Global High Yield vs Regional High Yield Whitepaper ... - CAMRAdata

1

Global High Yield vs Regional High Yield Whitepaper How best to invest in High Yield September 2016

Sponsored by

I N T E R N A T I O N A L

2

Introduction

Clear and Independent

3

Institutional Investment Analysis We provide institutional investors, including pension funds, insurance companies and consultants, with data and analysis to assess, research and report on their investments. We are committed to fostering and nurturing strong, productive relationships across the institutional investment sector and are continually innovating new solutions to meet the industry’s complex needs. We enable institutional investors, including pension funds, insurance companies and consultants, to conduct rigorous, evidence-based assessments of more than 5,000 investment products offered by over 700 asset managers. Additionally, our software solutions enable insurance companies to produce consistent accounting, regulatory and audit-ready reports. To discuss your requirements +44 (0)20 3327 5600 [email protected] Find us at camradata.com

Contents

The depth and breadth of the global high yield universe has developed apace in recent years, as investors are attracted to its defensive characteristics and low correlation to other asset classes. Expansion has come largely from Europe and emerging markets, with some believing the asset class of being capable of delivering equity-like returns with low volatility.

3

Introduction

4

Roundtable Participant Bios

10

How best to invest in High Yield

Articles

Join us on LinkedIn 18

Follow us on Twitter @camradata

22

Candriam Investors Group Ridgeworth International

The biggest risk to watch out for in the second half of this year is political uncertainty. US presidential elections, the aftermath from Brexit which has the potential to affect not just the UK but the whole of Europe, and the threat of further yuan devaluation could drive volatility in commodity and other risk assets. But some believe the consequence of populist politicians being elected across the globe is likely to be lower growth, lower interest rates and more QE which should tend to be supportive for higher yielding bonds. Focusing on the UK, companies may be likely to pause or reduce their investment programmes until they have greater certainty about what happens next – and that will no doubt slow growth……but isn’t slow growth is exactly what bond markets like? The European Central Bank continues to print money and is buying investment-grade corporate bonds in the secondary market thus driving their yields lower and forcing yield-hungry investors into the high yield market. Fixed income investors face some difficult choices against this backdrop with the challenge being widely acknowledged that yields are at momentous lows and are unlikely to rise any time soon. CAMRADATA’s roundtable will discuss these wider issues and debate the topic of “How best to invest in High Yield”.

Fixed income investors face some difficult choices against this backdrop with the challenge being widely acknowledged that yields are at momentous lows and are unlikely to rise any time soon

© Copyright CAMRADATA Analytical Services October 2016. This marketing document has been prepared by CAMRADATA Analytical Services Limited (‘CAMRADATA’), a company registered in England & Wales with registration number 06651543. This document has been prepared for marketing purposes only. It contains expressions of opinion which cannot be taken as fact. CAMRADATA is not authorised by the Financial Conduct Authority under the Financial Services and Markets Act 2000.CAMRADATA Analytical Services and its logo are proprietary trademarks of CAMRADATA and are registered in the United Kingdom. Unauthorized copying of this document is prohibited.

4

Roundtable

5

Bios Ankit Shah Investment Manager Ankit Shah is Investment Manager at Antares Managing Agency. In this role, he is responsible for structuring and implementing overall allocation of Investment portfolios for Antares, ranging from risk mitigation to capital optimised allocation strategies across asset classes as well as keeping it within Solvency II framework. Prior to joining the company, Ankit was working with Qatar Insurance Company, Doha, Qatar (parent of Antares) as Vice President – Investments, overseeing the investment operations and strategic asset allocation across the QIC group. Before this, he was Senior Fund Controller at AXA Investment Managers working on various UK and Pan European real estate funds and Group Financial Controller at UK Capital Investments Group. He trained as an Auditor and worked with Grant Thornton.

Patrick Zeenni, CFA Deputy Head of High Yield & Credit Arbitrage Management Patrick Zeenni, CFA has been Deputy Head of High Yield & Credit Arbitrage management at Candriam since 2011. He began his career in 1995 in bond origination at Société Générale, moving a year later to Bayerische Landesbank as Head of Bonds and Derivatives. In 2003, he became a Senior Fund Manager at Candriam, and assumed his current responsibilities in 2011. Patrick holds a Master’s degree in Finance and in Financial Markets from Paris Dauphine University. He has been a CFA Charterholder since 2010.

Ankit Holds a Bachelors in Accounting & Economics and is a Fellow at ACCA and Institute of Chartered Accountants of India.

Paul Whelan Senior Fixed Income Manager Researcher Paul Whelan is a Senior Fixed Income Manager Researcher at Aon Hewitt. Paul is also a member of the Fixed Income Portfolio Construction Committee which is responsible for putting forward candidates for manager searches. Paul heads our UK Transition Management capabilities ensuring movement of client assets happens in a timely and cost effective manner. Paul joined Aon Hewitt in November 2012 after more than 10 years in asset management with Aviva Investors, Henderson and UBS. He has worked in the strategy setting and management of fixed income portfolios for his entire career managing a variety of long-only and absolute return mandates across the fixed income universe. Paul holds a 1st Class Honours degree in Economics from the University of Bath. Paul is a CFA charterholder.

