Absolute Return Fixed Income The New Defensive: Redefining Core Fixed Income Strategy

Transcription

1 FOR PROFESSIONAL INVESTORS FOR PROFESSIONAL INVESTORS Absolute Return Fixed Income The New Defensive: Redefining Core Fixed Income Strategy Alex Johnson, Head of Absolute Return Fixed Income, FFTW June 11, 2014

2 06/11/2014 I 2 Definition: a strategy not managed relative to a benchmark Definition Role in Portfolio Risks Performance Measurement Questions Appendix Portfolio Composition FFTW Absolute Return Fixed Income Composite Disclaimer

3 06/11/2014 I 3 Definition: a strategy not managed relative to a benchmark Relative Return Unconstrained Total Return Absolute Return Relative Return Global Unconstrained Absolute Return Benchmark Tracks benchmark Benchmark aware No benchmark Duration Positive only Positive to zero Positive or negative Sector Allocations Follow benchmark Can deviate from benchmark Not influenced by benchmark

4 06/11/2014 I 4 Definition: a strategy not managed relative to a benchmark Compare to Relative Return Strategy, e.g. Core US Fixed Income: Performance Target? Absolute, not Relative Neutral Opinion? Relative Manager Holds; Absolute Return Manager Does Not Hold Negative Opinion? Relative Manager Underweights, Absolute Return Manager Can Go Short Portfolio Duration? Relative Manager Positive, Absolute Return Manager can be Positive and Negative Hard Universe to Define

5 06/11/2014 I 5 Role in portfolio: diversification from benchmark fixed income FFTW Absolute Return: "Multi Strategy Alpha (USD)". Source: FFTW. Dates: 31-Oct-2006 to 31-Jan-2014

6 06/11/2014 I 6 Role in portfolio: diversification from benchmark fixed income FFTW Absolute Return: "Multi Strategy Alpha (USD)". Source: FFTW. Dates: 31-Oct-2006 to 31-Jan-2014

