Macquarie Income Opportunities

Transcription

1 Analyst(s): Anthony Karaminas; David Erdonmez Macquarie Income Opportunities Standard & Poor's View Standard & Poor's Fund Services rates this fund four stars. This reflects our high conviction that the manager will consistently generate riskadjusted returns in excess of relevant investment objectives and relative to peers. The Macquarie Income Opportunities Fund (MIO) is managed by portfolio manager Brett Lewthwaite. We have met Mr. Lewthwaite on a number of occasions with our conviction in his ability consistently increasing. S&P views Macquarie's investment process positively, as it's well structured, repeatable, and clearly highlights potential investment opportunities to the management team. The fund is part internally managed and part fund-of-funds, investing in a variety of specialist managers and global-credit sectors. The majority of the fund is invested in the Australian floating-rate securities, which is managed by the Macquarie's fixed interest, currency, and commodities asset management (FICCAM) team, which S&P views as highly capable and with good experience. Over the past few years Macquarie's fixed-interest resources have been continually growing, the result of Macquarie Funds group making a number of large acquisitions in the U.S. Analyst resources are now a comparable size to some of the larger global fixed-interest managers. This said, communication and information-sharing between offices is not at the same level as peers, however, S&P notes this is less of a concern with this offering. Over the past year, the team has made some minor changes to the sector-rotation process, introducing a new short-term momentum signal, adding to the scorecard for investment-grade and high-yield sectors, revising the "scores to position" size matrix, and implementing a number of new trading tools. While a number of changes have taken place, S&P notes these are relatively minor, and enhance an already sound investment process. Macquarie's multi-manager process is thorough, with in-depth research conducted by the product-management team, with assistance from consultants Callan Associates. The fund's recent performance has been strong, with the fund producing 628 basis points (bps)(net) excess return in the past 12 months to June 30, The fund's MER is low compared with peers, although a performance fee is charged on selected underlying Macquarie managers. Investor Suitability The fund suits investors seeking an income offering that may take opportunistic exposures to emerging-market debt, high-yield, hybrids, and structured securities. It is designed to be part internally managed and part fund-of-funds, with three specialist external managers employed. The fund is a blend of international and domestic exposures anchored through an allocation to Australian investment-grade floating-rate credit. An appropriate investment horizon for the fund is at least three years. Key Strengths Expanding global team, with a sizeable domestic presence that is highly capable. Well-established, clear, and repeatable investment process, which clearly highlights potential investment opportunities to the management team. Strong near-term performance, predominantly achieved via security selection. Key Weaknesses Instability in the domestic credit team, with recent departures of two members. A 15% performance fee is charged on selected underlying Macquarie funds, which can increase the fund's overall cost. Risks Recent changes to the fund's sector-rotation process and allocation ranges may negatively affect performance. Underperformance compared to the benchmark and peers if the manager incorrectly takes an overweight position to global high-yield, emerging-markets debt, and the credit opportunities sector. APIR code MAQ0277AU Fund status Open Inception date Sept. 19, 2003 Responsible entity Macquarie Investment Management Limited Peer group International Fixed Interest - Diversified Fixed Interest Income Benchmark UBS Bank 0+ Yr TR AUD Investment style - Multi manager Yes Fund Size ($A) mil (at Oct. 31, 2010) Minimum investment (A$) ICR / MER (%) 0.49 Performance Fees (%) A 15% performance fee is charged on selected underlying Macquarie funds. Investment manager Macquarie Funds Group Redemption policy Daily Distribution frequency Monthly High water mark N/A Hurdle rate 0.15% above the UBS Bank Bill Index Return objective (%) Benchmark +1% to 4% Tracking error objective (%) N/A Average portfolio turnover (3yrs) (%) N/A Maximum cash holding (%) N/A Typical number of stocks 600 Release authorised by Leanne Milton The contents of this report are subject to the disclaimer on the final page. Nov. 19, 2010 Page 1

