Presentation The role of fixed income today Quentin Fitzsimmons Senior Portfolio Manager, Fixed Income T. Rowe Price
THE ROLE OF FIXED INCOME TODAY Quentin Fitzsimmons Global Fixed Income Portfolio Manager 18 July 2018 For Professional Clients only. Not for further distribution.
Fixed Income Should Be Simple 1 2 INCOME 3 DOWNSIDE RISK MANAGEMENT 4 DIVERSIFICATION FROM EQUITIES LIABILITY & CASH FLOW MATCHING 3
What Income, What Capital Preservation? As of 31 May 2018 YIELD TO MATURITY (%) 10 9 Current 10-Year UK Gilt Yield: 1.35% 8 7 Yield Breakeven: + 0.15% 6 5 Estimated impact of a 1% increase in 10-year yield: -9.70% 4 3 2 1 UK Gilts UK Corporate Bonds 0 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Source: Bank of America Merrill Lynch. Analysis by T. Rowe Price 4
Let s Talk About Diversification As of 31 May 2018 FTSE ALL SHARES EQUITY MARKET DRAWDOWNS > 10% JAN 1999 MAR 2018 30% 20% 10% Percentatge Return 0% -10% -20% -30% -40% Cumulative UK Equity Performance Cumulative UK Gilts Performance Cumulative UK Non-Gilts Performance Cumulative European High Yield Performance (GBP Hedged) -50% Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Past performance is not a reliable indicator of future performance. Indexes referred to: FTSE ALL SHARES Total Return Index, Bloomberg Barclays UK Gilt Index, UK Non-Gilt Index and Euro High Yield GBP Hedged Index. Source: Bloomberg Finance L.P. Data from Jan-1999 to Mar-2018. Returns in UK Sterling. 5
More Volatility Accidents To Be Expected As of 31 May 2018 VIX INDEX LEVEL 100 90 80 Financial Crisis (318 Days) 70 60 50 40 LTCM (211 Days) Asian Crisis (69 Days) Dotcom bust (113 Days) '02 Crash (206 Days) Eurozone Crises I & II (107 & 112 Days) Chinese Devaluation (28 Days) Vol Shock (6 Days) 30 20 10 0 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Sources: VIX; analysis by T. Rowe Price. 6
Is A Move Away From Traditional Fixed Income Investing the Answer? TRADITIONAL APPROACH NON-TRADITIONAL APPROACH Benchmark Return Target Cash Plus Return Target Defined by Benchmark Constituents Ability to Invest Broadly Influenced by Benchmark Weights Flexible Position Sizes Mostly Long Positions Mix of Long and Short Positions Unconstrained Multi-asset Credit Active Alpha Absolute Return Alternative Flexible Bonds Opportunistic Dynamic 7
Capturing Opportunities in Different Cycles As of 31 May 2018 ILLUSTRATIVE INTEREST RATE CYCLE 100 80 60 40 20 0 100 80 60 40 20 0 100 80 60 40 20 0 MONETARY POLICY ACTIONS 2016 87 cuts 38 hikes MONETARY POLICY ACTIONS 2017 84 cuts 34 hikes MONETARY POLICY ACTIONS 2018-YTD 31 cuts 22 hikes South Africa Interest Rates Going Down Peru Colombia Brazil Russia Indonesia Serbia Chile Malaysia Thailand Israel Australia Sweden Eurozone Developed Countries Developing Countries Interest Rates Stable China US Hong Kong Canada UK Czech Republic Hungary Philippines Poland Romania Interest Rates Going Up Egypt Argentina Mexico Turkey The Monetary Policy Actions charts show the number of rate cuts and rate hikes made by all central banks globally. Country classifications in the chart are in line with IMF groupings as of reporting date. Sources: IMF, CB Rates and T. Rowe Price. 8
Becoming More Selective in Credit As of 31 May 2018 CORPORATE HEATMAP U.S. Corporates European Corporates Emerging Markets Corporates Leveraged Loans Market Weight Yield to Maturity Spread Market Weight Yield to Maturity Spread Market Weight Yield to Maturity Spread Market Weight Yield to Maturity Spread AAA 2.0% 3.5% 66 0.6% 0.7% 68 0.1% 2.9% 68 N/A N/A N/A AA 7.8% 3.3% 67 9.7% 0.5% 72 2.5% 3.7% 98 N/A N/A N/A A 42.5% 3.7% 97 38.8% 0.8% 100 18.7% 4.4% 162 N/A N/A N/A BBB 47.7% 4.2% 146 51.0% 1.2% 145 36.6% 5.1% 231 N/A N/A N/A IG Index 100.0% 3.9% 117 100.0% 1.0% 120-4.8% 205 N/A N/A N/A BB 42.9% 5.5% 271 69.9% 3.0% 288 23.4% 6.3% 354 22.6% 5.0% 275 B 41.9% 7.2% 417 25.8% 5.9% 560 16.6% 7.8% 511 48.2% 6.3% 421 CCC and Below 15.2% 10.3% 738 4.3% 9.3% 915 2.0% 11.8% 906 4.2% 13.0% 1157 HY Index 100.0% 6.9% 403 100.0% 4.0% 383 100.0% 7.2% 448 100.0% 6.0% 391 Past performance cannot guarantee future results. Sources: BofA/ML, S&P, and J.P. Morgan Chase & Co. U.S. Investment Grade represented by the Bloomberg Barclays U.S. Corporate Index; U.S. High Yield represented by the J.P. Morgan US High Yield Index; European Investment Grade represented by the Bloomberg Barclays Euro Aggregate Corporate Index; European High Yield represented by the BofA/ML European Currency High Yield Const. ex Sub. Fin. Index; Emerging Markets Corporate Index represented by the JPM CEMBI Broad Diversified Index, and Bank Loans by the J.P. Morgan Leveraged Loan Index. 9