7 06/11/2014 I 7 Role in portfolio: diversification from other asset classes FFTW Abs Rtn TAIFEX 10Y BOND US 30YR NOTE (CBT) Barclays Glob Agg JPM EM External Debt Abs Rtn Bonds Commodities Correlation to 31-Mar-2014 Equities FX FFTW Abs Rtn TAIFEX 10Y BOND US 30YR NOTE (CBT) Barclays Glob Agg JPM EM External Debt JPM EM Local Debt CAN 2YR BOND FUT EURO-BUND FUTURE EURO-BOBL FUTURE EURO-SCHATZ FUT EURO BUXL 30Y BND LONG GILT FUTURE SWISS FED BND FUT US LONG BOND(CBT) US 5YR NOTE (CBT) US 10YR NOTE (CBT) US 2YR NOTE (CBT) CAN 10YR BOND FUT JPN 10Y BOND(TSE) AUST 10Y BOND FUT AUST 3YR BOND FUT N.ZEALND 10Y BOND N.ZEALND 3YR BOND KOREA 3YR BND FUT Barclays US Agg 3 YEAR EFN FUTURE SUGAR #11 (WORLD) NATURAL GAS FUTR LEAN HOGS FUTURE COTTON NO.2 FUTR WTI CRUDE FUTURE GASOLINE RBOB FUT GOLD 100 OZ FUTR SILVER FUTURE PLATINUM FUTURE PALLADIUM FUTURE LME COPPER FUTURE LME PRI ALUM FUTR LME ZINC FUTURE COCOA FUTURE COFFEE 'C' FUTURE CORN FUTURE SOYBEAN FUTURE WHEAT FUTURE(CBT) FCOJ-A FUTURE GS Comdty FTSE Bursa Malaysia KLCI NIKKEI 225 OMX COPENHAGEN 20 INDEX SWISS MARKET INDEX CAC 40 INDEX DAX INDEX BEL 20 INDEX OBX STOCK INDEX AEX-Index FTSE MIB INDEX IBEX 35 INDEX PSI 20 INDEX OMX STOCKHOLM 30 INDEX FTSE 100 INDEX UDAPEST STOCK EXCH INDX WSE WIG 20 INDEX RUSSIAN RTS INDEX $ S&P 500 INDEX RUSSELL 2000 INDEX NYF NASDAQ 100 STOCK INDX DOW JONES INDUS. AVG S&P/TSX 60 INDEX MEXICO IPC INDEX BRAZIL IBOVESPA INDEX S&P/ASX 200 INDEX HANG SENG INDEX KOSPI 200 INDEX HANG SENG CHINA ENT INDX NSE CNX NIFTY INDEX THAI SET 50 INDEX FTSE/JSE AFRICA TOP40 IX MSCI Global USD-JPY X-RATE USD-CNY X-RATE USD-GBP X-RATE USD-EUR X-RATE USD-NOK X-RATE USD-SEK X-RATE USD-ILS X-RATE USD-TRY X-RATE USD-HUF X-RATE USD-CZK X-RATE USD-PLN X-RATE USD-RUB X-RATE USD-CAD X-RATE USD-BRL X-RATE USD-MXN X-RATE USD-AUD X-RATE USD-NZD X-RATE USD-KRW X-RATE USD-INR X-RATE USD-ZAR X-RATE USD-CHF X-RATE FX Equities Commodities Bonds Abs Rtn JPM EM Local Debt CAN 2YR