High yield bonds in a low income world 1 February 2017
Fund facts M&G Global High Yield Bond Fund Inception October 1998 Co-fund manager Stefan Isaacs (since October 2010) Co-fund manager James Tomlins (since January 2014) Fund size 1,347m YTM (gross of ongoing charges) 4.51% Share classes* GBP, EUR hedged, USD hedged Sector Morningstar Global High Yield Bond EUR Hedged 2 The fund allows for the extensive use of derivatives. Ratings as at 31.01.17. The Morningstar Overall Rating based on the fund s Euro Class A shares. Copyright 2017 Morningstar UK Limited. All Rights Reserved. The Morningstar Analyst Rating. 2017 Morningstar. All Rights Reserved. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Ratings should not be taken as recommendation. Source: M&G, 31 January 2017. *Share classes may not be registered for sale in all regions
Total return (12/10/2010 = 100) Performance since launch M&G Global High Yield Bond Fund 150 140 130 120 110 100 90 M&G Global High Yield Bond Fund Morningstar Global High Yield Bond (EUR hedged) sector average 3 Source: Morningstar Inc, Pan European database, 31 January 2017, euro A-H class shares, gross income reinvested, price-to-price
Fund facts M&G Global Floating Rate High Yield Fund Inception: September 2014 Fund manager: James Tomlins (since inception) Deputy manager: Stefan Isaacs (since inception) Fund size: 1999 m YTM (gross of ongoing charges): 5.37% Sector: Morningstar Global High Yield Bond Share classes*: USD EUR hedged GBP hedged CHF hedged SGD hedged The fund allows for the extensive use of derivatives 4 Source: M&G, 31 January 2017. *Share classes may not be registered for sale in all regions
Total return (11/09/2014 = 100) Performance since launch M&G Global Floating Rate High Yield Fund 110 108 106 104 102 100 98 96 94 M&G Global Floating Rate High Yield Fund BoA ML Global Floating Rate High Yield 3% Constrained (EUR Hedged) Index 5 Source: Morningstar Inc., Pan European database, 31 January 2017, euro A-H share class, gross income reinvested, price to price
James Tomlins Biography Joined M&G in 2011 and was appointed manager of the M&G European High Yield Bond Fund. Also appointed co-manager of the M&G Global High Yield Bond Fund in January 2014 and has managed the M&G Global Floating Rate High Yield Fund since its launch in September 2014. Specialist in high yield credit with more than 11 years experience in this sector. James was previously an analyst and then a fund manager at Cazenove Capital Management. Before Cazenove, he was at KBC Alternative Investment Management, and in the three years prior to that, worked at Merrill Lynch Investment Managers. Holds an MA in history and PgDip in economics from the University of Cambridge and is a CFA charterholder. 6
High yield bonds in a low income world 7 James Tomlins, Fund Manager February 2017
Agenda High yield market update Portfolio themes Fund positioning 8
Trump effect on the high yield market Five themes to watch Theme Fundamentals Market reaction Looser fiscal policy Announced infrastructure spending and tax cuts to boost growth and consumption Sell-off in longer dated Treasuries Credit spreads unchanged LatAm / protectionism Trade barriers likely to increase Moderate repricing of LatAm credits Bigger moves in FX markets Foreign policy More isolationist US, more aggression from other countries No impact (yet) Fed Now more hawkish Curve steepening Healthcare Obamacare repealed, aggressive drug pricing reform less likely Sell off in hospitals Pharma rally 9 By Max Goldberg from USA - Trump in Ames, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=47586256 By Kremlin.ru, CC BY 4.0, https://commons.wikimedia.org/w/index.php?curid=42544016 Janet Yellen: United States Federal Reserve - http://www.federalreserve.gov/aboutthefed/bios/board/yellen_janet_rdax_161x201.jpg, Public Domain, https://commons.wikimedia.org/w/index.php?curid=40726336
