Bond Composite Period Ended 31 December 2014 Figures Shown in U.S. Dollars

2009 2010 2011 2012 2013 2014

Gross Annual Returns (%) 20.72 11.21 2.63 11.66 0.97 4.98 Net Annual Returns (%)1 20.27 10.80 2.25 11.25 0.59 4.59 Barclays Global Aggregate ex Treasury Bond USD Hedged Index (%) 9.14 5.67 5.25 7.18 -0.38 6.94 Composite 3-Yr St. Dev. N/A N/A 4.99 4.14 4.59 3.98

Barclays Global Aggregate ex Treasury Bond USD Hedged Index 3-Yr St. Dev. 3.54 3.59 2.49 2.13 2.60 2.50 Composite Dispersion N/A N/A N/A N/A N/A N/A Comp. Assets (Millions) 126.9 195.0 232.0 286.8 252.0 496.0 # of Accts. in Comp. 1 1 1 1 2 2 Total Firm Assets (Billions) 395.2 485.0 493.1 579.8 696.3 749.6

GIPS® Disclosure

Disclosure

Update from Slide 15: The information presented herein for the Sample Portfolios is hypothetical in nature and is shown for illustrative, informational purposes only. This material is not intended to forecast or predict future events, but rather to demonstrate T. Rowe Price’s capability to manage assets in this style. It does not reflect the actual returns of any portfolio strategy and does not guarantee future results. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in modeling analysis presented have been stated or fully considered. Changes in the assumptions may have a material impact on the information presented. Data shown is as of February 2014 and is subject to change over time. The Sample Portfolios are not actively managed and do not reflect the impact that material economic, market or other factors may have on weighting decisions. If the weightings change, results would be different. Management fees, transaction costs, taxes, potential expenses, and the effects of inflation are not considered and would reduce returns. Actual results experienced by clients may vary significantly from the hypothetical illustrations shown. This information is not intended as a recommendation to buy or sell any particular security, and there is no guarantee that results shown will be achieved. The views contained herein are as of February and may have changed since that time.

Important Information

This document, including any statements, information, data and content contained therein and any materials, information, images, links, sounds, graphics or video provided in conjunction with this document (collectively “Materials”) are being furnished by T. Rowe Price for your general informational purposes only. The Materials are not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the Materials and in certain countries these Materials are only provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction. Under no circumstances should the Materials, in whole or in part, be copied, redistributed or shown to any person without consent from T. Rowe Price. The Materials do not constitute a distribution, an offer, an invitation, recommendation or solicitation to sell or buy any securities in any jurisdiction. The Materials have not been reviewed by any regulatory authority in any jurisdiction. The Materials do not constitute investment advice and should not be relied upon. Investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services. T. Rowe Price (Canada), Inc. is not registered to provide investment management business in all Canadian provinces. Our investment management services are only available for use by Accredited Investors as defined under National Instrument 45-106 in those provinces where we are able to provide such services.

T. ROWE PRICE, INVEST WITH CONFIDENCE and the Bighorn Sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc. in the United States, European Union, and other countries. This material is intended for use only in select countries.

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