Claire Cairney Senior Investment Research Consultant Claire Cairney is a senior investment research consultant with over 18 years’ pension and investment experience. Claire joined Hymans Robertson investment research team in 2006 and heads the enhanced income research team. Prior to joining Hymans Robertson Claire worked at Morgan Stanley Investment Bank in a risk management function and at Abbey National Asset Management as an equity dealer.

6

Roundtable

7

Bios Daniel Fox Senior Associate Daniel is a Senior Associate within the investment team at P-Solve conducting asset class research, manager selection and monitoring across Fixed Income and Alternative strategies. Current coverage includes high yield and private credit which feed in to allocation decisions for fiduciary portfolios and advisory services. Daniel joined P-Solve in January 2016, having begun his career in the investment management industry in 2011 as an Investment Analyst for Investment Solutions UK, a South African multi-manager, where he conducted equity fund research. Later, Daniel was part of Mobius Life as a senior member of the investment team responsible for portfolio management and leading investment research across a range of asset classes following the management buy-out from Investment Solutions UK. Daniel graduated with a BSc (Hons) Degree in Economics from the University of Nottingham and subsequently completed a MSc in Economics and Financial Economics from the same university. Daniel is a CFA charter holder.

Michael Kirkpatrick Senior Portfolio Manager - Managing Director Michael Kirkpatrick is Senior Portfolio Manager of the RidgeWorth Seix High Yield Fund and the RidgeWorth Seix High Income Fund, subadvised by Seix Investment Advisors LLC. He is Managing Director for Seix and is a member of the Seix Investment Policy Group, which determines firm-wide asset allocation policy. As Senior Portfolio Manager since 2007, Mike has lead portfolio management responsibilities for the RidgeWorth Seix High Yield Fund and the RidgeWorth Seix High Income Fund. Prior to joining the firm in 2002, Mike was a senior analyst with Oppenheimer Funds, Inc., covering the telecommunications and cable industries. He was previously vice president and co-head of research at BNY Capital Markets, Inc., where he held responsibility for the telecommunications and consumer related industries. Prior to that, he was at Mendham Capital Group as a managing partner in high yield research where he focused on consumer-related industries. Mike has worked in investment management since 1991. He earned a Master of Business Administration degree from Rutgers University and a Bachelor of Science degree in Civil Engineering from the University of Delaware School of Engineering.

Ian Aylward Investment Director – Head of Manager Research Ian Aylward joined the business in April 2016 from Aviva Investors where he had been the Head of Multi-Manager for 5 years. Previous experience includes almost a decade in manager research at Skandia and two years prior to that managing UK equity at Rothschild. Ian has worked overseas on two occasions – a year in each of Sydney and the Channel Islands. He has an MSc in Economics and Finance from Warwick University and is a member of both the CFA Institute and the Chartered Alternative Investment Association.

Jordan Sriharan Senior Investment Analyst Jordan joined Thomas Miller Investment in 2014 as a Senior Investment Analyst following the acquisition of BROADSTONE. He has responsibility for the fixed income strategies within the Thomas Miller Investment Managed Portfolio Service in addition to providing asset allocation guidance for the broader multi-asset strategies. Further responsibilities within Thomas Miller Investment include being a member of the Collectives Research team, working towards the selection and monitoring of the collective fund approved lists. In addition, he is a member of the Fixed Income research team providing analysis and contributing to the investment strategy and outlook for the asset class. Jordan began his career at Fidelity Investments before later moving to The Wellcome Trust, the world’s second largest endowment, investing across multiple asset classes. Prior to Thomas Miller Investment, he worked at Mercer where he provided investment advice and technical solutions to institutional clients and charities. Jordan is a CFA Charterholder. He studied Economics as an undergraduate at the University of Sheffield and as a postgraduate at City University London with a particular focus on macro-economic analysis.


8

Roundtable

9

Bios Nimisha Srivastava, CAIA Head of Research, EMEA Nimisha Srivastava, CAIA, is Head of Research, EMEA at Willis Towers Watson, overseeing and linking manager research efforts with consultants and European clients, and is a member of the Investment Executive Committee. She is also a senior member of the Credit research team, focused on alternative and illiquid credit, working across strategy, client portfolio construction and research efforts. Prior to joining WTW in 2014, Nimisha helped manage the credit portfolio for the Universities Superannuation Scheme, one of the largest pension schemes in the UK. Before moving to the UK, she was a senior member of the hedge fund and alternatives research team at Segal Rogerscasey, a US investment consultant focused on TaftHartley, Public and Corporate pension plans. She began her career at Deutsche Bank in Sales & Trading, working across hedge fund/structured products sales and advising institutional clients on hedge fund allocations. She has also worked with the KAUST Endowment helping to launch their hedge fund portfolio and was selected as one of ten 100 Women in Hedge Funds/CAIA Scholars in 2012. Nimisha graduated with honours from Carnegie Mellon University with a B.S. in Mathematical Sciences and holds an MBA from the MIT Sloan School of Management.

