rbc gam webcast convertible bonds – the best of both...

RBC GAM Webcast Convertible Bonds – The Best of Both WorldsMay 14th, 2013

Mike Reed, Senior Portfolio Manager

For Advisor Use Only

2

Convertible Bonds – The Asset Class

• Convertibles are a hybrid security that combine the security of bond investment with the upside potential of equities

Equity-like upside, bond-like protection

DEBT EQUITYCONVERTIBLES• Unlimited equity upside• Fixed current income• Repayment of principal


3

Convertible Bonds – The Asset Class

• Convertibles can be seen as an optimal alternative to direct equity exposure

Convertible Bond Payoff

• Balanced: The convertible is at its point of maximum convexity. As the underlying equity price increases the convertible bond price rises reflecting the increasing equity-like profile of the security

• Equity: The valuation of the convertible has a high correlation with the underlying equity price

• Bond: The equity value has fallen and the convertible now has little equity sensitivity. The convertible bond exhibits bond-like behaviour reacting mainly to movements in interest rates and credit spreads

Data source: UBS Convertibles Marketing / MACE

0

20

40

60

80

100

120

140

160

0 20 40 60 80 100 120 140

Parity CB Price Bond Floor

Bond Balanced EquityConvertible Bond Payoff

Bond Like Equity Sensitive

Bon

d P

rice

Share Price


4

Convertible Bonds – Index CharacteristicsUBS Global Focus Convertible Index Comparative Performance

50

100

150

200

250

300

Jun-

98Ja

n-99

Jul-9

9Ja

n-00

Aug-

00Fe

b-01

Aug-

01M

ar-0

2Se

p-02

Mar

-03

Oct

-03

Apr-

04O

ct-0

4Ap

r-05

Nov

-05

May

-06

Nov

-06

Jun-

07D

ec-0

7Ju

n-08

Jan-

09Ju

l-09

Jan-

10Au

g-10

Feb-

11Au

g-11

Feb-

12Se

p-12

Mar

-13

Perfo

rman

ce (r

ebas

ed to

100

)

MSCI World Equity IndexUBS Global Focus Convertible Bond IndexMerrill Lynch Global Corporate Bond Index

Comparative Index Performance (Rebased to 100)

Data source: UBS Convertibles Marketing / MACE, as at 31 March 2013

• Over the long-term convertibles have outperformed equities significantly• Volatility of the convertible bond index is less than half that of the MSCI World Equity Index

MSCEI UBS Convert Bond

Global Corp Bond

Return 2013 YTD 7.2% 1.8% -1.1%

Lifetime from 30 June 1998

Total Return 32.1% 88.7% 149.5%

Annualised Return SI 1.9% 4.4% 6.4%

Volatility 17.3% 8.2% 5.3%

Beta vs MSCI World 1.000 0.398 0.032

Sharpe Ratio -0.03 0.25 0.76

Statistical Metrics, as at 31 March 2013


5

Convertible Bonds – Investment Case vs EquitiesConvertibles have offered similar returns with lower volatility

Total return Volatility Sharpe

Equities Converts Equities Converts Equities Converts

1 year 8.20% 4.84% 12.8% 5.6% 0.63 0.85

3 year 23.98% 17.80% 17.2% 7.8% 0.46 0.75

5 year -3.46% 9.14% 22.3% 9.3% -0.04 0.17

10 year 86.65% 82.94% 17.6% 7.8% 0.40 0.86

Convertibles have demonstrated an improved risk/reward profile

Data source: Bloomberg, as at 28 February 2013

• Convertible returns over 1, 3, 5 and 10 year periods are “equity-like”

• Volatility of convertible returns is consistently less than half of equity returns

• Over each period Sharpe ratio of convertibles is far superior to equities


6

Convertible Bonds – Current Outlook & Investment CaseConvertible inclusion improves a portfolio‘s risk/return

• The inclusion of convertibles clearly expands the efficient frontier in a portfolio

• Replacing stock allocations with convertibles reduces volatility

• Adding convertibles improves the diversification of a portfolio

Efficient Frontier (data 1989 to 2011)