BOND FUT EURO-BUND FUTURE EURO-BOBL FUTURE EURO-SCHATZ FUT EURO BUXL 30Y BND LONG GILT FUTURE SWISS FED BND FUT US LONG BOND(CBT) US 5YR NOTE (CBT) US 10YR NOTE (CBT) US 2YR NOTE (CBT) CAN 10YR BOND FUT JPN 10Y BOND(TSE) AUST 10Y BOND FUT AUST 3YR BOND FUT N.ZEALND 10Y BOND N.ZEALND 3YR BOND KOREA 3YR BND FUT Barclays US Agg 3 YEAR EFN FUTURE SUGAR #11 (WORLD) NATURAL GAS FUTR LEAN HOGS FUTURE COTTON NO.2 FUTR WTI CRUDE FUTURE GASOLINE RBOB FUT GOLD 100 OZ FUTR SILVER FUTURE PLATINUM FUTURE PALLADIUM FUTURE LME COPPER FUTURE LME PRI ALUM FUTR LME ZINC FUTURE COCOA FUTURE COFFEE 'C' FUTURE CORN FUTURE SOYBEAN FUTURE WHEAT FUTURE(CBT) FCOJ-A FUTURE GS Comdty FTSE Bursa Malaysia KLCI NIKKEI 225 OMX COPENHAGEN 20 INDEX SWISS MARKET INDEX CAC 40 INDEX DAX INDEX BEL 20 INDEX OBX STOCK INDEX AEX-Index FTSE MIB INDEX IBEX 35 INDEX PSI 20 INDEX OMX STOCKHOLM 30 INDEX FTSE 100 INDEX BUDAPEST STOCK EXCH INDX WSE WIG 20 INDEX RUSSIAN RTS INDEX $ S&P 500 INDEX RUSSELL 2000 INDEX NYF NASDAQ 100 STOCK INDX DOW JONES INDUS. AVG S&P/TSX 60 INDEX MEXICO IPC INDEX BRAZIL IBOVESPA INDEX S&P/ASX 200 INDEX HANG SENG INDEX KOSPI 200 INDEX HANG SENG CHINA ENT INDX NSE CNX NIFTY INDEX THAI SET 50 INDEX FTSE/JSE AFRICA TOP40 IX MSCI Global USD-JPY X-RATE USD-CNY X-RATE USD-GBP X-RATE USD-EUR X-RATE USD-NOK X-RATE USD-SEK X-RATE USD-ILS X-RATE USD-TRY X-RATE USD-HUF X-RATE USD-CZK X-RATE USD-PLN X-RATE USD-RUB X-RATE USD-CAD X-RATE USD-BRL X-RATE USD-MXN X-RATE USD-AUD X-RATE USD-NZD X-RATE USD-KRW X-RATE USD-INR X-RATE USD-ZAR X-RATE USD-CHF X-RATE Return Barclays Global Agg -2.60% Barclays US Aggregate -2.01% Absolute Return 3.43% Correlation Absolute Return Correlations to: Fixed Income Commodities Equities FX Source: FFTW, Bloomberg, March 2014 Correlations of Absolute Return to: Barclays Global Agg 0.14 JPM EMBI (External) 0.34 JPM GBI (Local) 0.35 US 10Yr Barclays US Aggregate GS Commodity 0.29 S&P MSCI Global 0.40 One example of differences