Investor Conference and Christmas Lunch - 29 November 2016 ‘Future-proof investing…mapping the way forward’

Agenda 8.30: Coffee and registration 8.50 - 13.00: Investor Conference with presentations from asset managers and guest speakers 13.00 - 15.00: Christmas Lunch

Brendan Maton Freelance Journalist A highly experienced financial journalist with an expansive network of contacts in the UK and across Europe. Brendan has written about pension schemes and national welfare systems from Finland to Greece for 18 years and understands the retirement savings industry in each European country. Brendan has interviewed EU commissioners and national ministers; central bankers; pension scheme heads; insurance chief executives; chief investment officers; actuaries; union officials; professional and lay trustees.He worked at Financial Times Business for eight years, finally as editor-in-chief of all international pensions titles. Brendan has spent the last ten years as a freelancer for a number of publications, including Financial Times, Responsible Investor, Nordic region pensions news and IPE. He is also Chief webcast host for IPE. Brendan has acted as conference chair for Financial News, the UK National Association of Pension Funds, Dutch Investment Professionals Association (VBA), Corestone, Insight Investment, Marcus Evans, Robeco Asset Management, Sustainable Asset Management (SAM), Towers Watson.

Details Date: Tuesday 29 November 2016 Venue: Painters’ Hall, 9 Little Trinity Lane, London EC4V 2AD If you would like to register, please email: [email protected]

How best to

10

11

invest in High Yield

The ECB is a trillion-dollar player. Its influence cannot be underestimated

High Yield debt has been one of those asset classes that has boomed since the Great Financial Crisis. From the beginning of 2009 to mid-2016 the US High Yield index has returned more than 13% annualised, with only one negative year. There are numerous reasons for this exceptionally high return (the long-run annualised return is 7.9%) but quantitative easing has played a major part. Central bankers have been mopping up lower-yielding government debt and so pushing pension funds and insurers towards lower-grade opportunities. This double trend looks set to continue as the ECB, the latest central bank to show appetite for quantitative easing, promises to buy not just more EU government debt but investment-grade corporate debt too. “The ECB is a trillion-dollar player. Its influence cannot be underestimated,” says Patrick Zeenni, deputy head of High Yield at Candriam. He points out that in Europe, yields on core countries’ government debt are currently negative, investment grade offers only around 1% real while high yield around 3-4%. Further ECB buying in the first two categories will leave High Yield even more attractive. Given the significant spread differential, it is no surprise when Zeenni tells the CAMRADATA roundtable that Candriam has been seeing a lot of new heads appearing at roadshows for High Yield issues. From the asset owner perspective, Claire Cairney, senior investment research consultant at Hymans Robertson, explained that UK defined benefit pension plans have been willing buyers of High Yield and other fixed income alternatives as they have been switching out of equities since 2009. “There is now much more exposure in the ‘growth’ or ‘risk’ portfolio of these investors to alternative types of fixed income. They give you stable income for lot less volatility than equities,” she said. The data on volatility - going back far further than quantitative easing or the Great Financial Crisis - endorse Cairney’s view. Over 24 years, the annualised return per unit of risk for US High Yield has been 0.9. For US large cap equities, the return per unit of risk has been 0.6 while for US small caps the figure is 0.5. Because of pension funds’ ongoing liabilities and deficits, the more efficient fixed income alternatives will stay in the portfolio, according to Cairney. “You don’t want to sell stable income.” Paul Whelan, senior fixed income manager researcher at AonHewitt, gave another slant on this story: “Historically it has been harder to pick out reputable dividend-payers in US equities when there is leverage involved,” he said. Ian Aylward, head of manager research at consultancy, Punter Southall Aspire, added that in the current environment not just higher-grade bonds but equities look relatively expensive. Cairney’s comment refers not just to High Yield but a whole suite of fixed income alternatives, including Collateralised Loan Obligations, commercial mortgages and direct lending. The long-term return per unit of risk for US Leveraged Loans, for example, is considerably higher than for High Yield – 1.1 versus 0.9. Other participants at the CAMRADATA roundtable are also in the hunt for alternatives. Just because a pension fund is unlikely to want to sell its holdings in High Yield does not necessarily mean it is going to add more. This brings us to the matter of timing. 1 Barclays Capital High Yield Credit Index; S&P500 Index: Russell 2000 Index. Calculations by SEIX Investment Advisors 2 Ibid

High Yield has had a great run in recent years, with returns since 2009 well above average and a bumper 2016 so far. Zeenni made a strong case for the relative unattractiveness of European govvies and Investment Grade given the current search for yield. But other CAMRADATA panellists were not convinced that now is the time to be adding more to High Yield. “If you were starting with an allocation of zero, then there is definitely a case for adding more,” said Jordan Sriharan, senior investment analyst at Thomas Miller Investment. “But if your exposure is already significant, then it should be risk off the table. From February to August we have had returns of 15-16%. We are seeing Multi-Asset Credit Strategies reducing their exposure to High Yield.” Sriharan emphasised that these comments were given through the lens of a dynamic asset allocator, with the perspective of three to six months. This is one of his functions at TMI. Ankit Shah, investment manager for Lloyds insurer, Antares Underwriting, said that he was looking at actively managed convertibles or EM debt as alternatives to High Yield. Nimisha Srivastava, head of research for Europe, Middle East and Africa at Willis Towers Watson said that High Yield had been great in previous years but since 2014 WTW had been shifting towards higher skill strategies, including long-short credit. “We have gravitated towards specialists. If we are comfortable with a managers’ process, then experiencing mark to market volatility relative to the index is fine.” While there is no imminent downturn expected, she noted that pension funds can take more than a year to alter their strategy and thus WTW has tried to move in advance of this, helping clients position for the future uncertainty in credit markets. The other portfolio manager at the table, Michael Kirkpatrick, senior portfolio manager of the Ridgeworth Seix High Yield Fund, although he voted in favour of more exposure to High Yield, noted that his strategy had reduced risk recently after a great second quarter.

