PH&N High Yield Bond Fund November 25, 2014 Presented by: Hanif Mamdani Lead Manager PH&N High Yield Bond Fund Head of Alternative Investments, RBC Global Asset Management
Why Did We Re-Open PH&N High Yield Bond Fund? +150 basis point sell-off in yield meaningfully improved risk/reward of asset class Supply/demand imbalance creating opportunity in secondary market New issues coming with much better concessions Changing liquidity of fixed income markets argues for larger cash buffer >150 bps Sell Off Source: Bloomberg, BoA/Merrill Lynch 11/20/2014 2
High Yield Credit Cycle Where are We Now? Peak? Strong GDP growth Robust M&A Low credit standards Expansion Increasing GDP growth Growing deal backlog Moderate credit standards Credit Cycle Contraction Contracting GDP growth Growing concern over credit problems Limited access to capital markets Trough Negative GDP Illiquid markets Forced selling 3
HY New Issuance Quality So Far This Cycle Much Better 2004-2007 2010-2014 Source: Bloomberg 4
Increasing Dispersion in HY Market Late Cycle Behaviour 2013 Taper Tantrum 2014 End-of-QE Sell-Off 2013 Taper Tantrum = Period from May 9, 2013 to June 25, 2013, 2014 Sell-Off = Period from September 1, 2014 to October 15, 2014 Sources: Bloomberg, RBC GAM 5
Compensation for Credit Risk Still at Mid-Cycle Levels Source: BoA/Merrill Lynch 6
PH&N High Yield Risk Management Philosophy Losses from Default 7
Portfolio Construction Tilt Towards Quality at Good Price Quality/Value Sizing Grid Position Size Poor Overall Quality of Name Blue Chip Rich Relative Cheapness Cheap 0% 0% 0-1% 0% 1-2% 1-3% 0-1% 1-3% 3-5% Adjustments/Constraints Max Industry Exposure ~ 25% Bias to more liquid names Bias to Canadian names Favour larger underwriting groups Final Portfolio 8
PH&N High Yield Bond Fund Portfolio Structure as of November 20, 2014 Rating Distribution Industry Distribution Maturity Distribution Sector Distribution Effective Yield: 5.05% Effective Duration: 2.8 yrs Effective Spread: +390 bps AUM: $3.6 bill Yields are reported on a pre-fee basis, Series O, standard performance data available in the Appendix. Effective duration and effective yield have been calculated in BondLab, by utilizing a proprietary option-adjusted model. Other metrics are available upon request. 9
Managing Default Risk Current Vulnerable Sectors Sector Why Vulnerable? ML Master II Index* % MV PH&N HYBF % MV Energy Significant issuance Typically negative FCF Capital constrained sector Oil prices 15.2% 15.4% (recently adding) Metals, Mining, Basic Industry Significant issuance Typically negative FCF Capital constrained sector Commodity prices 12.4% 0.3% Retailing Changing consumer dynamics Adjusted leverage higher (operating leases) Typically low recovery rates 4.4% 0.3% Total 32.0% 16.0% *BoA/ML Master II High Yield Index. Data as at November 20, 2014 10
Drilling Down into Energy Exposure Quality Names Baytex Energy 3.0% Gibson Energy 1.8% PH&N High Yield Bond Fund Ratings: Ba3/BB Ratings: Ba2/BB Market Cap: $5.2 B Market Cap: $3.9 B Debt/Capital: 41% Net Debt/EBITDA 1.7x Ent. Value/EBITDA 5.6x Debt/Capital: 45% Net Debt/EBITDA 2.3x Ent. Value/EBITDA 11.1x Savanna Energy Services 1.2% Trilogy Energy 2.7% Ratings: B/B high Market Cap: $472 M Debt/Capital: 26% Net Debt/EBITDA 2.1x Ent. Value/EBITDA 5.3x Ratings: B/B Market Cap: $1.9 B Debt/Capital: 47% Net Debt/EBITDA 2.1x Ent. Value/EBITDA 7.4x Western Energy Services 1.9% Canadian Energy Services 1.4% Ratings: B2/B+ Market Cap: $536 M Debt/Capital: 30% Net Debt/EBITDA 1.4x Ent. Value/EBITDA 4.6x Ratings: B/B high Market Cap: $1.9 B Debt/Capital: 39% Net Debt/EBITDA 2.2x Ent. Value/EBITDA 15.7x Source: Bloomberg, PH&N IM; As at November 20, 2014 11
