EG Capital Advisors is a UK headquartered asset management company whose core expertise is Emerging Markets Corporate High Yield debt. The Emerging Markets Corporate High Yield strategy is characterized by meticulous bottom-up credit analysis delivered by an investment team with an average of nearly ten years of experience. EG Capital Advisors aims to achieve superior returns while maintaining low volatility, and believes that an asset class with an inherently higher risk profile must be managed in a conservative fashion. Emerging Markets High Yield Corporate Debt has come of age as an asset class Total investible universe of about $800bn which is growing at 15% a year Improving political and economic fundamentals Lower default rates relative to other high yield debt instruments Attractive yields on a risk-adjusted basis compared with other asset classes Issuers are better positioned for normalising global interest rates than developed market peers Growing investor appetite with YTD 2017 inflows well ahead of 2016 Emerging Markets High Yield Corporate Debt is at the point where the US high yield market was 20 years ago on the brink of widespread investor acceptance as a serious asset class. Once regarded as illiquid and exotic, the asset class is fast becoming a must-have component of any diversified investment portfolio, offering attractive value at acceptable levels of risk. A $800bn universe growing at 15% compound year-on-year Back in 2004, overall stock of Emerging Markets US Dollar-denominated corporate debt was a mere $267bn, of which $103bn was of High Yield grade. Today that has grown to $2,069bn, of which $810bn is High Yield. Investors can now choose from a wide range of issuers and maturities, and invest in size in a market with reasonable liquidity and low volatility. Within the overall fixed income universe, Emerging Markets Corporate High Yield Debt is the fastest-growing asset class, recording compound growth of 173% since 2004. However, as with any investment, it pays to be selective. An investment approach based on a real understanding of the market and its characteristics is crucial to navigate the inevitable pitfalls of investing in what is still a relatively new asset class. Underpinned by strong economic and political fundamentals Perhaps counterintuitively, political and economic fundamentals across Emerging Markets are generally good, and have generated fewer adverse shocks recently than traditional safe haven Developed Markets, where political upsets such as Brexit, US elections and Catalonia have wrong-footed investors, and economic performance has disappointed. In contrast, Emerging Markets forecast GDP growth is 4.5% this year and 4.9% in 2018 1, well ahead of the 2.2% forecast for the Developed World for the same period. Developed World economies suffer from higher debt levels relative to GDP and face major structural issues: ageing populations, unfunded pension liabilities, weak productivity growth and rising welfare 1 Bloomberg as off 30.11.2017; 1
bills. In contrast, emerging economies generally have a better debt profile, and younger, growing populations. The rise of the middle-class consumer and the lower age profile in Emerging Markets is fuelling demand. Growing domestic markets create local champions who enter the global corporate scene to become new participants in the investable universe. Emerging Markets are not immune to the risks faces by Developed economies (for example, Chinese Debt is also at historical highs), but have the policy levers to counter adverse shocks - competitive exchange rates and scope to adjust policy rates, while yields are adequate to compensate for these risks. Rising rates are typically a sign of robustly-growing economies with improving fundamentals and strongly Av. Developed 2.2% 0.7% 41.6 105.3% cash-generative corporate sectors well able to service Source: Bloomberg, IMF, CIA, EGCA their debts. In a rising interest rate environment, High Yield debt would be likely to outperform Investment Grade due to its higher credit spread which would be able to absorb some of the effects of rising government bond yields, and deliver higher levels of income to investors. High Yield is no longer synonymous of High Risk Country GDP growth 2017F Interest rates Median Age General Government Gross Debt / GDP 2017 Brazil 0.7% 7.5% 32.0 83.4% China 6.8% 4.4% 37.4 47.6% India 6.8% 6.0% 27.9 68.7% Mexico 2.1% 7.0% 28.3 53.3% Russia 1.9% 8.3% 39.6 17.4% Turkey 5.2% 8.0% 30.9 27.9% Australia 2.3% 1.5% 38.7 41.9% Canada 3.0% 1.0% 42.2 89.6% Euro Zone 2.2% 0.0% 42.9 87.4% Japan 1.5% -0.1% 47.3 240.3% UK 1.5% 0.5% 40.5 89.5% US 2.2% 1.3% 38.1 108.1% Av. Developing 4.5% 6.9% 32.7 48.3% Emerging Markets Corporate High Yield debt offers attractive yield with current Yield to Worst (YTW) of 5.8% 2, above the 5.2% on offer for US High Yield credits, and significantly more than the 3.8% yield of EM Investment Grade. Similarly, on