We have gravitated towards specialists. If we are comfortable with a managers’ process, then experiencing mark to market volatility relative to the index is fine

13

12

Shah said that it was hard now to get an appropriate allocation to desired issues. “Even market-makers are struggling to get decent allocations. There is herding,” he said. Kirkpatrick replied Seix had had no problem buying cheap debt. He even suggested that in times of volatility, weak managers tended to become top-down, macro pundits instead of getting on with making good picks. This led on to a discussion about relationships with brokers. Srivastava said that WTW sifted managers on the strength of these relationships, given the importance of getting hold of desired stock at the right time and at a reasonable price. She added that the US market had more participants willing to take the other side of trades and give market liquidity. She reckoned for European High Yield this is more constrained, and fund managers need to have good relationships with the top 3-5 market makers. Zeenni disagreed, even though the Candriam global high yield fund is minimum 70% invested in US High Yield. He claimed that there were 10-15 important marketmakers in Europe beyond the banks that were competing for business and those marketmakers competed aggressively because they were not primary dealers. But the attacks on the European market were not finished. Sriharan said that he felt the European high yield market was more consensual given the smaller pool of issues, and if risk was the overriding sentiment, then the index was likely to fall accordingly. Srivastava linked this viewpoint to Zeenni’s comments on the dominant presence of the ECB. “We think European high yield right now is extremely macro-dependent,” she said. Sriharan, in support of the European market, said that his analysis of 30 active high yield managers in this class revealed a healthy dispersion of risk-adjusted returns. Zeenni added that one profound way to take risk out of the European market was to exclude financials, which Candriam believes have no place in high yield anyway. “The high yield market is linked to ‘pure’ corporates at the essence, where the drivers are achieved

Energy as a sector has bounded back this year, outperforming the index, but Kirkpatrick’s recollection is a reminder that managers cannot perfectly call an inflection point – they may buy before the pain and uncertainty are over.

“We have reduced bonds we believe exhibit a CCC risk profile that have hit our price target; and are adding to BB names. The best time to utilise risk budget in High Yield is during periods of dislocation, which we experienced earlier in the year. We are currently not seeing a tremendous amount of dislocation in the market.”

Selecting late-cycle managers Given current valuations, how best to invest in High Yield ‘late in the cycle’? For Kirkpatrick, the way forward is to select the right kind of manager, and to avoid short-cut solutions like buying a High Yield ETF or a very large fund. “Buying into a US$30bn fund is effectively buying an index fund,” he said. Kirkpatrick recollected that while the Ridgeworth Seix High Yield Fund has done well this year, the first quarter was not easy. “I would go home every weekend and do research, finding these amazing companies. We would take a position but by 10am Monday I would be tearing my hair out as the issues kept going down,” said Kirkpatrick. One such investment was Chesapeake, the energy explorer, which had been hovering near default and had to sell assets to generate liquidity. Seix bought low and is sitting on a tidy profit as the bonds now trade near 90 cents in the dollar. Another was Continental Resources, which Seix bought around 75 cents, after which the issue fell to the fifties before climbing back now to roughly par. Energy as a sector has bounded back this year, outperforming the index, but Kirkpatrick’s recollection is a reminder that managers cannot perfectly call an inflection point – they may buy before the pain and uncertainty are over. Sriharan said that several managers he spoke to had complained they could not get hold of names in energy, even during the darkest periods of the first quarter, and hence did not fully participate in the rebound.

Analysis of 30 active high yield managers in this class revealed a healthy dispersion of risk-adjusted returns

15

14

exposure to defaults was about 0.3% versus upwards of 4% for the index. He added that those numbers ultimately show through in performance.

US versus Europe This raised the question for consultants and manager selectors of whether they invest globally or by region. PSolve has a fiduciary offering as well as traditional investment advice for pension fund clients. PSolve has long been keen on High Yield and is currently invested in four US managers, including a specialist distressed manager, and one global manager. Fox said that P-Solve had been giving increasing attention to the European market and possibly would appoint a specialist European manager were asset allocation views to change. He commented on the increased demand global high yield appears to be seeing relative to solely US strategies, with many asset managers launching new global strategies, and then emphasised the importance of regional expertise as opposed to ‘bolting on’ European sleeves to existing US focussed products. Sriharan said Thomas Miller Investment uses two global and one European manager. He noted that one of the global managers focused on stock selection while the other looked to add additional alpha by portfolio construction. Shah thought High Yield was best addressed globally and he would prefer a global manager rather than regional specialists. Unlike the major consultancies represented, he did feel that High Yield merited an allocation on its own and a specialist manager rather than featuring as just a part of a larger multi-credit mandate. Neither Hymans Robertson nor AonHewitt use high yield managers much per se because most of their clients were in Multi-Asset Credit Strategies, wherein a manager was free to allocate up or down to high yield among other types of credit. Whelan reckoned in the last 24 months the firm had conducted 75 MAC searches versus one global high yield searches and five regional high yield search.

operational risks while on financials the drivers can be on political and regulatory issues,” he said. “They are not part of our benchmark; they came into the index in 2009,” he said.