2 Objectives, Fees and Features MIO invests in a mix of Australian and international securities with the aim of outperforming the UBS Bank Bill Index by between 1% and 4% per year. The fund's investment target is more aggressive then most peers; however, given the fund's portfolio structure which can be fundamentally different to that of the index, S&P believes the fund has sufficient alpha sources to achieve this target. S&P rated two Macquarie products as part of the international fixed-interest sector, the Macquarie Diversified Fixed Interest Fund and this product, with this offering generally having duration in line with the UBS Bank Bill Index. The MER of 49.2 bps is below peers, and the buy/sell spread is 0.15%. A 15% performance fee is payable on selected Macquarie funds. At time of review, this fee was charged on the fund's exposure to the Macquarie Funds' Debt Market Opportunity No.1 Fund and Macquarie Funds' Debt Market Opportunity No.2 Fund. The performance fee is calculated on performance exceeding a meagre 0.15% above the UBS Bank Bill Index. We do not view this performance fee favourably; however, we note the fund's allocation in aggregate will generally not exceed 12% of the overall fund. Allocation ranges to emerging markets have increased from 0-10% to 0-15% and credit opportunities increasing from 0-10% to 0-20%. Conversely, the fund's hybrid allocation range has decreased from 0-50% down to 0-30%, as the manager's allocation to this sector has never exceeded 30%, and hasn't had an allocation over the past two years. The manager operates within broad sector ranges, allowing for both aggressive and defensive positioning, giving the manager freedom to position the portfolio throughout a market cycle. Although it can be an advantage, S&P also notes that wide mandate restrictions can potentially increase risks, heightening the importance of the team's ability to correctly position the portfolio. The fund's exposure is floating-rate securities, plus an opportunistic allocation to hybrids, global investment-grade credit, high-yield, emerging-market debt, and credit opportunities. Investment Philosophy and Style Macquarie believes mispricing occurs due to differing investor expectations and investors interpreting information in different ways. Different asset sectors require different investment processes and specialist skills. To accommodate this view, the fund is part internally managed and part fund-of-funds, as it employs a variety of specialist managers and global-credit sectors. The majority of the fund is invested in the Australian fixed-interest sector, which is managed by the Sydney team. Macquarie Funds Group also manages the fund's global sovereign and credit opportunities exposure. The fund employs specialist external managers to manage the remaining asset classes Rogge manages global investment-grade credit, Wellington global high-yield, and Stone Harbor Partners emerging-market debt. Investment Team Structure The Macquarie FICCAM team is located in both domestic and global markets. The domestic investment team is led by portfolio manager on this fund, and head of Australian fixed income, Mr. Lewthwaite. Cohead of FICCAM Dean Stewart will return to Australia in January from his current posting in Delaware, and join Lloyd Alty in the quantitative research team. Mr. Stewart will no longer hold the co-head of FICCAM title, with Mr. Lewthwaite assuming his management duties and taking on the role as head of FICCAM. This will extend Mr. Lewthwaite's management responsibilities to include the London team on top of current domestic duties. The team's U.S. presence started with Macquarie's acquisition of two Los Angeles-based firms, Allegiance and Four Corners. The addition of these two firms has further strengthened the fixed-interest group, particularly in their specialised areas Allegiance's expertise is in highgrade fixed-income, and Four Corners specialises in non-investmentgrade credit and the senior loan market. During the course of 2009, Macquarie Funds Group continued to expand its operations, with the acquisition of Delaware Investments based in Philadelphia. Delaware Investments is primarily credit-focused and has a sizeable team of around 140 investment professionals, incorporating over 40 portfolio managers and over 50 research analysts. Global sector-rotation specialist Graham McDevitt sits within the Philadelphia-based team and is a member of the firm's strategic committee with Mr. Stewart, Mr. Lewthwaite, and sector-rotation member Eun Sub Kim. The strategic committee meets monthly or when performance varies from the fund's benchmark by more then 1%. The committee presides over high-level decisions, such as reviewing the fund's strategic asset allocation ranges. The London team is the smallest in the group, with members focusing on sovereign bonds and commodities. Over the past few years, the Macquarie fixed-interest resources have been continually growing to a size