86% Bonds14% Converts

7% Stocks93% Bonds

100% Stocks

100% Converts

67% Stocks33% Bonds



34% Stocks66% Bonds



Data source: Merrill Lynch Convertible research, data calculated from 1989 to 2011 For Advisor Use Only

7

Macro Overlay

Convertible Bonds Valuation Analysis

Fundamental Analysis

Credit / Equity

Portfolio Construction

Portfolio Construction

Investing in Convertibles at BlueBay

• BlueBay employs a unique 360 degree approach to convertible fund management

• Portfolio construction is performed by combining top down, bottom up and derivative valuation techniques


8

BlueBay Convertible Bonds – The Team

Michael ReedSenior Portfolio Manager• Mike joined BlueBay in October 2007 from Pendragon, where, as

a Partner, he ran the company’s convertible arbitrage strategies. Prior to that, he was a Managing Director of Salomon Brothers, responsible for international convertible bond trading between 1994 and 2002. Michael joined the Japanese Warrant Arbitrage desk at Salomon in 1989 and spent 2 years trading Japanese Warrant Arbitrage in Tokyo. Michael holds a Bachelor of Engineering from Southampton University

Alessandro EspositoPortfolio Manager• Alessandro began his career in 1998 at JPM before moving to

Intesa in 2000. He began trading hybrids and equity derivatives at Morgan Stanley in 2003 and ran the convertible arbitrage strategy at Peloton Partners from 2006. He joined BlueBay in December 2007 as a portfolio manager on the convertible arbitrage team. He has MSc in Mathematical Trading and Finance and is a CFA charter holder

• Experience: The Portfolio Managers have a combined 39 years of investment experience

• Participation at Investment Committee: Senior investment professionals across all product areas are members of the Investment Committee, chaired by the CIO

• Proprietary research: Working with the dedicated credit analysts within BlueBay covering Investment Grade, High Yield, and Emerging Markets

A dedicated team of investment professionals

Investment Grade Analysts

Robert LambertNesche YazganRussell Vincett

James MacDonald Arun Konkoth

John GuarneraHigh Yield Analysts

Thomas KreuzerClaire BonyngeCaroline Brown

Oliver GraceFred Kooij

Praveen Pillai

Charles WhineryJorge Lazaro Soler

Tim Horan Rajat MittalJeff Jablons

Emerging Market Analysts

Jo MorrisStanislav GelferShikeb Farooqui

Alan SiowMagashlin Chetty

Kaushik RambhiyaAmanda GraySven Scholze

Risk Management, Compliance & Legal

Investment Committee

Mark Poole (CIO) Alex Khein (COO)Senior investment

professionals

Trade ExecutionJohn Orrock

(Senior Trader & Trade Operations Lead)

Philip Steel (Exec. Trader – CB) Convertible Bonds

Investment Team

Portfolio ManagersMichael Reed (Senior PM & Partner)

Alessandro Esposito

Junior Portfolio ManagerDavid Watling

Dedicated Credit & Equity AnalystsEsther KrukowskiKirsten Macaulay

Vanessa Scarbonchi

Note: As at 31 March 2013 For Advisor Use Only

9

Sector Breakdown

Broad Range of Credits**Country Breakdown

Global MarketCanadian Market

Sector Breakdown

Data source: Bloomberg, UBS Convertibles Marketing / MACE. Canadian market data as of July 19, 2012; Global market data as of February 29, 2012 * Based on active issues trading between $50-$150 ** Where no official rating is available, BlueBay assigns an effective rating using internal processes

Relatively Small• Represents only 5% of the global marketConcentrated• Approximately 80% of all issues are in Financial, Energy,

and Industrial sectorsNarrow• Approximately 50% of market capitalization is in 39 issues

from 28 different companies

80% of issues are in financial, energy, and industrial sectors

Global market is diversified across sectors

Convertible Bond Market OverviewAdvantages of access to global convertible bond market

