Global Fixed Income Opportunities Amidst Emerging Divergence

Transcription

1 Global Fixed Income Opportunities Amidst Emerging Divergence Benefits Canada Defined Benefit Summit December 2014 Jim Cole Phillips Hager & North Investment Management

2 $ (millions) DB Costs Skyrocket Secular Forces Remain Entrenched Increases Pressure to Use Capital Efficiently! Market Value of Liabilities Secular Forces Low Interest rates Mature liability profiles Increasing longevity Funding pressures 80 Market Value of Liabilities 2

3 % Higher Interest Rates? Increases Likely Limited and Slow to Emerge 14 Historical U.S. 10-year Treasury Yields Range: 3% - 5% Range: 2% - 5% 50 Years 45 Years Source: RBC GAM, RBC CM 3

4 (Meanwhile) The Hunt for Yield Continues. CartoonStock Cartoonist: Harley Schwadron 4

5 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Yield to Worst (%) Balancing Risk and Opportunity Market Volatility Is Increasing BoA/Merrill Lynch US High Yield Index Rising Volatility Monetary policy >150 bps Sell Off Supply / demand Dealer liquidity Event Risk Source: Bloomberg, BoA/Merrill Lynch 11/20/2014 5

6 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Stock Price Price ($) ($) Bond Price ($) Event Risk Quintessentially Canadian M&A Portfolio Implications 100 Tim Hortons Common Share Price 110 Tim Hortons 4.2% 2017 Corporate Bond Source:Charts\Other\ THI Equity 100 Source: anna\excel files \event risk 9/30/14 Source: FTSE TMX Global Debt Capital Markets Inc., BondLab, Bloomberg 6

7 Times are a Changin Decoupling Central Banks Create Opportunity BoE Fed BoC ECB BoJ 7

8 Increasing Performance Disparity Global Bond Yields 10 Year Government Bond Yields Source: other\global yields - weekly (germany ) 10/31/14 Source: FTSE TMX Global Debt Capital Markets Inc., Bloomberg 8

9 Increasing Performance Disparity Geographies India Brazil Election Election Source: Bloomberg, JP Morgan. Indian bond market represented by JP Morgan GBI-EM India Unhedged USD Index. Brazilian bond market represented by JP Morgan GBI-EM Brazil Unhedged USD Index 9

10 Too Big To Ignore? Comparative Index Sizes Index/Market Size DEX Universe Bond Index $1.3 Trillion Global High Yield 1 $2.1 Trillion Emerging Market Debt 2 $2.3 Trillion U.S. Corporate Bonds 3 $5.1 Trillion S&P/TSX Composite Index $2.1 Trillion 1 BoA/Merrill Lynch Global High Yield Constrained Index (HW0C) 2 JP Morgan Emerging Markets Bond Index Global Diversified (EMBI, hard currency sovereign) + JP Morgan Corporate Emerging Markets Bond Index Broad Diversified (CEMBI, hard currency) + JP Morgan Government Bond Index-Emerging Markets Broad Diversified (GBI-EM, local currency sovereign) 3 BoA/Merrill Lynch U.S. Corporate Master Index (C0A0) As at September 30,

11 Portfolio Construction Framework Asset Allocation Decisions Investment Committee vs. Manager Lower Degree of Manager Flexibility Higher Asset Allocation Mandate Extension Domestic Core Mortgages High Yield Private Placements Global / Currency Domestic Core Mortgages High Yield Private Placements Global / Currency Trustees Responsibility for Asset Allocation Managers 11

12 Ask Your Managers for Help! But Also Understand Investment and Risk Management Process Mandate Review: Credit quality investment grade vs. high yield Maximum Position Sizes BBB market is evolving Private Placements increasingly accessible asset class Domestic vs. Global large and evolving markets! Currency Exposures sometimes they are risk reducing! 12

13 Back to Efficient Capital Allocation Investment Policy Cycle 1. Plan Design 7. Monitoring & Review 2. Governance Structure 3. Investment Beliefs 5. Investment Manager Structure 4. Asset Mix Policy Efficient Capital Allocation in a Changing Market Environment 13

14 Conclusion Last 6 years rhymed Seeing diverging policies and asset class differentiation Opportunities for active management Give thought to portfolio construction and mandate definition Thank you! Questions? 14