now comparable to some of the larger fixed-interest managers. This said, communication and information-sharing between offices is not at the same level, however, S&P notes this is less of a concern with this offering. We view the FICCAM team as highly capable, with good experience. Key Investment Personnel Name, Position Years* Experience Brett Lewthwaite, portfolio manager/head of FICCAM 7 16 Graham McDevitt, sector rotation 3 26 Dean Stewart, co-head of FICCAM (moving to quantitative research role) David Hanna, portfolio manager credit Joris Hillmann, senior portfolio manager 5 12 Eun Sub Kim, sector rotation 8 8 Raj Gohil, head of product 3 10 Average tenure with current firm 6 N/A Average industry experience N/A 15 *Years with current firm. Years of relevant industry experience. Portfolio Managers Mr. Lewthwaite has over 16 years' experience, joining the firm in Since then, Mr. Lewthwaite has become head of the credit team, head of the Australian fixed-interest group, and now the head of FICCAM. Prior to joining the firm, Mr, Lewthwaite was with BT Funds Management for nine years, where he started his career as a graduate. S&P has met Mr. Lewthwaite on a number of occasions, with our conviction in his ability consistently increasing. Mr. Lewthwaite displays a strong understanding of fixed-interest markets. The contents of this report are subject to the disclaimer on the final page. Nov. 19, 2010 Page 2

3 Research Team In addition to Mr. Lewthwaite, the domestic credit team includes senior member and portfolio manager David Hanna and credit analyst Adrian David. Recently more junior members Joanne Chua and Asmita Kulkarni, departed the firm with the manager currently seeking replacements. S&P believes, given the experience of senior credit members and their research responsibilities, these departures won't affect the performance of the fund. Joris Hillmann heads the domestic rates team, with Renaye Skidmore providing direct support on rates decisions for this product. Sydney-based Mr. Sub Kim works directly with Mr. McDevitt. Sectorrotation specialist Mr. McDevitt is also the portfolio manager on the Macquarie Diversified Fixed Interest Fund, and has more than 26 years' experience as an economist and global strategist. Mr. McDevitt joined the firm from ABN AMRO, where he was employed for eight years. He held various roles including global head of interest rate strategy, global head of credit research, and more recently global head of financial market research, covering interest rates, currencies, and credit. Mr. McDevitt initially joined Macquarie's London office, before relocating in 2008 to the U.S. Assisting the investment staff is the product-management team, which is responsible for external-manager research, selection, and monitoring. The product-management team has assistance from an external adviser, Callan Associates, to identify and review investment managers. All other aspects of the multi-manager process are carried out in-house by product manager Raj Gohil and Mr. Stewart. Callan Associates replaced AON Consulting in January The investment teams are additionally supported by a quantitativeresearch team (led by Mr. Alty) and the economics and asset-allocation team, which includes technical analysis. Alignment and Accountability The performance of members in the FICCAM investment team is assessed on three criteria, which include portfolio performance (70%), teamwork (15%), and business growth (15%). Staff members receive a fixed salary, while being eligible for bonuses out of a profit-sharing scheme. The profit share pool is determined with reference to Macquarie's after-tax profits. Once the total profit share pool is determined, it is allocated to businesses and, in turn, to individuals based on performance. Inexperienced Small Unstable Investment Process Experienced Large Stable Overview The fund invests in underlying sector funds and direct securities using a combination of in-house capabilities, external-manager selection, and active sector rotation. The fund's Australian floating-rate and credit opportunities exposure are managed in-house, with investment-grade credit, high-yield, and emerging-markets debt managed through external funds. The fund's allocation range for each sector is relatively wide, which reflects the product's ability to take defensive and aggressive positions when the manager sees fit. While no major changes have been made to the fund's investment process, over the past year the team has implemented structural enhancements to their sector-rotation process and added tools to assist with implementation. Research Process The fund invests in underlying sector funds and direct securities using a combination of in-house capabilities, external-manager selection, and active sector rotation. The fund's allocation range for each