8 06/11/2014 I 8 Role in portfolio: positive performance in rising rate environments For Illustrative Purposes Only

9 06/11/2014 I 9 Risks 1. Volatility 2. Concentration 3. Liquidity 4. Replacing benchmark risk with active management risk Absolute return is just active management without any beta so active management success is the key risk

10 06/11/2014 I 10 Performance Absolute return not guaranteed return Performance measurement Benchmarked to cash? Cash + x? Liabilities? Information Ratio Peer universe? Guidelines

11 Questions? 06/11/2014 I 11

12 /11/2014 I 12 Portfolio Composition Sector: diversified across sectors 6 Currency: active shorts and longs Treasuries Cash CMO Financial Institutions Sovereign CMBS Industrial ABS Covered Utility -4 MBS Passthrough Duration by currency: short duration Rating: strong investment-grade bias Exposure (%) JPY USD GBP EUR CAD PLN SEK Total USD NOK GBP SEK EUR JPY Exposure (%) Exposure (in years) AAA AA+ AA A A- BBB+ AA- A+ BBB BBB- BB+ BB BB- B+ B B- CCC+ Exposure (%) Source: FFTW, March 2014

13 06/11/2014 I 13 FFTW Absolute Return Composite FFTW Investment Performance Multi Strategy Alpha (USD) Composite in USD presented on a Gross basis April 30, 2014 Last 3Mths <= , <= , <= , <= , <= , <= , <= , <= , Additional Information Gross Composite Return % Dollar Weighted Benchmark Return % Gross Return Increment April Q-T-D Y-T-D Annualized Composite Annualized Benchmark Standard Deviation Standard Deviation Tracking Volatility Information Ratio Last 12 months Last 3 years Last 5 years Inception (10/2006) Date Printed: May 15, 2014 Gross Composite Return % Dollar Weighted Benchmark Return % Gross Return Increment Portfolios at End of Period Total Composite Assets at End of Period Total Firm Assets (USD millions) Percentage of Firm Monthly Benchmark Standard Deviation Past performance is not indicative of future results which may vary. There can be no assurance that the investment objectives of any portfolio will be achieved. Please see Additional Disclosures for further information. Notes: 1. As of January 1, 2011, the Firm's definition includes Fischer Francis Trees & Watts, Inc. ("FFTW") and its affiliates Fischer Francis Trees & Watts UK Ltd. and Fischer Francis Trees & Watts Singapore, which is a registered business name (Business Reg. No K) of BNP Paribas Investment Partners Singapore Limited Co. (Reg. No D). All are part of the global investment management group, Fischer Francis Trees & Watts (the "FFTW Group"), which is part of the BNP Paribas' asset management business. The FFTW Group specializes in managing U.S. and global fixed income portfolios for institutional clients. FFTW is wholly owned by BNP Paribas Investment Partners USA Holdings Inc. (formerly known as Charter Atlantic Corporation). Additional details are available in each firm's ADV, which is available upon request. 2. A complete list and description of firm composites will be made available upon request. 3. FFTW does not include any portfolio whose net asset value ("NAV") or levered exposure, as applicable, is less than US $5 million in any composite. 4. Returns are expressed in USD currency. 5. One or more portfolios within this composite may utilize various degrees of leverage in their investment programs including through the use of derivative instruments. These instruments can include, but are not limited to, the following: interest rate futures, currency futures, options, interest rate swaps, credit default swaps, and foreign exchange contracts. The extent of such use, including specific instruments employed, may vary among the portfolios. Accounts included in this composite reflect client customized leverage provisions, but overall the composite would be considered to employ a low to moderate leverage. The use of leverage has the potential to magnify adverse impact of losses on a portfolio. Additional information regarding the use of leverage and derivative instruments in implementing the investment strategy underlying this composite is available upon request. 6. The returns presented are gross of all fees and expenses other than trading expenses. Performance returns for each portfolio that is included in this composite will be reduced by those fees and expenses that are charged to such portfolio. For an illustration of the impact of fees on portfolio returns please see Additional Disclosures. 7. When applicable, performance is presented net of withholding taxes (if any) actually withheld, but gross of all other applicable taxes. In the event that any portion of withholding taxes previously withheld is recouped, performance is adjusted to reflect the recoupment on a going forward basis from the date of recoupment. 8. Additional information regarding policies for calculating and reporting returns is available upon request. 9. Composite description: Multi Strategy Alpha strategy reflecting assets denominated in USD. This composite strategy utilizes a multi-strategy, market neutral investment approach, investing within the global fixed income and currency markets. These accounts incorporate Interest Rate, Foreign Exchange, Structured Securities and Emerging Markets strategies. 10. Composite Multi Strategy Alpha (USD) was created on December 5, Policies for valuing portfolios, calculating performance, and preparing compliance presentations are available upon request. 12. FFTW, Inc. claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. Fischer Francis Trees & Watts, Inc. has been independently verified for the periods January 1, 1990 through June 30, The verification report(s) is/are 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. 13. The benchmark is the dollar weighting of the individual benchmarks for all portfolios in this composite. The benchmark is rebalanced monthly and information regarding the underlying benchmarks and their weightings is available upon request. 14. As of December 31, 2013, the monthly benchmark return of: 0.01 has the following weightings: 15. Merrill Lynch U.S. Dollar LIBOR 1-month Constant Maturity Index - Unhedged: % 16. There can be no assurance that a targeted tracking error will be achieved. Please see Additional Disclosures for further information. 17. Effective January 1, 2011, the Firm has decided that accounts will no longer be removed when there is a significant cash inflow or outflow. Prior to this time, a significant cash flow policy was applied. The most recent threshold (effective since Mar 1, 2010) was 15%. Additional details are available as requested. 18. As a result of the functional integration on September 30, 2010, FFTW incorporated approx $16.8B (USD) of transfer account assets under (AUM). Of this total, approximately $13.7B (USD) was eligible for inclusion in FFTW's GIPS assets under management. 19. The FFTW basic fee schedules, listed below, are subject to negotiation between the parties at FFTW's discretion. The precise schedule of fees is dependent upon the size of the mandate as well as any client specific requirements. 20. The performance calculations for non-usd accounts are based on currency translations using end of month forward rates (Source:1-month forward rate, Source: Citigroup Indices). 21. The asset calculations are based on end of month spot exchange rates (Source:Spot rate, Reuters/WM Company Fixing, 4pm London). 22. Performance return in original currencies for each underlying account can be provided upon request. Assets Monthly Composite Standard Deviation