a current yield basis, Emerging Market High Yield Corporates are offering 6.2%, against 6.1% for US High Yield and 4.2% for EM Investment Grade. The higher yield on Emerging Markets Corporate Debt is not because of higher default rates. In fact, since 2003, default rates for EM Corporate High Yield Debt have been on average lower than for other, supposedly, less risky credits 3.5% 3 versus 4% for Global High Yield and 4.2% for US. Next year, rating agencies and JP Morgan expect to see lower default rates due to limited amount of redemptions. Cumulatively, ten-year average default rates are lower at 13.12% compared with 24.26% 4 for US, while recovery rates are similar: 37% versus 36% for Emerging Markets and US High Yield respectively 5. 2 - As at 31 Oct 2017, EM Corporate High Yield - JP Morgan CEMBI HY; US High Yield - ishares IBOXX USD High Yield Index; EM Corporate Investment Grade - JP Morgan CEMBI HG Index. Graph Source: EGCA, J.P. Morgan; 3 - Average default rates for 1997-2016, Source: S&P 4-10-year cumulative average default rates based on 1981-2016 data; EM HY data is based on 1997-2016 time frame due to limited data availability, Source: S&P. 5 - Average recovery rates for 2000-2016 (excluding 2004-2007 data due to limited data availability for EM HY 2
Overall, Emerging Markets Corporate High Yield has delivered an absolute return of 114% since 2008. That Source: J.P. Morgan, S&P, EGCA compares with 74% for US High Yield, 80% for the S&P 500, 41% for Emerging Market Sovereign Bonds, 25% for Global Equities, -10% for Emerging Markets Equities, and -54% for Commodities 6. Similarly, risk-adjusted returns by asset classes, measured by the ten-year Sharpe Ratio, show Emerging Markets High Yield Corporate Debt as best in class with a figure of 0.32 compared with 0.30 for US High Yield, 0.27 for the S&P, 0.19 for Emerging Markets Sovereign Bonds, 0.13 for World Equities, 0.04 for Emerging Market Equities and -0.20 for Commodities 7. Effective Diversification Emerging Markets High Yield has a low correlation with alternatives in the developed world. For example, correlation with Developed Markets equities has been on average below 50% 8, compared with 69% for MCSI Emerging Equities and 68% US High Yield 9. So, there are significant diversification benefits from including an Emerging Markets Corporate High Yield allocation in any portfolio. 6 - EM High Yield - JP Morgan CEMBI HY index, US High Yield - Ishares iboxx USD High Yield Index, Sovereign Bonds - JP Morgan Government Bond Index Emerging Markets, Global Equities - MSCI World USD index, EM Equities - MSCI ACWI Index, Commodities - Bloomberg Commodity index as of 30.11.2017; 7 Source: J.P. Morgan, EGCA 8 Developed World equities - MCSI World for 2008-2017. 9 - Data source: Bloomberg, EGCA, 30.11.2017 3
Emerging Markets Corporate High Yield Debt may also offer potential for further diversification within the asset class across both regions and sectors. Conclusion Emerging Markets Corporate High Yield Debt is an asset class whose time has come. The universe of investable securities has now reached a scale where it is too big to ignore. We have seen how over the decades, US High Yield Corporate Debt has evolved from a marginal activity into an accepted part of mainstream investing. Emerging Markets High Yield is about to undergo the same transformation in investor perception. The view that Emerging Market Corporate Debt was a purely risk on trade is out of date, and at variance with the wealth of data now available. The fundamentals are excellent, and likely to get better at a time when other, supposedly safe assets, face significant headwinds. Having been for too long overlooked by important classes of investors, mostly as a result of reluctance to 4
Important Information This document is for use in the United States and its territories only. This document has been prepared by EG Capital Advisors, Cayman Islands (EGCA CI) for illustrative purposes only (Registered Office - Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands, Company Number - 278703). In the United States and its territories, EGCA CI operates as a sub-advisor to Aliier LLC (CRD# 283642 / SEC# 801-107953) on the Aliier Passport platform. The document does not constitute an offer or inducement to engage in any investment activity in any jurisdiction and does not imply the entering or offering to enter into any form of agreement. Important Notes Investing involves risk. Past performance does not guarantee or indicate future results. The information expressed herein is as of August 31, 2017 and is subject to change. Model portfolio characteristics reflect the strategy for a fully discretionary, unconstrained account and are the result of actual trading within our Cayman fund: EG Fixed Income Fund I and have been audited by Deloitte Limited through EOY 2016. Actual portfolios may differ as a result of account size, client-imposed investment