sector is relatively wide, which reflects the product's ability to take defensive and aggressive positions when the manager sees fit. Currently, the allocation ranges are: 20%-100% to the core income portfolio, 0-30% to hybrid securities, 0-40% to global investment-grade credit, 0-15% to global high yield, 0-15% to emerging-markets debt, and 0-20% to the credit opportunities sector. The fund's credit opportunities exposure has an opportunistic focus, investing in Australian residential mortgage-backed securities (RMBS), offshore asset-backed securities (ABS), and bank loans. The fund's exposure to Australian RMBS is currently through an investment in the Macquarie Debt Market Opportunity No.1 Fund and Macquarie Debt Market Opportunity No.2 Fund, which also invests in ABS and commercial mortgage-backed securities (CMBS). The fund is anchored by a 20%-100% sector-allocation range to core income floating-rate securities. Macquarie has a multifaceted return approach to domestic fixed-interest management focusing on yield curve, sector rotation, and security selection to deliver a diversified portfolio that includes corporate investment-grade securities, assetbacked debt, mortgage-backed securities (MBS), hybrids, and the use of some derivatives. Over the past year, the team made enhancements to the sectorrotation process, introducing a new short-term momentum signal, adding to the scorecard for the investment-grade and high-yield sectors, and more recently increasing the weight of the yield curve signal. The team has also revised the "scores to position" size matrix and implemented a number of new trading tools. Macquarie's multi-manager process is thorough. Manager selection considers a manager's investment philosophy, investment process, staff, investment performance, and fee structure, including performance fees, risk management, ownership structure, client service, business issues, and consistency in investment outcomes. Ongoing manager-monitoring occurs at various frequencies, ranging from daily and monthly compliance checks by a separate riskmanagement team at Macquarie, monthly and quarterly quantitative and qualitative assessments, and annual due diligence and reassessment of the manager line-up and style for each asset class. The productmanagement team conducts this due diligence every year or more frequently if market conditions have changed considerably. Manager termination can result from the monitoring and review process, a significant event that weakens Macquarie's conviction in the manager's process and ability, or a change in the mandate. The fund's sector mix is formally reviewed weekly, or more frequently if conditions dictate, to review the attractiveness of positioning and to discuss potential changes. The manager uses a scoring framework to highlight opportunities through assessing valuations using historical averages and cyclically adjusted models, the economic environment using macro and economic triggers, and technical factors. The funds and their benchmarks are: The Macquarie Debt Market Opportunity No.1 Fund, which is benchmarked against the UBS Bank Bill Index; The Macquarie Debt Market Opportunity No.2 Fund, which is benchmarked against the UBS Bank Bill Index; The investment-grade bond fund (managed by Rogge), which is benchmarked against the Barclays Global Aggregate ex Treasuries Index (hedged); The contents of this report are subject to the disclaimer on the final page. Nov. 19, 2010 Page 3

4 The high-yield bond fund (managed by Wellington), which is benchmarked against the BofA Merrill Lynch Global High Yield Constrained Hedged Total Return Index Hedged 100%; and The emerging-markets debt fund (managed by Stone Harbor Partners), which is benchmarked against the JP Morgan Emerging Markets Bond Index (global diversified, hedged). In March 2009, Stone Harbor Partners replaced BlueBay Asset Management Ltd., after a lowering in conviction. The manager's rationale for termination included the departure of Simon Treacher following an internal valuation breach, the fund's drop in performance, and Aon Consulting changing its view. After these changes, Macquarie conducted a full review of BlueBay in its London offices. During this period, Macquarie were also meeting with its short list of backup managers supplied by Callan Associates. Once Macquarie deemed a change was necessary, Stone Harbor was selected as the manager's favoured replacement. S&P was pleased with Macquarie's prompt and proactive response, which led to a change in their emergingmarkets debt exposure. Portfolio Construction The fund's portfolio construction is primarily driven by a scorecard framework that highlights opportunities through assessing valuations using historical averages and cyclically adjusted models, the economic environment using macro and economic triggers, and