Legg mason

28
Fixed Income Investing in a Low Growth World Dipankar Shewaram Citywire Newcits Retreat 1-3 December 2010 This document is for Asset Managers, Fund Distributors and Authorised Intermediaries. Not for use by Private Individuals.
  • date post

    19-Oct-2014
  • Category

    Documents

  • view

    2.522
  • download

    5

description

 

Transcript of Legg mason

Page 1: Legg mason

Fixed Income Investingin a Low Growth World

Dipankar Shewaram

Citywire Newcits Retreat

1-3 December 2010

This document is for Asset Managers, Fund Distributors and Authorised Intermediaries. Not for use by Private Individuals.

Page 2: Legg mason

Page 2

Western Asset

Source: Assets under management in USD (billions), as of 30 Sep 10.

Total AUM: $469.4

7 Countries

Singapore

$2.0

New York

$164.8

London

$50.0

Tokyo

$43.0

Melbourne

$9.0

São Paulo

$15.8

Pasadena

$184.8Hong Kong

Page 3: Legg mason

Page 3

Western Asset

Source: Western Asset as of 20 Oct 10.

Brendan A. Bowman (5 yrs) – USInvestment-Grade Credit & High-Yield Credit/Leveraged Loans

Investment-Grade CreditRyan K. Brist, CFA (17 yrs) – USBlanton Keh, CFA (10 yrs) – USTakahiro Omura, CFA (18 yrs) – JapanDipankar Shewaram, CFA (13 yrs) – UKJeffrey Van Schaick, CFA (29 yrs) – US

Stephen A. Walsh (29 yrs)Chief Investment Officer

Michael C. Buchanan, CFA (20 yrs)Head of Credit

High-Yield Credit/Leveraged LoansMichael C. Buchanan, CFA (20 yrs) – USIan R. Edmonds (20 yrs) – UKTimothy J. Settel (17 yrs) – US

Emerging Markets CreditMatthew Duda, CFA (17 yrs) – US

Portfolio Managers

Research

Rene Ledis (17 yrs) – USBasic Industries/Utilities/Energy

DeAndre L. Parks, CFA (17 yrs) – USHealthcare / Consumer Products / Retail

Davis Smith (21 yrs) – USCommunications

Ivor Schucking (19 yrs) – USFinancial Institutions

Adrian Chee (18 yrs) – SingaporeAsian Investment-Grade & Financials

Kailash Chhaya, CFA (9 yrs) – JapanCredit Analyst

David Klein (13 yrs) – UKConsumer Products, Retail

Sean Rogan (21 yrs) – AustraliaCredit Analyst

Trading

J. Gibson Cooper, CFA (23 yrs) – USChemicals, Energy, Pipelines & Gas DistributionArvinder S. Chowdhary, CFA (15 yrs) – UKEuropean High-Yield CreditThomas R. Galloway (18 yrs) – USHealthcare, Gaming, Lodging, REITS, Pharmaceuticals

Henrietta Gourlay (11 yrs) – SingaporeAsian High-Yield

Christopher N. Jacobs, CFA (22 yrs) – USDistressed, Media, Environmental, Brokerage/Insurance/Finance

Araceli M. Sibley (18 yrs) – USConsumer Products, Entertainment, Restaurants, Consumer Services, TextilesSuzanne M. Trepp, CFA (20 yrs) – USAerospace/Defense, Transportation, Retail, Food & Beverage, Tobacco

Robert Abad (21 yrs) – USEMD Credit Analyst

Marcos Collina (25 yrs) – BrazilBanks, Financials

Daniel Araujo (26 yrs) – BrazilIndustrials

Oberto Alvarez (17 yrs) – US

Chetna Mistry (13 yrs) – UK

Walter E. Kilcullen (13 yrs) – US

Charles Shia (14 yrs) – US

Kevin Ritter, CFA (12 yrs) – US

Christopher Kilpatrick (13 yrs) – USTelecom, Cable

Portfolio Analyst

Dan Alexander, CFA (6 yrs) – US

Sophala Chhoeng (5 yrs) – US Matthew Graves, CFA (5 yrs) – US

Product Specialist Shing Chi (Charles) Poon, CFA (12 yrs) – US

Jeffrey Nuruki, CFA (13 yrs) – USCredit Analyst

Taylor Dowling (9 yrs) – Australia

Ian Justice (12 yrs) – UKWhole Business Securitization

Samira Sattarzadeh (8 yrs) – UK

Vivek K. Acharya (9 yrs) – UK

Thomas V. McMahon (31 yrs) – USInvestment-Grade Credit & High-Yield Credit/Leveraged Loans