Factoring Geo-Political Risk As of 31 May 2018 MARCH MARCH MAY JULY SEPTEMBER OCTOBER NOVEMBER ITALY RUSSIA UK MEXICO SWEDEN BRAZIL US Presidential Elections Local Elections General Elections GUESS WHICH BOND MARKET I AM 140 GUESS WHICH CURRENCY I AM 1.32 138 1.30 136 134-5.9% 1.28 1.26-6.5% 132 1.24 130 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 1.22 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 Source: Bloomberg. Analysis by T. Rowe Price 10
And The Cost of Hedging Back Into UK Sterling As of 31 May 2018 3-MONTH US LIBOR VS. 3-MONTH UK LIBOR (%) 5 Hedging US assets back into UK Sterling has increased. However 4 3 starting point UK Libor also going up 2 cost of hedging has increased because US assets have become more attractive 1 0 US Libor A true global bond approach should not depend on a particular market -1 UK Libor Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Source: ICE; analysis by T. Rowe Price. 11
Coherent Portfolio Construction is Essential To Deliver Stable Returns Return Seeking Positions Core Stable Positions Defensive Positions High conviction positions with strong potential for capital gains or with high income characteristics Positions with small but steady Income/gain potential and low risk profile Positions with defensive characteristics and unlikely to perform unless in a risk averse environment Vulnerable to risk aversion scenario Less affected by risk aversion scenario Benefits from risk aversion scenario 12
Targeting Risk Through Different Angles is Key PORTFOLIO ANALYSIS Ex-Ante Risk Scenario Analysis Ex-Post Attribution Using Different Correlation Inputs Using Different Volatility Inputs Performance Activity Thematic breakdown Risk Appetite vs. Risk Hedging POSITION ANALYSIS 13
In Conclusion 1. DEFINE ROLE OF FIXED INCOME 2. LOOK FOR GLOBAL APPROACH 3. FOCUS ON PORTFOLIO CONSTRUCTION Sustainable Performance Capital preservation Income generation Diversification Local Expertise Access to Research Full Universe Liquidity Filtering Best Ideas Strength of Conviction Risk Management Think Worst Case Scenario! 14
APPENDIX
Fixed Income At T. Rowe Price As of 31 March 2018 1. The total fixed income assets under management of the T. Rowe Price group of companies. Firmwide AUM includes assets managed by T. Rowe Price Associates, Inc. and its investment advisory affiliates. 2. Research & Analysis includes credit analysts, associate analysts, and quantitative research analysts. Trading includes traders and trading analysts, Portfolio management includes portfolio managers, and associate portfolio managers. Counts do not include Fixed Income associates who support Fixed Income investments (Portfolio Specialists, Management, and Economists). Count, additionally, does not include associates with Stable Value Analyst role. 3. Includes Portfolio specialists and does not include trading analysts, or economists. Head of International Fixed Income Trading included in both Global Investment Grade and Global High Yield counts due to dual trading coverage. 4. Staff figurers include associates who joined the firm though acquisition in May 2017 and whose trading and research in our Philadelphia office remains fully separate and distinct from T. Rowe Price s existing High Yield platform. Numbers may not be total due to rounding. 16
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Presentation The role of fixed income today Quentin Fitzsimmons Senior Portfolio Manager, Fixed Income T. Rowe Price