10.1%6.8%

21.6%2.2%

6.5%9.7%

4.2%17.7%

12.7%5.6%

2.8%

0% 5% 10% 15% 20% 25% 30% 35%

FinancialEnergy

IndustrialsUtilities

MaterialsHealthcare

Consumer StaplesConsumer Discretionary

TelecomIT

Other

Market Statistics

Market Capitalization CAD$20.5bn

Average issue Size* CAD$77m

Market Statistics

Market Capitalization US$475bn

Average issue Size* US$888m

US38.5%

Asia ex japan17.6%

Europe31.4%

Japan12.5%

AAA -AA

7.1%

AAA -AA

39.0%

BBB23.0%

BBB19.5%

BBB10.6%

CCC0.8%


10

Convertible Bonds – Current Outlook & Investment CaseCredit markets remain attractive

Data source: Bloomberg US HY default rates – source JP Morgan

• Current credit spreads imply annual default rates of over 2.0% for investment grade and over 4.5% for high yield credits

• Default rates are expected to remain low for 2013

• Current credit spreads are too wide for bottom-up anticipated default rates

0%

2%

4%

6%

8%

10%

12%

14%

16%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

E

High Yield

60

80

100

120

140

160

180

200

220

300

400

500

600

700

800

900

1,000

Dec

-09

May

-10

Sep-

10

Jan-

11

Jun-

11

Oct

-11

Feb-

12

Jun-

12

Nov

-12

Mar

-13

Investment G

rade (bps)

Cro

ssov

er (b

ps)

Crossover

Investment Grade

Credit spreads – Implying high rates of defaults, to 31 March 2013 Default rates – Expected to stay low 2013

Long-term average default rate

4.3%

2013E 2.0%


11

Convertible Bonds – Current Outlook & Investment CaseEquities supported by valuation arguments

• Equity yields are attractive relative to bond yields on an historic basis

• Given current corporate profitability dividend payout ratios have room to increase

Data source: Goldman Sachs and BloombergData source: JP Morgan as at 31 March 2013

Dividend yield gap - Equity yields compelling S&P dividend payouts - Low by historic ratios. As at 31 March 2013

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

20

40

60

80

100

120

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

E

Payout RatioS&

P po

ints

Dividends (points)

Earnings (points)

Payout (ratio)

-2%

0%

2%

4%

6%

8%

10%

12%

1960

1970

1980

1990

2000

2010

2013

Yiel

d ga

p(1

0-yr

US

Gov

't yie

ld) m

inus

(S

&P50

0 D

ivid

end

yiel

d)


12

Convertible Bonds – Current Outlook & Investment CaseEmerging Markets – Credit and Equity Opportunities

• Strong GDP growth and healthy banking systems are supporting EM credit

• Equivalent grade credits trade at a discount in EM

• Healthy asset inflows are supportive of both EM credit and equity markets

• EM equities trading near cyclical lows on forward P/E

Emerging markets forward P/E earnings ratio

Data source: BNP Paribas as at 1 February 2013

Spread of emerging market IG corporates vs developed market IG corporates

Data source: Bloomberg, BlueBay Asset Management, Bloomberg, as at 31 March 2013

-150

-100

-50

0

50

100

150

Dec

-01

Sep-

02

Jun-

03

Mar

-04

Dec

-04

Sep-

05

Jun-

06

Mar

-07

Dec

-07

Sep-

08

Jun-

09

Mar

-10

Dec

-10

Sep-

11

Jun-

12

Mar

-13

EM IG less DM IG Spread


13

Convertibles perform well in rising rate environments

-10

-5

0

5

10

15

20

25

30

1994 1999 2009

(%)

Equities CBs USTs

• We believe that in periods of rising rates the equity component of convertibles normally compensates for falling bond floors• Over last 20 years, in each annual period that government bonds have posted significant losses convertibles have posted

positive returns.