It’s not necessarily the right thing to simply sell when the bonds hit a certain low price or credit rating,

Candriam also ensures a desired liquidity by including only issues of US$500m or above, thereby missing out on small caps, and not investing below CCC+. The strong sell discipline helps explain why the Candriam fund had never suffered a default since inception in 2003 while posting annualised returns of 5.7% net of fees. Moreover, Zeenni confided that the fund was heavily underweight oil issuance since oil was US$100 a barrel nor held any mining bonds during the same period. So an active conservative strategy optimizing risk reward, whose volatility over the last five years is less than half the benchmark and peer average. Whelan added that he did not have a stigma regarding defaults. “It’s not necessarily the right thing to simply sell when the bonds hit a certain low price or credit rating,” he said. “In some situations the subsequent recovery on the defaulted security may be above the purchase price.” Kirkpatrick outlined that indeed was the Seix approach and illustrated a number of examples in support of both CCC securities, but also defaulted securities that have come through that process to yield health returns for clients. Daniel Fox, a senior associate at PSolve, noted the importance of looking beyond default statistics, where managers can sell bonds at significant losses in the lead up to the official default, and asked the portfolio managers whether they gave prospects data on what they on defaulted issues as well as bonds sold at very low prices. Kirkpatrick replied that Seix’s Benchmark is BAML Global HY BB/B Constrained Index excluding Financials. Peer group is Morningstar: EAA OE Global High Yield Bond - EUR Hedged

Shah thought High Yield was best addressed globally and he would prefer a global manager rather than regional specialists.

17

16

None of the CAMRADATA panellists foresaw another European crisis. On the contrary, with regard to high yield, Aylward and Fox both noted the historic tendency of riskier bonds to do better in rising interest rate environments than those with higher duration – although Aylward noted that rate rises have a habit of getting pushed back by central banks. Kirkpatrick was also upbeat. He said that Seix tended to do well after a market dislocation or cleansing and he felt that 2015, like 2011 and 2008 had been one of those periods. He positioned the manager as one that could offer a full solution to companies because it took on leveraged loans as well as debt. Zeenni pointed out that Candriam’s expertise in the high yield markets had successfully navigated a broad spectrum of market environments since 1999, avoiding defaults thanks to its risk control, its strong legal review of covenants and its dynamic and flexible management around high convictions. Zeenni concluded that the best approach to deal with the current environment is a global “helicopter view” approach: optimizing performance between different geographical regions, markets and products.

High yield is viewed as just one option and the ability to rotate to specialists, for example towards sub-investment grade structured credit, is critical.

WTW shared this philosophy. Of the 75+ searches in alternative credit the consultancy carried out in 2015, the vast majority were for multi-credit mandates. Srivastava said high yield is viewed as just one option and the ability to rotate to specialists, for example towards sub-investment grade structured credit, is critical. Whelan explained that his focus was on Absolute Returns, typically targeting 3% above cash. This tended to complement Liability-Matching strategies AonHewitt clients had in place. He thus had little interest in the nature of high yield indices – he looked for unconstrained managers who could meet that 3% target.

The relevance of local factors Zeenni was then asked about the impact of the local economy on an issue. He noted that during the PIIGS crisis in Europe of 2011, there was no doubt that major issuers such as Telefonica were rendered vulnerable by their country’s fragility. “You were trading Spanish risk five years ago. Sovereign risk gets embedded into corporate debt because if Spain went bust, then Telefonica would suffer.” He noted that Candriam didn’t own PIIGS bonds but waited until the worst was over, which was signalled by the speech of Mario Draghi, ECB governor that it would do “whatever it takes” to support the euro. Candriam used CDS crossovers with an embedded exposure to peripheral markets to hedge their positions.

None of the CAMRADATA panellists foresaw another European crisis.

High Yield Markets: An attractive alternative in a low rate environment, a must have in a slow growth world At present, the slow trajectory of interest rate rises remains the most significant headwind for most fixed income categories, in particular the traditionally safehaven area of government bonds.

Whilst the overall macro picture remains uncertain, central banks have been very supportive for credit.

Whilst the overall macro picture remains uncertain, central banks have been very supportive for credit. Even if investors might argue that they are being forced down the risk curve, the attractiveness of high yield merits serious consideration for investors seeking out a combination of yield and potential appreciation over the long term. At Candriam, we strongly believe that actively-managed high yield strategies with a robust risk framework have a role to play in investors’ portfolios.