restrictions, the timing of client investments, market, economic and individual company considerations and other factors. Any performance information included herein represents the performance achieved by EGCA CI as a discretionary investment manager with trade implementation responsibility for accounts included in the performance. Investing involves risk. EGCA CI may act as a discretionary investment manager or non-discretionary model provider in a variety of separately managed account or wrap fee programs (each, an SMA Program ) sponsored by a third party investment adviser, broker-dealer or other financial services firm (a Sponsor ). When acting as a discretionary investment manager, EGCA CI is responsible for implementing trades in SMA Program accounts. When acting as a non-discretionary model provider, EGCA CI s responsibility is limited to providing non-discretionary investment recommendations (in the form of model portfolios) to the SMA Program Sponsor or overlay portfolio manager ( OPM ), and the Sponsor or OPM may utilize such recommendations in connection with its management of SMA Program accounts. In such modelbased SMA Programs ( Model-Based Programs ), it is the Sponsor or OPM, and not EGCA CI, which serves as the investment manager to, and has trade implementation responsibility for, the Model-Based Program accounts. Past performance does not guarantee or indicate future results. Any performance information included herein represents the performance achieved by EGCA CI as a discretionary investment manager with trade implementation responsibility for the accounts included in the performance composite. The performance shown does not reflect any performance of Model-Based Program accounts managed by a Sponsor or OPM utilizing EGCA s non-discretionary investment recommendations. In Model-Based Programs, although it is generally contemplated that the Sponsor or OPM will implement EGCA CI s investment recommendations in Program accounts, the performance of such accounts may differ from the performance shown for a variety of reasons, including but not limited to: the Sponsor or OPM, and not EGCA CI, is responsible for implementing trades in the accounts; differences in market conditions; client-imposed investment restrictions; the timing of client investments and withdrawals; fees payable by Model-Based Program accounts; and/or other factors. The document contains information that relates to the general strategy and performance of the EG Fixed Income Fund I, an unregulated Cayman exempted company, and is intended only to illustrate the general Emerging Market Corporate High Yield strategy. EGCA CI has made every attempt to ensure that the information contained in this document has been obtained from reliable sources but are not responsible for any errors or omissions and make no representations or warranties of any kind, expressed or implied, about the completeness, accuracy, reliability, suitability or timeliness of such information. Past performance does not guarantee, and is not a reliable indicator of, future results and the value of investments and any income from them can fall as well as rise. The risks connected with investing into Emerging Markets also potentially include a restricted choice of investments, reduced liquidity, and less developed clearing, settlement, safe custody and registration systems as well as market, financial, political and foreign exchange risks. Composite and benchmark/index performance results reflect realized and unrealized appreciation and the reinvestment of dividends, interest, and/or capital gains. Taxes have not been deducted. Gross composite returns do not reflect actual performance because they do not reflect the deduction of any fees or expenses. Such fees that a client may incur in the management of their investment advisory account may reduce the client s return. The net of fees performance figures reflect the deduction of actual investment advisory fees but do not reflect the deduction of custodial fees. This material has been created by EGCA CI and the information included herein has not been verified by your program sponsor and may differ from information provided by your program sponsor. This material must be preceded or accompanied by the manager profile, which you can obtain from your Financial Advisor. Without the prior written consent of EGCA CI and Aliier, this document, as well as any information contained in it may not be (a) reproduced (completely or partially), (b) copied, (c) used for any purpose except for your evaluation of the strategy, or (d) provided to any other person except your employees and/or consultants who should be informed of the confidential nature of this information. For more information: / www.aliier.com and 2017 EG Capital Advisors. All Rights Reserved. Aliier and Aliier Passport are registered trademarks of Aliier LLC. All other trademarks are those of their respective owners. 5