APPENDIX


15

APPENDIX: BlueBay Convertible Bonds – Our Track RecordLong Only Products – BlueBay Global Convertible Bond Fund

Data source: BlueBay Asset Management Fund Type: UCITS IV Fund (Part I SICAV) *Annualised return. Fund inception date: 9 December 2008Please refer to the Disclaimer located at the back of this presentation for important information regarding the performance shown above

Risk/Return CharacteristicsCumulative Gross Relative Performance (to 30 April 2013)

1M 3M YTD 2012 2011 2010 2009 Ann. SI*

BlueBay Funds -

BlueBay Global Convertible Bond Fund 2.73% 2.09% 5.07% 14.43% -3.55% 13.83% 36.70% 15.54%

UBS Global Convertible Focus Index USD 2.37% 2.08% 4.26% 10.56% -4.58% 9.73% 24.42% 11.08%

Alpha 0.36% 0.01% 0.81% 3.88% 1.03% 4.10% 12.28% 4.46%

UBS Global Convertible Focus Index USD

BlueBay Funds - BlueBay Global Convertible Bond Fund

Performance (US$ gross of fees to 30 April 2013)

Fund Type: UCITS IV Fund (Part I SICAV) This Fund is not available to Canadian investors.


16

Return (% p.a.)

Standard Deviation (% p.a.)

Reward to Risk

Tracking Error (% p.a.)

Information Ratio

APPENDIX: Convertible Bonds at BlueBay – Our Track Record Performance characteristics vs UBS Global Convertible Index

Data source: Mercer. Universe of 13 Funds.

95th Percentile

Lower Quartile

Upper Quartile

5th Percentile

Median

BlueBay Global Convertible Bond Fund

Comparison with the UBS Global Convertible Index (US$ net) over 3 years to December 2012

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

-1.0

17.0

15.0

13.0

11.0

9.0

7.0

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0.0

-0.1

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

0.8

0.4

0.0

-0.4

-0.8

-1.2

Fund Type: UCITS IV Fund (Part I SICAV) This Fund is not available to Canadian investors.


17

APPENDIX: About BlueBayKey facts

Data Source: BlueBay Asset Management *As at 31 March 2013 **As at 31 March 2013. Investment professionals defined as staff members directly involved in the investment process

• Founded in 2001, BlueBay is a leading European credit specialist with long-only and alternative capabilities with assets under management of over US$55.7 billion*

• Absolute return-style products across investment grade, high yield debt, loans, distressed debt, convertible bonds, and emerging markets

• Operational and control infrastructure of a mainstream asset manager with the mindset of a boutique

• Based in London with offices in Hong Kong, Japan, Luxembourg and the US, BlueBay has 328 employees including 84 investment professionals**

• BlueBay Asset Management is a wholly-owned subsidiary of Royal Bank of Canada (RBC) and part of the RBC asset management division, RBC Global Asset Management group of companies

2001

March 2002 Launch of first

long / short fund

June 2004 BlueBay reaches US$1bn of AUM

April 2007 Launch of first long/short

multi strategy fund

July 2001 BlueBay is established with

institutional backing of Barclays Bank and Shinsei Bank

September 2002 Launch of first long-only fund

2002 2003 2004 2005 2006 2007 2008 2009

December 2010 BlueBay acquired

by Royal Bank of Canada

2010

December 2009 Launch of the first

long-only active asset allocation product

2005 Office opened

in Japan

2006 Office opened

in the US

2011

April 2011 Office opened in Hong Kong

2012

April 2012 BlueBay becomes a

Limited Liability Partnership

March 2013 AUM

US$55.7bn

November 2006 BlueBay lists shares on London Stock Exchange

2013


18

Disclaimer


The full name of the Canadian-domiciled fund is BlueBay Global Convertible Bond Fund (Canada) (“Fund”). RBC Global Asset Management Inc. (“GAM”), an indirect wholly-owned subsidiary of Royal Bank of Canada, is the manager of the Fund. BlueBay Asset Management LLP, a wholly-owned subsidiary of Royal Bank of Canada and an affiliate of GAM, is the sub-advisor of the Fund.

This document may contain information collected from independent third party sources. For purposes of providing these materials to you, neither GAM nor any of its affiliates, subsidiaries, directors, officers, or employees, has independently verified the accuracy of the third-party information contained herein. The information set forth herein is subject to change without prior notification. GAM and its affiliates make no

express or implied warranties concerning these materials.

®/TM Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2013

rbc gam webcast convertible bonds – the best of both...

Documents