Mark A. Hughes, CFA (12 yrs) – USAutomotive, Media Non-Cable, Industrials, Building Products, Rental Service

John M. King, CFA (13 yrs) – USUtilities, Metals & Mining, Packaging, Paper & Forest Products

Tobias Grün (22 yrs) – UKFinancial Institutions

Paul S. Olsen (27 yrs) – USGeneralist, Liquidity

Edward T. Ma, CFA (8 yrs) – US

Kurt D. Halvorson, CFA (9 yrs) – US

James Newbery (15 yrs) – UKEuropean Credit

Roderick MacPhee (7 yrs) – UK

Ruchi Gupta (12 yrs) – UKEuropean High-Yield Credit

Page 4: Legg mason

Where is growth going to come from?

Page 4

Page 5: Legg mason

Gross National Product

Where is growth going to come from ?

GNP = C + I + G + ( X – M )

Consumers are deleveraging

Investment is not picking up

Fiscal deficits need to be cut

C = Consumption, I = Investments, G= Government Spending, X= Exports, M = Imports

Page 6: Legg mason

Page 6

Deleveraging Financial Sector

Banks are reducing balance sheet size and improving capital significantly

96

52 53

109

9

126

-5

22

-7 -6 -9

0

-24

-7 -4

2

3322

31

11

27

100

5

30

10

31

62

2121

281

1

-31

-10

-30

-9

-26

128

-4

-40

-20

0

20

40

60

80

100

300

280

260W

ells

Far

go

Ban

k of

Am

eric

a

Citi

grou

p

JP M

orga

n C

hase

San

tand

er

BN

P P

arib

as

Lloy

ds

UB

S

HS

BC

Bar

clay

s

Cre

dit S

uiss

e

Uni

Cre

dit

Ban

co B

ilbao

RB

S

Deu

tsch

e

Inte

sa

Soc

iete

Gen

eral

e

Cre

dit A

gric

ole

Eur

opea

n A

vera

ge

US

Ave

rage

Cha

nge

in T

angi

ble

Equ

ity (%

)Change in T angible Common Equity T otal Change in Assets

Source: Citigroup. As of 25 Jun 10

Balance sheet numbers represent the change over the period year end 2008 to year end 2009.

Page 7: Legg mason

Page 7

Unemployment Rates Remain Extremely High

Consumption to remain soft

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Une

mpl

oym

ent R

ate

(%)

US UK EU

Source: Bloomberg. As of 30 Sep 10.

Page 8: Legg mason

8

Firms Look To Rebuild Profits Before Investment

-30

-20

-10

0

10

20

30

Mar 96 Sep 97 Mar 99 Sep 00 Mar 02 Sep 03 Mar 05 Sep 06 Mar 08 Sep 09

Perc

ent (

YoY)

Private Sector Business Investment Profits

Source: ONS, Western Asset. As of 31 Mar 10

Page 9: Legg mason

Page 9

Fiscal Deficits to Continue

Government finances need to be tightened

Page 10: Legg mason

Page 10

Equity Market Focus

Page 11: Legg mason

Government Bonds Look Expensive vs Equities

Risk aversion has driven investors into lower risk assets pushing up their prices

Dow Jones Dividend

Yield

UST 10yr Yield

0

1

2

3

4

5

6

7

8

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Perc

ent

Source: Bloomberg. As of 30 Sep 10.

Page 12: Legg mason

Page 12

Historical Dow Jones P/E Ratio

Stocks are NOT cheap in isolation

Dow Jones PE Ratio

0

5

10

15

20

25

30

35

40

45

50

1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

PE R

atio

Source: http://www.econ.yale.edu/~shiller/data/ie_data.xls

Stock Market Data Used in "Irrational Exuberance" Princeton University Press, 2000, 2005, updated

Robert J. Shiller

Page 13: Legg mason

Page 13

Japan’s 20 Year Bear Market

Equity markets can fall for prolonged periods of time

Nikkei-225

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1985 1990 1995 2000 2005 2010

Inde

x

Source: Bloomberg. As of 29 Oct 10.

Page 14: Legg mason

Page 14

Are We In A Severe Bear Market Rally?