technical factors. A "score to position" matrix is used as a guide to risk limits, however, positioning will be the outcome of Mr. Lewthwaite's views and the sector-rotation team's decisions, in which he is a member. The fund's sector mix is formally reviewed weekly or more frequently if conditions dictate, to review attractiveness of positioning and to discuss potential changes. S&P views Macquarie's investment process positively, as it's well structured, repeatable, and clearly highlights potential investment opportunities to the management team. Risk Management The fund invests in underlying sector funds and direct securities using a combination of in-house capabilities, external-manager selection, and active sector rotation. There is credit-quality specification at the portfolio level, which requires that no more than 15% of the portfolio be invested in securities that are below investment grade, no more than 50% of the fund can be held in 'BBB' rated investments, and no more than 10% in unrated products. The fund has the ability to be both +/-0.75 year duration, and the fund's duration has been consistently in line with the UBS Bank Bill Index. Macquarie has an independent risk-management group, which is responsible for assessing and monitoring risks across all business groups. This team monitors both internal product offerings, as well as reviewing external manager mandates separately from the productmanagement team. The product-management team regularly assesses internal and external manager performance, appropriateness, and contribution. External managers have customised mandates, which can be quite detailed. The investment team is supplied external portfolios on a daily basis, and they conduct look-through analysis on credit rating, maturity, industry, and country allocation of each portfolio individually and in aggregate. Currency Management Hedging of the fund's international component occurs at the underlying manager's level, with Wellington and Stone Harbor using one-month currency forwards, while Rogge uses a number of strategies. For bank loans and CMBS holdings, Macquarie will enter three-month currency forward contracts. Performance Performance has been impressive over the past 12 months ending June 30, 2010, with the fund producing net returns of 10.17%, well above the benchmark's 3.89%. Over three years to the same date, the fund's performance is below the benchmark, returning (net) 4.78% compared with 5.56%. Over the past year, the fund had strong returns during the months of July, December, and March, with the fund's largest detractors occuring in May, as for most managers. Security selection has produced the majority of the fund's attribution during the year, similar to peers, as most participated in the recovery in markets. Portfolio Review As of June 30, the fund had few allocations, with 87% of the portfolio positioned in Australian floating-rate securities, and the remainder in credit opportunities (7.9%) and cash. This highlights the flexibility of the fund's mandate, and that sectors will be completely avoided if the manager doesn't believe they are an appropriate investment. As a result of the fund's large core allocation, the portfolio was primarily invested in domestic securities. A third of the portfolio was positioned in ABS, with over 20% invested in corporate, bank, and cash. The fund's average credit rating was 'AA'. Breakdown of Attribution (%) (at June 30, 2010) 1 Year % 3 Years % Sector and security selection Credit Rating Breakdown (%) (at June 30, 2010) AAA AA A BBB BB and below 1.80 Sector Breakdown (%) (at June 30, 2010) Corporate Asset-backed securities Bank Cash Regional Breakdown (%) (at June 30, 2010) North America U.K Europe (excluding U.K.) -.32 Australia Cash Management Group Profile Macquarie Bank Ltd., a publicly listed Australian investment bank, is structured into six operating groups. The heads of each group are also part of the bank's executive committee, which sets overall guidelines and specific parameters. Each group or division has a particular market and product focus, and is run autonomously. The contents of this report are subject to the disclaimer on the final page. Nov. 19, 2010 Page 4

5 The Macquarie Funds Group, one of the six, was formed in 2008 to concentrate on asset management, product innovation and solutions, and institutional-business development. It has offerings in various asset classes, including cash, fixed income, currency, property, equities, infrastructure, and private equity. Some of the capabilities are run by Macquarie Investment Management Ltd. in-house, but some have been delegated to other external specialist investment managers. Funds Under Management As of June 2010, the Macquarie Income Opportunities Fund had A$392 million in FUM. Funds Under Management Table (at June 30, 2010) Current pool size ($) 392 million The contents of this report are subject to the disclaimer on the final page. Nov. 19, 2010 Page 5