Why high yield? In the current environment, an allocation to high yield can potentially enhance the risk/ return characteristics of a portfolio on a number of levels. •

•

•

One key feature of the high yield market is that it is more resilient within a low growth macro environment without inflation, compared to equities or more secured bonds. As issuers are, on average, able to post positive free cash flow and deleverage, we expect default rates to remain below their long term average. The opportunity set is becoming broader and deeper. Whilst US corporate issuers still dominate the market, the European high yield segment has expanded significantly and is close to providing a distinct asset class in itself. An active global high yield strategy thus provides diversification in terms of geographical and political risks, in addition to sector and issuer levels. High yield is a versatile asset class. If an allocation were to be funded from equities, it has the capacity to enhance the efficiency of an investor’s growth-seeking portfolio by providing equity-type returns with lower volatility. Over 3 Years

Patrick Zeenni, CFA Deputy Head of High Yield & Credit Arbitrage Management

High yield is for active management High yield lends itself well to active management for a number of reasons, the most compelling being the significant idiosyncratic risks in high-yield bonds which requires thorough fundamental analysis to underpin the investment process. Currently the high yield market is split into two universes with distinct drivers: financial credits (driven by political, regulatory issues and negative rate burden) and corporate credits (driven by operational risks & leverage adequacy). To avoid specific financials risk, our strategy focuses only on pure corporate credit. In a low-growth environment, issuers with high leverage are sometimes unable to meet their debt repayments, and smaller companies struggle to maintain their pricing power. This creates dispersion around issuers’ quality and therefore opportunities for active managers. Well-honed bond selection skills are required to identify, capture and benefit from these opportunities as well as manage the risks involved. Our active management style has a strong track record of generating alpha while a typical passive approach would be significantly lagging behind.

Well ahead of ETFs over the past 5 years 50%

40%

21% Cumulative Performance CANDRAIM BONDS-GLB HIGH YIELD YLD-I-C ISHARES IBOXX H/Y CORP BOND

16%

30% 11% 20% 6% 10%

Over 5 Years

MSCI World

Global High Yield Index

MSCI World

Global High Yield Index

Annualized Return

4.30%

4.50%

5.20%

6.10%

Annualized Volatility

11.60%

6.50%

13.60%

7.73%

Written by

19

1%

0%

-4%

-10% Jun 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16

18

Source: Candriam Investors Group, Bloomberg. Data as of August 31st, 2016. The Index Global High Yield : BofA Merrill Lynch Global High Yield Index (HW00)

Source: Candriam, Bloomberg. Data as of August 31st, 2016. Past performance is no guarantee of future results and is not constant over time

•

Our portfolio management team is a pioneer in the high yield space. Our stable, integrated and experienced team of portfolio managers have worked together for over a decade and refined a philosophy and investment process that has successfully navigated a broad spectrum of market environments.

•

Within fixed income, high yield has traditionally exhibited low correlation to other fixed income categories. Historically, high yield has also performed well in periods of rising rates. Spread tightening and carry can potentially compensate for the slow rate and modest magnitudes of the rate rises. We view the high yield market today as a good carry opportunity for investors who look for yield and can withstand some volatility. Our base assumptions for the asset class are that its potential return is in the range of 4-6% p.a., with a volatility around 6% p.a.

Candriam Bonds Global High Yield : A multi-faceted process Candriam’s Global High Yield strategy is a high conviction, ‘pure corporate’1 strategy that seeks to give access the best of the global high yield market. We have a longterm track record of delivering strong performance with lower risk and drawdown than traditional benchmarks. 1 Excluding financials

Our stable, integrated and experienced team of portfolio managers have worked together for over a decade and refined a philosophy and investment process that has successfully navigated a broad spectrum of market environments.

20

21

21

12% 10%

CAMRADATA’s Assisted Searches

8.2% 7.2%

8%

5.5%

6%

Our investment philosophy is to build a convictiondriven portfolio with multiple return drivers, whilst mitigating default risks

5.9%

For institutional investors with very specific manager search requirements, we run assisted searches on their behalf. This service is free of charge for institutional investors.

4% 2% 0% -2& -4%

CAMRADATA Assisted Search added a new dimension to our tender process. We were able to narrow the field in terms of the service we were after and gain interest from a wide range of market participants. A bonus was the help we received in coordinating a presentation day and providing a central neutral location at which to meet.

-4.2%

-6% -8% -8.7%

-10% Perf. 5Y

Max drawdown (monthly data)

Peter Beaumont, Finance Director, Cornish Mutual Volatility

Source: Candriam and BAML Indices. Data as of August 31st, 2016. Benchmark: BAML Global High Yield BB/B constrained index, excluding financials. The investment process does not replicate the reference index which is mentioned for information purpose only. Past performance is no guarantee of future results and is not constant over time.

Our global coverage allows us to identify numerous opportunities in the two largest credit markets, the US and Europe, as well as in cross currency issuers (European issuers’ debt in USD and vice versa). Our investment philosophy is to build a conviction-driven portfolio with multiple return drivers, whilst mitigating default risks. As a consequence we favor companies with strong liquidity profiles and strong governance. We look closely at potential upgrade stories, deleveraging issuers, special situations (e.g. M&A, refinancings) and specific capital structure positioning (e.g. senior secured, hybrid corporates). We focus on finding niche and “best in class” players, such as high added value issuers with high barriers to entry.

