Negative rates threatening European savers: High Yield Value Bonds. Sparinvest

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1 Negative rates threatening European savers: High Yield Value Bonds Sparinvest

2 Investing in High Yield Bonds Henrik Lind-Groenbaek, Chief Investment Officer, Sparinvest

3 Returns as per May 2014 Global Asset Classes Excellent returns across all asset classes over ten years High Yield is best among bonds High volatility but lower than equities Hunt for yield in all asset classes Name Ticker 1 year 3 years 5 years 10 years Ann. Vol 10 Year US US Treasury Master G0Q0 Index 1,16 9,21 19,35 56,73 4,25 US Corp Master, High Grade Corp C0A0 Index 4,83 18,73 53,01 78,57 5,86 US High Yield Master II, High Yield CorpH0A0 Index 7,94 28,08 96,46 136,11 10,46 Europe German Govt GGDE Index 2,56 16,75 28,22 60,55 4,05 Euro Corp ER00 Index 10,39 14,54 36,61 77,07 11,74 Global HY European Issuers HWP0 Index 14,31 29,39 112,83 194,42 16,53 Em.Markets Sov Global EM Sovereigns IG00 Index 9,98 35,28 86,28 192,25 11,35 Global Eq. Mkts S&P 500 SPX Index 17,96 43,00 109,28 71,64 14,89 Stoxx 600 SXXP Index 14,41 22,48 65,33 45,03 14,66 Nikkei NKY Index 6,23 50,95 53,66 30,22 20,47 Shanghai SHSZ300 Inde -17,26-28,16-21,86 78,69 32,45 Bovespa IBOV Index -4,24-20,71-3,68 162,17 22,31 US High Yield US High Yield BB H0A1 Index 7,41 26,74 83,30 129,35 8,68 US High Yield B H0A2 Index 7,68 27,75 85,24 115,09 10,16 US High Yield CCC & lower H0A3 Index 9,75 30,82 142,95 177,16 16,46 Euro High Yield Euro High Yield BB HE10 Index 9,89 35,53 96,28 127,44 10,48 Euro High Yield B HE20 Index 11,64 33,95 116,60 141,41 13,60 Euro High Yield CCC & lower HE30 Index 13,73 34,19 224,55 226,51 22,21 3 Sparinvest

4 Is there still a potential in High Yield Bonds? High Yield is sensitive towards the economic cycle Next downturn is likely some years ahead US in its fifth year of economic recovery Euro zone lacks, but encouraging signals following reforms implemented in Growth in Euro Zone is now positive Default rates are likely to remain low Uncertainties Historically low interest rates Many fear interest risks from rising interest rates Credit spreads have tightened Limited liquidity Volatility is much higher than e.g. high grade government bonds Geopolitical risks 4 Sparinvest Sources: Markit, Eurostat

5 Portfolio OAS Nordic Investment Managers Forum Credit spread compensates for significant default losses Recovery Rate 10% 20% 30% 40% 50% 250bps 11% 13% 14% 17% 20% 300bps 13% 15% 17% 20% 24% 350bps 16% 18% 20% 23% 28% 400bps 18% 20% 23% 27% 32% 450bps 20% 23% 26% 30% 36% 500bps 22% 25% 29% 33% 40% Estimate of default rates required to yield the same as a 4 year government bond (4 year risk free rate) 5 Sparinvest

6 Historic default rates in the High Yield market 12% 10% 8% 6% 4% 2% 0% Global High Yield Emerging Corporate High Yield 6 Sparinvest

7 Solution Maturity strategies maturing in 3-5 years Low interest rate risk Low credit spread volatility Low volatility, expected 2-3% Value screening limits defaults Liquidity less important Investing off benchmark offer higher yields Investing in smaller issuers and issues Buy and hold portfolio Current Yield-to-Maturity 5%-6%, before costs and default losses, but after currency hedging 7 Ι Sparinvest

8 Sparinvest Value Bonds Disclaimer The mentioned sub-fund is part of Sparinvest SICAV, a Luxembourg-based, open-ended investment company. For further information we refer to the prospectus, the key investor information document and the current annual / semi-annual report of Sparinvest SICAV which can be obtained free of charge at the offices of Sparinvest or of appointed distributors together with the initial statutes of the funds and any subsequent changes to such statutes. Investments are only made on the basis of these documents. Past performance is no guarantee for future returns. Investors may not get back the full amount invested. Investments may be subject to foreign exchange risks. The investor bears a higher risk for investments into emerging markets. The indicated performance is calculated Net Asset Value to Net Asset Value in the fund s base currency, without consideration of subscription fees. For investors in Switzerland the funds representative and paying agent is RBC Investor Services Bank S.A., Zurich Branch, Badenerstrasse 567, P.O. Box 101, CH-8066 Zurich. Published by Sparinvest, 28, Boulevard Royal, L-2449 Luxembourg. A historically low default rate is no guarantee of a future low default rate. 8 Sparinvest Value Bonds Strategi