6 Fund Rating Philosophy A star rating is a forward looking assessment of a manager's ability to consistently generate risk-adjusted returns (net of fees) in excess of both its relevant investment objectives and its peers. Fund Rating Process In assigning a star rating to a fund, Standard & Poor's evaluates: the size, skill, and stability of the manager's investment team; the clarity, implementation, and risk management of the investment process; the fund's objectives, fee structure and portfolio characteristics; and the manager's business management. Fund Rating Definitions Standard & Poor s has very high conviction that the manager will consistently generate risk-adjusted fund returns in excess of its relevant investment objectives and relative to its peers. Standard & Poor s has high conviction that the manager will consistently generate risk-adjusted fund returns in excess of its relevant investment objectives and relative to its peers. Standard & Poor s has conviction that the manager will generate risk-adjusted fund returns in-line with its relevant investment objectives and relative to its peers. Standard & Poor s has conviction that the manager will not generate risk-adjusted fund returns in in-line with its relevant investment objectives and relative to its peers. Standard & Poor s has high conviction that the manager will not generate risk-adjusted fund returns in-line with its relevant investment objectives and relative to its peers. Issues that may affect the fund's management have emerged; and the fund rating is temporarily suspended, pending clarification. Significant issues exist that potentially will adversely affect the fund s performance. Investors should consider obtaining advice on switching or redeeming funds. Fund Rating Subscript here the investment process, fund manager, or the fund has a relatively short history, or the analytical team has changed significantly, but a relevant and demonstrable track record is shown on similar funds. Glossary of Terms Benchmark The standard (e.g. an index) by which an investment is measured against to evaluate performance. Excess Return Return of an investment relative to its benchmark. FUM Funds Under Management - The total value of the funds managed by an asset management firm. High Water Mark The highest net asset value (NAV) of a fund achieved to date. If the NAV of a fund falls below this level, no performance fee will be payable to the investment manager until this level is subsequently exceeded. Hurdle Rate A minimum rate of return that a fund must achieve before a performance fee can be charged. This can be the benchmark or the benchmark plus an additional fixed rate. Performance Fees A fee payable in excess of the ongoing management fee. There is often a hurdle rate and/or high watermark that must be reached before this fee is payable. ICR-Indirect Cost Ratio Information Ratio MER-Management Expense Ratio This is a ratio of indirect costs to the total investment in a particular fund expressed as a percentage. It includes the MER, expense recoveries, performance fees and other costs associated with running the fund. Is a measure of the relative reward for the relative risk taken (excess returns of an investment (above the benchmark) divided by the tracking error). A positive information ratio would indicate efficient use of risk by the manager. This ratio is a calculation of investment management, marketing, trusteeship, legal, accounting and auditing costs of a managed investment fund expressed as a percentage of a fund s net asset value. It is the ongoing charges for managing a fund. The average return of the funds in the relevant S&P peer group. Peer Group Return Sharpe Ratio Is a measure of risk-adjusted performance, measuring the absolute reward for the absolute risk taken (return of the investment less the risk-free rate (e.g. bank bills) divided by the standard deviation). The higher the Sharpe ratio the greater the efficiency produced by the manager. Standard Deviation Measure of the variability or volatility of the monthly returns of the fund. Tracking Error Ex Ante Trading Error Ex Post Trading Error How closely a portfolio follows or "tracks" an index to which it is benchmarked. (the standard deviation of monthly excess returns against the benchmark). Predicted or forecast of tracking error. Historical or actual tracking error. Disclaimer: Standard & Poor's Information Services (Australia) Pty Ltd (ABN ) (Standard & Poor's) rating and other opinions are and must be construed solely as statements of opinion and not statements of fact or recommendations to purchase, sell or hold any financial product(s). 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