Below highlights just some of the asset classes CAMRADATA Assisted Searches have covered over the past quarter:

Passive UK Government Fixed Income

Emerging Market Equities Euro Corporate Bond Funds Global Equities SRI

Emerging Market Small Cap Equities

Active UK Government Fixed Income

Our bottom-up screening helps us to identify “best-in class” issuers in each sector and niche players. Our analysis combines fundamental analysis with a close onthe-ground access to issuers and quantitative analysis to assess the cheapness or expensiveness of our issuers, combined with an in-depth legal analysis allowing us to assess covenant strengths rigorously.

If you would like us to carry out an assisted search, please contact us now

•

Macro filters and relative value analysis where we closely monitor the sovereign risk embedded in each issuer and optimize our sectors allocations as well as our EUR and USD markets exposures.

Tel: +44 (0)20 3327 5600 Email: [email protected]

•

Our final portfolio is constantly monitored with a strong sell discipline, triggered by both quantitative and qualitative filters. This sell discipline is essential: if a specific credit might deteriorate rapidly, or when issues become too expensive, we seek to find better relative value opportunities.

Subsequently our strategy has successfully avoided all defaults since inception, while demonstrating one of the strongest track-records in the peer group.

UK Equities SRI

Multi Sector Fixed Income

Our investment process is based around a traffic-light system across the bottom-up selection and monitoring of our positions, starting with liquidity filters: •

Fixed Income SRI

In Search of Yield


With their low correlation to much of the fixed income market, high yield bonds can add an important degree of diversification to a portfolio.

22

In the quest for sustainable income sources that can keep pace with inflation, investors have been confronted with a dilemma – in the low yield environment of recent years, traditional high quality bonds have not generated enough income to meet the near term requirements of retirement-minded individuals or the funding liabilities of institutions. For investors who can sustain some increased portfolio volatility, high yield bonds may offer three distinct benefits: 1. By paying a higher coupon than Treasuries and high grade corporate bonds, high yield bonds may offer a way to capture a more attractive level of income. However, they are more vulnerable to credit risk than higher quality bonds. These securities are rated below investment grade by at least one rating agency or are not rated at all. Still, as the current low yield environment has intensified, the advantages of at least some exposure to high yield investments may be beneficial to investors who can tolerate a higher level of short-term volatility.

Exhibit 1: High yield bonds have surpassed the yields and returns of other popular fixed income choices (1/1/06–6/30/16) High Yield Bond Intermediate Bond World Bond Intermediate Government Muni Intermediate

15 12 9

Total Returns 5.52% 4.26% 3.99% 3.75% 3.95%

6 3 0

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

23

3. A blend of high yield and high quality bonds may optimize a portfolio’s risk/return profile. When combined with other income asset classes in a diversified portfolio, high yield bonds may temper principal fluctuation and potentially enhance returns over the long term. In Exhibit 3, an allocation of 30% high yield bonds and 70% U.S. Treasuries offered substantially lower volatility than a hypothetical portfolio of U.S. Treasuries, with a slight increase in return. By including a lower quality, higher risk component with a higher quality position, risk is substantially lower than a 100% U.S. Treasury portfolio. Additionally, a blended portfolio of 65% high yield and 35% Treasuries delivered substantially less risk than a pure high yield portfolio, while maintaining a very competitive return. Located in the northwest quadrant of the chart, this blend demonstrated a particularly attractive level of portfolio efficiency.

Exhibit 3: High yield bonds may add a measure of performance efficiency to an income portfolio (6/30/96–6/30/16) 8.0 Annualised Total Return (%)

22

65% High Yield / 35% Treasury 100% High Yield

7.0 30% High Yield / 70% Treasury 100% Barclays 7-10 Year Treasury 6.0

6/30/16

4.0

Source: Morningstar, as of 30/6/16. Date pulled 24/8/16. Asset classes represented by Morningstar peer group categories. Past performance is not indicative of future results.

6.0

8.0

10.0

Annualised Standard Division Source: FactSet, as of 30/6/16. Date pulled 24/8/16. Past performance is not indicative of future results.

Written by Michael Kirkpatrick Senior Portfolio Manager Managing Director Seix Investment Advisors

2. High yield bonds may offer a valuable measure of non-correlation. Considered hybrid securities, high yield bonds share characteristics with both stocks and bonds. As corporate securities, their prices tend to track the behavior of the equity market even though they pay income like other fixed income vehicles. With their low correlation to much of the fixed income market, high yield bonds can add an important degree of diversification to a portfolio. In Exhibit 2, from 1/1/92 to 6/30/16, high yield bonds, represented by Barclays High Yield Index, demonstrated a negative correlation to all of the U.S. Treasury and U.S. Government indexes. Instead, high yield bonds correlated most closely with large and small capitalization stocks, followed by REITs and corporate bonds. While there is no guarantee, low correlation with the fixed income market may offer a potential cushion against price declines during a rising rate environment.

