Embed Size (px)
Citation preview
Oddo AM Expertise
INTENDED SOLELY FOR PROFESSIONAL CLIENTS (MIFID)
Bond Investment
Strategies 2014: Give
me credit
!
Alain Krief, Gérant High Yield, Responsable
de la gestion Fixed Income
Alexander Eventon,
Gérant Senior Investment
Grade
Olivier Becker, Gérant-Analyste High Yield
2
Disclaimer
This document has been drawn up by Oddo Asset Management and is exclusively dedicated to professional clients (MIFID). It may not be circulated among the public. Potential investors are invited to consult an investment advisor before subscribing to the fund. However, should they decide to subscribe, investors undertake to consult the Key Investor Information Document (KIID) or the fund’s prospectus in order to acquaint themselves with the precise nature of any risks incurred, in particular the risk of capital loss. The value of the investment may vary both upwards and downwards and may not be returned in full. The investment must be made in accordance with investors’ investment objectives, their investment horizon and their capacity to deal with the risk arising from the transaction.Investors are reminded that past performance is not a reliable indication of future returns and is not constant over time. Any opinions presented in this document result from our market forecasts on the publication date. They are subject to change according to market conditions and Oddo AM shall not in any case be held contractually liable for them. The Key Investor Information Document (French, English) and the prospectus (French, English) are available free of charge from Oddo Asset Management or on its internet site www.oddoam.com. The annual and interim reports are available free of charge from Oddo Asset Management or on its internet site www.oddoam.com. The Fund is authorised for sale in France, Belgium, Italy and Luxemburg.
3
Olivier BeckerSenior Credit Analyst
Alex EventonSenior Portfolio Manager, Credit
Alain KriefSenior Manager, Head of Fixed Income Investments
Management team
4
Content
1.
CREDIT MARKET OVERVIEW
2.
Give
me High Yield
3.
Oddo Bonds High Yield
The opinions expressed in this document reflect our market expectations at the time of publication. They are liable to change depending on market conditions, and in no way represent a contractual liability on the part of Oddo AM
5
GIVE ME CREDIT The supply-demand equilibrium
Significant inflows for the credit asset class in 2013: European High Yield: €8.2bn of inflows in 2013 European Investment Grade: stable in 2013
Cumulative inflows in 2013 – European HY (€m)
Estimate of new issues in 2014: European High Yield: €60bn-80bn European Investment Grade: €500bn-600bn
Issuers are refinancing at lower rates
Investors are seeking out yield
Cumulative non-financial issues – European HY (€bn)
Source: Morgan Stanley. Data as of February 2014
2013: €75bn
Data as of February 2014
6
GIVE ME CREDIT Credit remains one of our strongest convictions for 2014, but managers must adapt
to a new environment
Via the portfolio management approach and fundamental research
Positioning in a rapidly evolving European HY universe
Investment Grade hedges for the High Yield marketHigh Yield diversification principles for Investment Grade
• European High Yield• Flexible Investment GradeValue remains in
7
75 76 100165
285
496
734
145 207
318
446
626
1173
1668
18 33 55 78147
254
390
0
200
400
600
800
1000
1200
1400
1600
1800
AAA AA A BBB BB B CCC
spre
ad
Eur - 31/01/2014
Eur - 31/12/2011
Eur - 31/12/2006
Credit curves Spreads and rates: where are we now?
Source: Oddo AM, Bloomberg. Data as of 31/01/2014
• Steep curves in times of crisis tend to flatten in phases of “normalisation”
• Interest rates are at all-time lows, but the yield curve remains very steep.
Value in credit, but beware a normalisation in risk-free rates!
Spread curves Yield curves
1.78 1.42 1.662.30
3.56
5.51
7.93
2.22 2.883.92
5.28
7.09
12.68
17.54
4.11 4.27 4.49 4.74
5.666.62
8.00
4.68 4.70 4.945.62
7.04
9.04
11.44
0
2
4
6
8
10
12
14
16
18
AAA AA A BBB BB B CCCYi
eld
(%)
Eur - 31/01/2014
Eur - 31/12/2011
Eur - 31/12/2006
Hypothèse Yield 2006 + spread 2014
8
Credit curves in Europe vs
US European credit has a shorter duration than US credit
Spread curves Yield curves
• Spreads rated B and CCC still offer more value in Europe than in the US
• US Investment Grade offers higher returns than European Investment Grade, but has a longer duration (6.4 vs 4.3)
• Duration is also longer in US High Yield (3.65 vs 2.9)
Source: Oddo AM, Bloomberg. Data as of 31/01/2014
9
Content
1.