14 06/11/2014 I 14 Biography Alex Johnson, Head of Absolute Return Fixed Income Alex is the Head of Absolute Return Fixed Income for FFTW and is responsible for the management, growth and development of global absolute return strategies. Alex also chairs the Absolute Return Group at FFTW supporting Global, Currency, Mortgage and Inflation-Linked Absolute Return strategies. Prior to his current role, Alex served as Co-Head of Global Fixed Income Products for FFTW having previously worked as Head of Portfolio Management. Prior to joining FFTW, Alex was employed as a Senior Portfolio Manager at Fortis Investment Management, which was integrated into FFTW in Before joining Fortis Investment Management in 2008, Alex was on the Global Fixed Income team at BlackRock having spent four years prior at FFTW where he was the Market Specialist responsible for short duration interest rate strategies across the major currency blocs. Alex came to FFTW from Paribas Asset Management, where he worked as a Portfolio Manager for UK and European funds. Collectively Alex has over 12 years within the BNP Paribas, or affiliate, organization and over 17 years of global fixed income portfolio management experience. Alex received an MA in Law from Balliol College, University of Oxford and an LLM in Law from the University of Virginia. He holds ISMA and London Business School Investment Management Program diplomas. Alex is based in New York.

15 06/11/2014 I 15 Disclosures This material is issued by Fischer Francis Trees & Watts, Inc. ( FFTW )* and refers to products managed or advised by FFTW and possibly members of Fischer Francis Trees & Watts UK Ltd ( FFTW UK )**, both members of BNP Paribas Investment Partners (BNPP IP)***. This material is produced for information purposes only and does not constitute: 1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. any investment advice. This material makes reference to certain financial instruments (the Financial Instrument(s) ) authorised and regulated in its/their jurisdiction(s) of incorporation. No action has been taken which would permit the public offering of the Financial Instrument(s) in any other jurisdiction, except as indicated in the most recent prospectus, offering document or any other information material, as applicable, of the relevant Financial Instrument(s) where such action would be required, in particular, in the United States, to US persons (as such term is defined in Regulation S of the United States Securities Act of 1933). Prior to any subscription in a country in which such Financial Instrument(s) is/are registered, investors should verify any legal constraints or restrictions there may be in connection with the subscription, purchase, possession or sale of the Financial Instrument(s). Investors considering subscribing for the Financial Instrument(s) should read carefully the most recent prospectus, offering document or other information material and consult the Financial Instrument(s) most recent financial reports. The prospectus, offering document or other information of the Financial Instrument(s) are available from your local BNPP IP correspondents, if any, or from the entities marketing the Financial Instrument(s). Opinions included in this material constitute the judgment of FFTW, FFTW UK and their affiliates at the time specified and may be subject to change without notice. FFTW, FFTW UK and their affiliates are not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the Financial Instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for a client or prospective client s investment portfolio. Given the economic and market risks, there can be no assurance that the Financial Instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the Financial Instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the Financial Instruments may have a significant effect on the results portrayed in this material. Past performance is not a guide to future performance and the value of the investments in Financial Instrument(s) may go down as well as up. Changes in currency exchange rates may affect the value of your investment. Investors may not get back the amount they originally invested. The performance data, as applicable, reflected in this material, do not take into account the commissions, costs incurred on the issue and redemption and taxes. Comparisons to a benchmark are provided for informational purposes only. While the portfolio design seeks to reflect appropriate risk and return characteristics, including in respect of sector weights, credit quality and duration, it should be understood that such characteristics, as well as portfolio volatility, may deviate to varying degrees from those of the benchmark. The risk management process described herein or elsewhere includes an effort to monitor and manage risk, but should not be confused with and does not imply low risk. * Fischer Francis Trees & Watts, Inc. is registered with the US Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. ** Fischer Francis Trees & Watts UK Ltd is authorised and regulated by the Financial Conduct Authority. Registered in England No: , registered office: 5 Aldermanbury Square, London, England, EC2V 7BP, United Kingdom. FFTW UK is also registered with the US Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. *** BNP Paribas Investment Partners is the global brand name of the BNP Paribas group s asset management services. The individual asset management entities within BNP Paribas Investment Partners if specified herein, are specified for information only and do not necessarily carry on business in your jurisdiction. For further information, please contact your locally licensed Investment Partner.