Exhibit 2: High yield bonds correlate more closely to stock market than other fixed income asset classes (1/1/92–6/30/16) Index

Barclays High Yield

Barclays Corporate

Barclays Aggregate

Barclays High Yield

1.00

Barclays U.S Corporate

0.54

1.00

Barclays Aggregate

0.22

0.88

1.00

Barclays Treasury

-0.09

0.68

0.93

1.00

Barclays Government

-0.06

0.70

0.94

1.00

1.00

S&P 500

0.61

0.25

0.04

-0.17

-0.15

1.00

Russell 2000

0.62

0.17

-0.06

-0.24

-0.23

0.80

1.00

REITs

0.59

0.34

0.17

0.00

0.00

0.54

0.62

Sources: Barclays, Standard & Poor’s, Russell, Bloomberg, as of 6/30/16

Barclays Treasury

Barclays Gov’t

S&P 500

Russell 2000

REITs

1.00

While high yield bonds have risks, they may offer advantages to investors who can tolerate a measure of portfolio volatility. •

While past performance is no guarantee of future results, high yield bonds have paid a higher coupon than Treasuries and high grade corporate bonds over the past five years.

•

High yield bonds may have less sensitivity to price declines than their higher credit quality counterparts during periods of rising interest rates.

•

High yield bonds may offer a valuable measure of non-correlation to a portfolio.

•

When combined with other income asset classes in a diversified portfolio, high yield bonds may help temper principal fluctuation and potentially enhance returns over the long term.

All investments involve risk. There is no guarantee a specific investment strategy will be successful. All information contained herein is based on information available at the time, is subject to change without notice, is for informational purposes only, and is not intended as individual or specific advice. It is not intended to be, and should not be construed as investment advice. Individual investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions. FOR UK INVESTORS For the purposes of distribution in the EEA, this financial promotion has been distributed by RidgeWorth International Ltd., which is an appointed representative of Mirabella Advisers LLP, which is authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of distribution to prospective investors in the UK, this document is only made available in circumstances in which the relevant investment can be promoted in compliance with applicable UK law and regulation. To the extent that the investment takes the form of interests in transferable securities, this document is distributed only to qualified investors, as defined in section 86(7) of the Financial Services and Markets Act 2000. To the extent that the investment takes the form of interests in an unregulated collective investment scheme, this document is distributed only to Professional Clients and Eligible Counterparties (as defined in the glossary of the FCA Handbook) and other persons to whom it may lawfully be communicated by an authorized person by virtue of the Financial Services and Markets Act (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 and COBS 4.12 in the FCA Handbook. FOR HONG KONG INVESTORS RidgeWorth Capital Management LLC does not carry on a business in a regulated activity in Hong Kong and is not licensed by the Securities and Futures Commission. FOR ALL OTHER INVESTORS This brochure was prepared for professional investors only. For the purposes of distribution to prospective investors, this document is only made available in circumstances in which the relevant investment can be promoted in compliance with the applicable jurisdiction’s law and regulation. ©2016 RidgeWorth Investments. All rights reserved. RidgeWorth Investments is the trade name for RidgeWorth Capital Management LLC, an investment adviser registered with the SEC. RidgeWorth International Ltd. is a wholly owned subsidiary of RidgeWorth Capital Management LLC. All third party marks are the property of their respective owners.

When combined with other income asset classes in a diversified portfolio, high yield bonds may temper principal fluctuation and potentially enhance returns over the long term.

Important Notice This document is produced by CAMRADATA Analytical Services Ltd (‘CAMRADATA’), a company registered in England & Wales with registration number 06651543. CAMRADATA is neither authorised nor regulated by the Financial Conduct Authority in the United Kingdom nor the Securities and Exchange Commission in the United States of America.

CAMRADATA 5th Floor, 80 Leadenhall Street, London, EC3A 3DH +44 (0)20 3327 5600 camradata.com

Join us on LinkedIn

Follow us on Twitter @camradata

This document is not intended to constitute an invitation or an inducement to engage in any investment activity. It is not intended to constitute investment advice and should not be relied upon as such. It is not intended and none of CAMRADATA, its holding companies or any of its or their associates (‘CAMRADATA Group’) shall have any liability whatsoever for (a) investment advice; (b) a recommendation to enter into any transaction or strategy; (c) advice that a transaction or strategy is suitable or appropriate; (d) the primary basis for any investment decision; (e) a representation, warranty, guarantee with respect to the legal, accounting, tax or other implications of any transaction or strategy; or (f) to cause the CAMRADATA Group to be an advisor or fiduciary of any recipient of this report or other third party. The content and graphical illustrations contained in this document are provided for information purposes and should not be relied upon to form any investment decisions or to predict future

performance. CAMRADATA recommends that recipients seek appropriate professional advice before making any investment decision. Although the information expressed is provided in good faith, the CAMRADATA Group does not represent, warrant or guarantee that such information is accurate, complete or appropriate for your purposes and none of them shall be responsible for or have any liability to you for losses or damages (whether consequential, incidental or otherwise) arising in any way for errors or omissions in, or the use of or reliance upon the information contained in this document. To the greatest extent permitted by law, we exclude all conditions and warranties that might otherwise be implied by law with respect to the document, whether by operation of law, statute or otherwise, including as to their accuracy, completeness or fitness for purpose. CAMRADATA Analytical Services and its logo are proprietary trademarks of CAMRADATA and are registered in the United Kingdom. Unauthorised copying of this document is prohibited. © Copyright CAMRADATA Analytical Services October 2016.