A new tool for a rising rate environment - M&G Global Floating Rate High Yield Fund James Tomlins, Fund Manager October 2015
A solution for taking advantage of rising interest rates M&G Global Floating Rate High Yield Fund Inception: September 2014 Fund manager: Deputy manager: Fund size: Sector: Share classes*: James Tomlins (since inception) Stefan Isaacs (since inception) 732.0m Morningstar Global High Yield Bond USD EUR hedged GBP hedged CHF hedged SGD hedged Source: M&G, 30 September 2015. *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 102 101 100 99 98 97 96 M&G Global Floating Rate High Yield Fund BoA ML Global Floating Rate High Yield (EUR Hedged) Index Source: Morningstar Inc., Pan European database, 30 September 2015, euro A-H share class, gross income reinvested, price to price
James Tomlins Biography Joined M&G in 2011 and was appointed fund manager of the M&G European High Yield Bond Fund. He was also appointed co-manager on the M&G Global High Yield Bond Fund in January 2014. James has also managed the M&G Global Floating Rate High Yield Fund since its launch in September 2014 Specialist in high yield credit with more than 10 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 He holds an MA in history and PgDip in economics from the University of Cambridge and is a CFA charterholder
Agenda Views on the global high yield market Focus on high yield floating rate bonds High yield solutions for different market expectations
Total return (rebased to 100) Comparing fixed income asset classes Performance of global IG, global HY and global HY FRN 116 114 112 110 108 106 104 102 100 98 96 Volatility caused by taper tantrum US HY sell-off as oil prices plunge, then rallies harder Government bond sell-off in Q2 2015 Global HY FRN Global HY Global IG High yield FRN has delivered lower volatility while generating income Source: M&G, Bloomberg, BofA Merrill Lynch indices, 30 September 2015. Rebased to 100 at 31 December 2012
Valuations US and European high yield market yields 14% 12% 10% 8% 8.3% 6% 5.7% 4% 2% Source: M&G, Bloomberg, 30 September 2015 USD high yield, non financials - yield to worst Euro high yield, non financials (constrained) - yield to worst US high yield looks better value than Europe, but beware the impact of oil
Sector credit spread (bps) US HY credit spread US high yield sector spreads Sector selection remains key 700 600 500 400 300 200 100 0-100 -200-300 Spreads trading wider Average credit spread Portfolio weightings versus neutral position Media (overweight) Telecommunications (overweight) Capital goods (overweight) Real estate (underweight) Spreads trading tighter Credit spreads in energy and metals & mining are still at the mercy of commodity prices Source: M&G, BofA Merrill Lynch indices, 30 September 2015
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 Source: M&G, BofA Merrill Lynch Global Research, 31. August 2015
US high yield: sector outlook Sector distress ratio: sector % trading at distressed levels Energy Transportation Retail Materials Consumer Products 29.4 28.6 32.1 32.1 50.0 24.0 Media Technology Capital Goods Financials Hotels & Leisure Gaming Food 11.8 22.2 22.2 20.0 17.9 17.1 17.1 11.4 Utilities Automotive Real Estate Health Care 6.8 6.5 11.1 11.1 0% 10% 20% 30% 40% 50% Source: M&G, Bloomberg, Bank of America Merrill Lynch indices, 30 September 2015
M&G Global High Yield Bond Fund Fund positioning By region By sector By financial tier 35% 17.2% 27.1% US 30% Underweights Overweights Core Europe & Nordics UK 25% 20% 50.9% Senior secured Senior unsecured Junior 15% By rating Periphery 10% NA/NR CCC & below EM 5% 0% 0% 20% 40% 60% B BB BBB Neutral position Fund A & above 0% 30% 60% 90% Source: M&G, 30 September 2015
Agenda Views on the global high yield market Focus on high yield floating rate bonds High yield solutions for different market expectations