Rebased to 100 as at 31 December 2013 High yield total returns Global vs US and Europe 122 117 112 116 117 118 115 107 102 97 92 US HY Europe HY Global HY Global HY FRN 10 Source: M&G, BofA Merrill Lynch Indices, 31 January 2017
High yield market spreads OAS bps 900 800 700 600 500 400 300 462 403 393 365 Global HY FRN Europe HY Global HY US HY 11 Source: M&G, Bloomberg, BofA Merrill Lynch Indices, 31 January 2017
Historic high yield default rates by region LTM issuer default rate (%) Issuer default rates by region 20 18 16 14 12 10 8 6 4 2 0 US HY EU HY EM HY Current global HY default rate 12 Source: M&G, BofA Merrill Lynch Global Research, 31 January 2017
Soaring energy default rates skewing the overall picture for high yield defaults HY default rate in % of issuers 30 25 26.9 20 15 10 5 0 7.0 3.3 13 Source: M&G, BofA Merrill Lynch indices, 31 January 2017 US HY Energy ex-energy US HY (ex energy) 12-month trailing default rates are still low, albeit picking up slowly
Valuations Global, US and European high yield market yields Yield-to-worst 14% 12% 10% 8% 6% 4% 6.2% 4.9% 3.2% 2% USD high yield, non financials Euro high yield, non financials (constrained) Global floating rate high yield 14 Source: M&G, Bloomberg, 31 January 2017
Government bond yields How might high yield floating rate / high yield fixed rate perform over the next 12 months? Total return under various rate/spread scenarios -1.0% -0.5% No change +0.5% +1.0% Credit spreads -1.0% -0.5% No change +0.5% +1.0% 4.39% 3.61% 2.82% 2.04% 1.25% 11.41% 9.53% 7.65% 5.77% 3.89% 4.83% 4.05% 3.26% 2.48% 1.69% 9.45% 7.57% 5.69% 3.81% 1.93% 5.27% 4.49% 3.70% 2.92% 2.13% 7.48% 5.60% 3.72% 1.84% -0.04% 5.71% 4.93% 4.14% 3.36% 2.57% 5.52% 3.64% 1.76% -0.13% -2.01% 6.15% 5.37% 4.58% 3.80% 3.01% 3.55% 1.67% -0.21% -2.09% -3.97% = High yield fixed outperforms high yield floating = High yield floating outperforms high yield fixed 15 For illustration purposes only. This is not intended to provide expectations of future returns or yield and spread levels. Portfolio analysis based on a one-year holding period, assuming a static portfolio and parallel shifts in yield curves. Analysis also assumes that any moves in rates and/or spreads are one-off shocks. Assumed default rate of 3% and a recovery rate for Global High Yield Index (HW00) of 40%. Source: M&G, BofA Merrill Lynch Indices, 31 January 2017
Government bond yields How might high yield floating rate / high yield fixed rate perform over the next 12 months? Total return under various rate/spread scenarios -1.0% -0.5% No change +0.5% +1.0% = High yield fixed outperforms high yield floating = High yield floating outperforms high yield fixed Hedging costs are an approximate measure and calculated as the difference between EUR/USD spot rate and 3M forward rate For illustration purposes only. This is not intended to provide expectations of future returns or yield and spread levels. Portfolio analysis based on a one-year holding period, assuming a static portfolio and parallel shifts in yield curves. Analysis also assumes that any moves in rates and/or spreads are one-off shocks. Assumed default rate of 3% and a recovery rate for Global High Yield Index (HW00) of 40%. 16 Source: M&G, BofA Merrill Lynch Indices, 31 January 2017 Credit spreads -1.0% -0.5% No change +0.5% +1.0% 2.75% 1.97% 1.18% 0.40% -0.39% 9.77% 7.89% 6.01% 4.13% 2.25% 3.19% 2.41% 1.62% 0.84% 0.05% 7.81% 5.93% 4.05% 2.17% 0.29% 3.63% 2.85% 2.06% 1.28% 0.49% 5.84% 3.96% 2.08% 0.20% -1.68% 4.07% 3.29% 2.50% 1.72% 0.93% 3.88% 2.00% 0.12% -1.76% -3.64% 4.51% 3.73% 2.94% 2.16% 1.37% 1.91% 0.03% -1.85% -3.73% -5.61%