Finding Better Bargains in High-Quality Energy Bonds Baytex 6.625% 22 (Spread to 2020 Call Date) Western Energy 7.875% 19 (Spread to 2018 Call Date) +110 bps +90 bps Trilogy Energy 7.25% 19 (Spread to 2018 Call Date) Wajax Corp 6.125% 20 (Spread to 2019 Call Date) +144 bps +93 bps Sources: Bloomberg 12
Single-B Exposure Heavily Front-Loaded Term Structure Profile Based on Ratings Source: PH&N IM, As at November 20, 2014 13
PH&N High Yield Bond Fund Taking Less Risk than HY Index or Peers Interest Rate Risk (Duration) Quality Risk ( CCC Content ) Realized Volatility (Last 5 Years) Drawdown Risk * 2013 Taper Tantrum = Period from May 9, 2013 to June 25, 2013, 2014 Sell-Off = Period from September 1, 2014 to October 15, 2014 Sources: Bloomberg, RBC GAM 14
PH&N High Yield Bond Fund Emphasis on Risk-Adjusted Returns Performance as of September 30, 2014 10 Year Risk-Return Profiles (Oct 2004- Sep 2014) Return Annualized to Sep 30, 2014 3 Yrs (%) 5 Yrs (%) 10 Yrs (%) Universe Bond Index 3.45 4.85 5.37 PH&N High Yield Bond Fund* 8.61 8.44 8.32 ML HY Master II Index 10.95 10.40 8.20 Risk Annualized to Sep 30, 2014 10 Yrs St.Dev. (%) Max Drawdown (%) Universe Bond Index 3.3-3.9 PH&N High Yield Bond Fund* 3.7-7.4 ML HY Master II Index 10.4-33.3 * Series O returns. Total returns are gross-of-fee and reported in Canadian dollars Standard deviation is calculated on a monthly basis. Universe Bond Index stands for FTSE TMX Canada Overall Universe Bond index 15
PH&N High Yield Bond Fund Recognized Leader in High Yield Bonds Fund Achievements/Awards Canadian Investment Awards (Morningstar) High Yield Bond Fund of the Year 2006 Canadian Investment Awards (Morningstar) High Yield Bond Fund of the Year 2007 Canadian Investment Awards (Morningstar) High Yield Bond Fund of the Year 2008 Canadian Investment Awards (Morningstar) High Yield Bond Fund of the Year 2009 Canadian Investment Awards (Morningstar) High Yield Bond Fund of the Year 2011 Lipper Fund Awards Canadian High Yield Fixed Income Award 2009 (1-, 3-, 5-year) Lipper Fund Awards Canadian High Yield Fixed Income Award 2010 (3-, 5-year) Lipper Fund Awards Canadian High Yield Fixed Income Award 2011 (5-, 10-year) Lipper Fund Awards Canadian High Yield Fixed Income Award 2012 (10-year) Lipper Fund Awards Canadian High Yield Fixed Income Award 2013 (10-year) Lipper Fund Awards Canadian High Yield Fixed Income Award 2014 (10-year) Canada s Fund Manager of the Year 2011 (Investment Executive) 16
Disclosures This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. Due to the possibility of human and mechanical error as well as other factors, including but not limited to technical or other inaccuracies or typographical errors or omissions, RBC GAM is not responsible for any errors or omissions contained herein. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information. Any investment and economic outlook information contained in this report has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions. This report may contain forward-looking statements about the Fund, its future performance, strategies or prospects, and possible future Fund action. The words may, could, should, would, suspect, outlook, believe, plan, anticipate, estimate, expect, intend, forecast, objective and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent risks and uncertainties, both about the Fund and general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made in relation to the Fund. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors. / Trademark(s) of Royal Bank of Canada. Used under licence. RBC Global Asset Management Inc. 2014 17