Central bank base rates Base rates at all time lows 7% 6% 5% 4% 3% Future expectations 2% 1% 0% -1% US UK Europe Source: M&G, Bloomberg, forward curves as of 30 September 2015 (expectations based on synthetic forward rates in US, UK and Germany); quotes as of July 2015
What are floating rate high yield bonds? Definition FRNs are debt instruments with a variable interest rate Coupon is made up of a variable component (resetting every three months) plus a fixed spread minimal interest rate duration FRNs issued by high yield issuers will pay a higher credit spread
Investment universe Global high yield FRN index (data by market weight) Currency distribution Financial tier USD 32.5% Mainly EUR as US firms can use loans Junior 20.5% Senior secured 50.8% GBP 7.9% EUR 61.4% Senior unsec. 28.7% Geographical distribution EM 11.5% UK 15.1% Euro periphery 24.0% US 18.6% Euro core 32.3% M&G credit analysis team covers 97% of the global HY FRN market Source: M&G, Bloomberg, Bank of America Merrill Lynch indices, 30 September 2015 (HFLT) Sector Automotive (0.9%) Banking (28.8%) Basic industry (12.6%) Capital goods (5.4%) Consumer goods (2.0%) Energy (14.1%) Financial services (3.1%) Healthcare (6.1%) Insurance (1.6%) Leisure (1.8%) Media (1.5%) Retail (8.3%) Services (5.9%) Telecommunications (7.9%) Utility (1.9%)
Investment universe Global high yield FRN index together with CDS (data by number of issuers) Currency distribution Investable universe Region Issuers USD 43.4% EUR 52.4% Europe 75 itraxx Xover Index US 100 CDX NA HY Index Global HY FRN 113 Total adding CDS 288 Bonds in HY FRN Index GBP 4.2% Geographical distribution Global HY fixed rate - other Sector 3,667 Grand total 3,955 Bonds in HY fixed Index EM 3.5% UK 14.0% US 40.6% Issuance by industrials is increasing Utilities 2.1% Financials 20.5% Europe 42.0% Industrials 77.4% Source: M&G, Bloomberg, Bank of America Merrill Lynch, 30 September 2015 (HFLT and HW00)
Price (EUR) Salt, formally Orange (Switzerland) Secured bond prices since issue date 102 100 98 96 7.18 % 94 92 90 Euribor +375bps floating rate note bond* 3.875% fixed rate bond ** The floating rate bond has broadly been immune to the move in the bund market Source: M&G, Bloomberg, 31 August 2015. *MATTER (Salt) Float 05/01/2022 **MATTER (Salt) 3.875% 05/01/2022
Price (Rebased to 100 as at 11 August 2014) Stock selection in action Smurfit Kappa vs Wind vs Quicksilver Resources 100 90 80 70 60 50 40 Smurfit Kappa (SKGID 0 10/15/2020) Wind (WINDIM 0 07/15/2020) Quicksilver Resources (KWK 0 06/21/2019) Source: M&G, Bloomberg, 30 September 2015
Agenda Views on the global high yield market Focus on high yield floating rate bonds High yield solutions for different market expectations
Fund positioning M&G Global Floating Rate High Yield Fund Asset allocation YTM (gross of fees): 5.2% 7.2% 4.3% 11.8% Spread duration: Duration: 3.0 years 0.1 years Top 10 holdings net of CDS collateral 76.7% Government bonds + cash CDS Physical FRNs Interest rate swaps Ticker 1 CDX NA HY 9.39% 2 Telenet 3.68% 3 Wind Acquisition Finance 3.61% 4 Ardagh Packaging 3.54% 5 Iglo Foods 3.54% 6 Tenet Healthcare 3.53% 7 Matterhorn 3.52% 8 New Look 3.15% 9 Verisure 2.94% 10 Stonegate 2.77% Source: M&G, 30 September 2015
Fund positioning M&G Global Floating Rate High Yield Fund By region By sector By financial tier 35% 19.2% 2.5% US Core Europe & Nordics UK 30% 25% 20% 15% Underweights Overweights 71.6% Senior secured Senior unsecured Junior By rating Periphery 10% 5% EM 0% 0% 10% 20% 30% 40% Neutral position Fund NA/NR CCC & below B BB BBB A & above 0% 30% 60% 90% Source: M&G, 30 September 2015
Conclusions High yield spreads now more attractive Sector positioning key Energy/Commodities High yield floating rate bonds are a possible tool for the next stage of monetary policy cycle Source: M&G, October 2015
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