Equities may have further adjustments to go through

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

2005 2006 2007 2008 2009 2010 2011

Inde

x

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

Index

FT SE-100 (LHS) S&P (RHS)

Source: Bloomberg. As of 29 Oct 10.

?

Page 15: Legg mason

Page 15

Volatility in Bond Markets:Government vs. Credit

Page 16: Legg mason

Page 16

10 Year Treasury Yield At Historic Lows

If yields rise then passive government bond investment can bring negative returns

10-Year Treasury Yield

(LHS)

3-Year rolling volatility

(RHS)

0

2

4

6

8

10

12

14

16

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Yiel

d (%

)

0.0

0.5

1.0

1.5

2.0

2.5

3.0Volatility (%

)

Source: Bloomberg, Western Asset. As of 30 Sep 10.

Page 17: Legg mason

Page 17

How Risk-free Is The Risk-free Rate?

European sovereign issuers protection premiums higher than corporate issuers

Corporate vs. Sovereign Risk

iTraxx Europe Main CDS

index

iTraxx Western European

Sovereign CDS index

0

50

100

150

200

250

Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10

Spre

ad (b

ps)

Source: Bloomberg As of 30 Sep 10

Page 18: Legg mason

Page 18

The Advantage of Beta Flexibility

Premium increases can lead to capital losses

iTraxx Europe Main CDS index

0

50

100

150

200

250

Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10

Spre

ad (b

ps)

Source: Bloomberg, Western Asset. As of 30 Sep 10. Returns for shaded regions shown in bold.

1.13

-3.186.44

-2.89

3.26

-6.91

4.35

-5.87

1.65

-2.07

0.14

Page 19: Legg mason

Page 19

Return Dispersion in Credit

2005/06 was about alpha - we expect similar themes for 2010/11

3.02.3

-2.4

-1.2

-4

-2

0

2

4

2005 2006

Exce

ss R

etur

n (%

)

Top Decile Bottom Decile

0.0 -1.8

59.4

-11.2

-86.4

2.6

-100

-50

0

50

100

2007 2008 2009

Exce

ss R

etur

n (%

)

Top Decile Bottom Decile

Source: Deutsche Bank. As of 31 Dec 09

Excess Returns in European Corporates

Page 20: Legg mason

Page 20

Conclusions

• We are in a period of extreme uncertainty. Having more tools to manage portfolios is key

• Absolute government bond yields are at historically low levels against a backdrop of heightened volatility

• 2010/11 will see a large divergence between positive and negative performance of individual issuers

These are the views of Western Asset as at 30 September 2010. These are subject to change.

Page 21: Legg mason

Page 21

Legg Mason Western Asset Global Credit Absolute Return Fund

Page 22: Legg mason

Page 22

Why a Credit Absolute Return Fund?

• Credit sector and security selection are key to positive returns as market moves to alpha from beta; credit dispersion has been the key theme in 2010/2011

• Broad opportunity set – ability to invest in all credit sectors (investment grade and high yield)

• Increased volatility in sovereign markets therefore active interest rate management is the key to positive returns from global fixed income going forward

• Credit is a core strength of Western Asset

The above reflects current opinions of Western Asset Management.

Page 23: Legg mason

Page 23

Legg Mason Western Asset Global Credit Absolute Return Fund

Expected sources of gross total return for target 8-10%* per annum over a market cycle

• Focused credit alpha generation

• Medium-term and opportunistic credit beta generation

• Active interest rate management

Global Credit Absolute Return and Risk Target

• Absolute return focus, with a target of 8-10% p.a. over a market cycle*

• Target 8-10% volatility*

• Target sharpe ratio of at least 1*

* This is a target and there is no guarantee that it will be met.

Some key strategy limits•Seek to invest at least 50% in investment grade securities •Duration range of +/- 10yrs•Maximum 20% foreign currency exposure•Maximum VaR limit of 20%

Other features•Daily Liquidity•Takes advantage of alpha opportunities in global credit

markets•Invests in a diverse portfolio of investment grade and high

yield credit (including emerging market credit) •Active interest rate management (can be long or short

duration)•Maximum flexibility allowing the generation of positive

returns through the credit cycle•Ability to use single name CDS (long and short) to

express views on specific issuers•Ability to use index CDS (long and short) to manage beta•UCITS III vehicle utilising VaR to measure and control

global exposure

Page 24: Legg mason

Page 24

Portfolio Characteristics

As of 30 September 2010

Source: * Cash Bonds & Single Name CDS

Delta Adj Wht (%) Spread Duration (yrs)Duration (yrs)