Agenda High yield market update Portfolio themes Fund positioning 17
Price (Rebased to 100 as at 31 December 2014) Sector selection in action: underweight in cyclicals and energy Ardagh Packaging vs Chesapeake Energy 120 100 80 60 40 20 0 ARGID 4.25 01/15/2022 CHK 4⅞ 04/15/2022 Underweight in energy a great position to have in 2015, not so much in 2016 18 Source: M&G, Bloomberg, 15 February 2017
Price Value in banks Credit Suisse Coco vs subordinated Banca Monte Dei Paschi 110 100 90 80 70 60 50 40 MONTE 5 04/21/20 (EUR) CS 7½ PERP (USD) 19 Senior secured financial service companies have been less affected by concerns about European banks Source: M&G, Bloomberg, 20 February 2017
OAS (bps) US vs Europe USD BB credit vs Euro BB credit spreads over past two years 595 545 495 445 395 345 295 245 195 20 Source: M&G, Bloomberg, 17 February 2017 EUR BB USD BB Post-election US spreads have traded tighter on average
Agenda High yield market update Portfolio themes Fund positioning 21
Defensive positioning in high yield Interest rate duration Credit spread duration Fund Index Fund Index M&G Global High Yield Bond Fund 3.2 3.7 3.4 3.7 M&G Global Floating Rate High Yield Bond Fund 0.16 0.15 2.9 1.5 22 Source: M&G, Bloomberg, BofA Merrill Lynch Indices, 31 January 2017. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund Review
23 M&G Global High Yield Bond Fund
Fund vs neutral positioning M&G Global High Yield Bond Fund Ireland Switzerland By country (top 10) 35% 30% By sector Underweights Overweights 17.3% By financial tier 25.8% France Spain Netherlands 25% 20% 49.9% Senior secured Senior unsecured Junior Italy 15% Luxembourg 10% Germany UK 5% US 0% 0% 20% 40% 60% Index Fund By rating CCC & below B BB BBB A & above 0% 20% 40% 60% Index Fund 24 Source: M&G, Bloomberg, BofA Merrill Lynch Global High Yield Index, 31 January 2017. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund Review
25 M&G Global Floating Rate High Yield Fund
Fund positioning M&G Global Floating Rate High Yield Fund Asset allocation Spread duration: 2.8 years 8.7% Duration: 0.16 years 10.5% Top 10 holdings net of CDS collateral 1 CDX NA HY Index 21.1 2 Tenet Healthcare 3.5 27.5% Physical FRNs CDS 53.4% 3 Reynolds 3.0 4 Ardagh Packaging 2.5 5 Guala Closures 2.4 6 Cemex 2.2 7 Labco 2.1 8 Igloo Foods 2.1 9 itraxx Crossover Index 2.0 10 Iceland Bonco 2.0 Interest rate swaps Govt bonds & cash 26 Source: M&G, 31 January 2017. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund Review.
Fund positioning M&G Global Floating Rate High Yield Fund By region By sector By financial tier US Core Europe & Nordics UK Periphery 25% 20% 15% 10% 5% Overweights Underweights 3.6% 54.9% 41.4% Senior secured Senior unsecured Junior By rating* 0% 20% 40% 60% 80% A & above BBB EM BB 0% 20% 40% Neutral position Fund 0% B CCC & below NR 27 Source: M&G, as of 31 January 2017. *Includes derivative positions. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund Review
Outlook Macro Growth and default outlook supportive for high yield credit Valuations Valuations suggest much is already priced in Portfolios Active opportunity but overall defensive positioning 28 Source: M&G, February 2017
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