16 06/11/2014 I 16 Additional Disclosures The past performance (if shown) of any representative portfolio is shown for illustrative purposes only in connection with a consideration of the proposed strategy. It represents performance of a portfolio with a fundamental investment objective that is similar to the investment objective of the strategy under consideration. Past performance is not indicative of future performance, and, in addition, the past performance of any representative portfolio does not represent the past or future performance of any other portfolio. The performance of the portfolio under consideration may differ from the performance of any representative portfolio due to a number of factors including, without limitation, potentially differing rates of fees and expenses applicable to each such portfolio, cash levels, investment timing issues, and regulatory considerations that could impact the performance of each portfolio relative to the other. Below is an illustration of the effect of management and performance fees (where applicable) on portfolio returns. The illustration assumes that (i) the portfolio had a steady excess return, gross of fees, of 1% per year (examples A & B), (ii) the portfolio was subject to a yearly management fee of 15 basis points of the market value of the portfolio (examples A & B), (iii) the portfolio was subject to an annual performance fee of 20 percent of the net excess return of the portfolio for the year (example B only), and (iv) there were no cash flows during the period (examples A & B). The illustration shows the compounding effect of management and performance fees (where applicable) on portfolio returns over time, assuming that other factors such as investment return and fees remain constant. The illustration below is simplified. The difference between gross-of-fees and net-of-fees performance return will in practice depend on a variety of factors. The illustration below is cumulative and not annualized. Tracking volatility is one possible measurement of the dispersion of a portfolio s returns from its stated benchmark. More specifically, it is the standard deviation of such excess returns. Tracking volatility is a figure that represents statistical expectations falling within a normal distribution of returns. Dependent on the measurement period, normal statistical distributions of returns suggests that approximately two thirds of the time the annual gross returns of the accounts will lie in a range equal to the benchmark return plus or minus the tracking volatility if the market behaves in a manner suggested by historical returns. Targeted tracking volatility therefore applies statistical probabilities (and the language of uncertainty) and so cannot be predictive of actual results. The returns that will actually be achieved may inherently lie outside of the range suggested by the historic tracking volatility. The actual tracking volatility is the result of many factors (including but not limited to market volatility, company specific anomalies, instability of correlation between benchmark holdings, timing differences between the calculation of the portfolio value and the valuation of the benchmark by the index provider). In addition, past tracking volatility is not indicative of future tracking volatility and there can be no assurance that the tracking volatility actually reflected in a portfolio will be at levels specified in the investment objectives. This document is not to be construed as an offer to buy or sell any financial instrument. It is presented only to provide information on investment strategies and current financial market trends. Any analyses and opinions contained in this document are those of the preparer, and are based upon information obtained by the preparer from sources which are believed to be reliable. The preparer provides no assurance as to the completeness or accuracy of the information contained in this document. Readers should independently evaluate the information presented and reliance upon such information is at their sole discretion. The information contained herein (and any calculation of targeted/expected returns) includes estimates and assumptions and involves significant elements of subjective judgment and analysis. No representations are made as to the accuracy of such estimates and assumptions, and there can be no assurance that actual events will not differ materially from those estimated or assumed. In the event that any of the estimates or assumptions used in this presentation prove to be untrue, results are likely to vary from those discussed herein. Please note that pricing sources and methodologies which reflect market practice are utilized, including internal valuations if it is determined that valuation data from independent sources is not available or is unreliable. However, your custodian, who maintains the official books and records for your portfolio, may utilize different pricing sources resulting in deviations between internal and the custodian s valuations. Further, from time to time financial markets may suffer periods of illiquidity caused by unusual volatility or extreme disturbances and prices realized could vary widely from recent valuations.