Effective Duration -0.37

Spread Duration -4.63

Number of Holdings* 84

VaR 6.4%

Average Rating AA

Other Statistics

CashCash EquivalentsCurrency Forwards

US GovernmentsEuro GovernmentsUK GovernmentsNorway Governments

IG Financials*IG Non-financials*High Yield*

iTraxx MainiTraxx CrossoveriTraxx Main OptionsiTraxx Crossover OptionsiTraxx SOVXWE Options

756

-2

5

31-24

2

-127-19

010

24

0.100.13

0.35

2.02

-0.39-2.25

-0.41

0.08

0.99

0.09-1.09

-0.84

0.390

-6.22

2.04

Page 25: Legg mason

Page 25

Legg Mason Western Asset Global Credit Absolute Return Fund

• Long: Long Financials across the capital structure

• Short: Short Non-Financials using CDS indices and single name CDS

• Interest Rate Risk: Tactical approach to duration management

• Currency: Short Australian Dollar and Euro versus long in US Dollar

Source: Western Asset as at 30 September 2010

Page 26: Legg mason

Page 26

Legg Mason Western Asset Global Credit Absolute Return Fund

Performance since launch

Source: Legg Mason at at 30 September 2010

2.05

0.23 0.29

3.32

0.29

-2.03

-3

-2

-1

0

1

2

3

4

Since Inception 20 May 2010 May June July August September

To

tal R

etu

rn (%

)

Source: Legg Mason as of 30 September 2010. Performance shown is net of investment management fees.

Page 27: Legg mason

Page 27

Legg Mason Western Asset Global Credit Absolute Return Fund

Net Asset Value (NAV) Since Launch

Source: Western Asset as of 12th November 2010

Val

ue

Date

Page 28: Legg mason

Page 28

Important Information

This information has been prepared from sources believed reliable but is not guaranteed by Legg Mason Investments and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors.

Western Asset Management is affiliated with Legg Mason through common control and ownership by Legg Mason, Inc.. Legg Mason provides its clients with access to Western Asset Management primarily through its range of Irish and UK authorised funds in which Western Asset Management serves as investment manager or sub-investment manager. Some of the affiliates are not authorised to offer their investment advisory services in all European jurisdictions.

The Legg Mason Western Asset Global Credit Absolute Return Fund is a sub-fund of Legg Mason Global Funds plc, an umbrella fund with segregated liability between sub-funds, established as an open-ended investment company with variable capital and incorporated with limited liability under the laws of Ireland with registered number 278601. It qualifies and is authorised in Ireland by the Financial Regulator as an undertaking for collective investment in transferable securities and is a section 264 Scheme as recognised by the FSA. This Fund is offered solely to non-US investors under the terms and conditions of the Fund’s current prospectus - please refer to the Simplified Prospectus and Prospectus documentation, which describe the full risk factors associated with this Fund.

This document does not constitute an invitation to invest. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested. Fluctuations in exchange rates can affect the value of the Fund and the income from it.

The fund may invest in ‘non-investment grade’ bonds, which carry a higher degree of default risk than ‘investment grade’ bonds.

The Legg Mason Western Asset Global Credit Absolute Return Fund may invest in emerging markets that may be less liquid and may have less reliable custody arrangements than mature markets and may involve a higher degree of risk. Unlike a bank or building society account, your money is at risk.

This Fund may invest extensively in certain types of financial derivative instruments (FDIs) for efficient portfolio management or investment purposes. These instruments involve additional and higher levels of risk including but not limited to market risk, liquidity risk, counterparty risk and operations risk.

This Fund may use eligible derivatives to hedge their foreign currency exposure back to the class currency. Hedging transactions can reduce the effects of currency and asset fluctuations but can expose additional risks, e.g. counterparty default.

Due to its investment policies, this Fund may have particularly volatile performance.

Issued and approved by Legg Mason Investments (Europe) Limited, registered office 75 King William Street, London, EC4N 7BE. Registered in England and Wales, Company No. 1732037. Authorised and regulated by the Financial Services Authority. Client Services 0207 070 7400.

This document is for use by asset managers, fund distributors and authorised intermediaries. Not for use by private individuals.

Issued November 2010 Ref: 6168