Credit market
overview
2. GIVE ME HIGH YIELD
3.
Oddo Bonds High Yield
The opinions expressed in this document reflect our market expectations at the time of publication. They are liable to change depending on market conditions, and in no way represent a contractual liability on the part of Oddo AM
10
These securities are not investment recommendationsSource: Bloomberg. Data as of 31/01/2014
5Y: 4.3%
5Y: 3.6%
5Y:
4.7%
5Y: 3.2%
5Y: 2.5%
5Y: 2.4%
5Y: 2.9%
5Y: 2.6%
6Y:
4.0%
4Y:
2.3%
5Y:
3.4%
7Y: 3.7%
High Yield
issuersBetter-known but increasingly expensive names (all-time low interest rates)
11
Source: Unicredit. Data as of January 2014 Source: Morgan Stanley, Bloomberg. Data as of January 2014
Source: Moody’s, RBS. Data as of January 2014
Default rates low
Stable leverage, contrary to Investment Grade Maturities pushed back to around 2018
M&A activity still weak in Europe
High Yield market –
Sound fundamentals The current
market configuration bodes well for High Yield bonds
Source: Morgan Stanley, Bloomberg. Data as of January 2014
12
Independent researchBrokers and banks
Analysis of financial
statements
FUNDAMENTAL OPINION
Meetings with managers
Review of industry trends
Analysis of prospectus
Comparison with
competitors
Monitoring of newsflow
Modelling of financial
projections
Dashboard of sector
indicators
Initiation of coverage reports
Regular notes as a function of earnings statements
Fundamental analysis: methodology Reputed and market leading internal research
Oddo AM Credit Analysts
13
96
98
100
102
104
106
108
110
Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
• Exponential growth : 675 stores in 2013 vs 58 in 2007• +36% revenue growth CAGR between 2010 and 2012 including +13% like for like• During the period, EBITDA margin increased by 200bp to 17.5%, one of the
highest levels of profitability in the retail sector• Winning marketing positioning and state of the art IT/Logistics (6 weeks from
design to the store)• Conservative and experienced management (ex Comptoir des Cotonniers) in its
development strategy : testing a new market with a concession in a department store before opening a store
• KKR recently entered the capital to accelerate international growth (70% of openings in Q3 13 were abroad) together with the top management which invested €80m in the company
SMCP - B3/B - France – Specialised Distribution2020 - Coupon 8,875% - Yield 6,77%
Trading statement
Company EBITDA Margin 2012
GAP 13.4%H&M 21.1%Inditex 23.3%Levi’s 9.9%New Look 10.1%Quiksilver 7.0%SMCP 17.5%Takko 11.6%
Midcaps : The Oddo Expertise SMCP : The success story of French fashion
Company Profile2012
Revenues 350 M€EBITDA 61 M€Net debt 175 M€Leverage 2.9xFFO / ND 13.4%
ICR 4.7x
Q2 Earnings
Evolution of bond price
Past performance is not a reliable indication of future return and is not constant over time.These securities are not investment recommendations. Source: Oddo AM, Bloomberg. Data as of 31/01/2014
14
90
92
94
96
98
100
102
104
106
108
110
Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
• A very resilient business (services that relate to the function and/or operation of a building)
• Continued growth despite a challenging Italian macro environment (revenue CAGR of 13.5% between 2005 and 2012)
• Stability of EBITDA margin between 11% and 12%• Scope for gradual deleveraging thanks to asset-light model and decrease in DSO
(-18 days YTD in 2013)• High probability of an IPO before 2016• A very attractive bond in relative value terms compared to its French peers
MANUTENCOOP - B+/B - Italy - Services2020 - Coupon 8,50% - Yield 6,46%
H1 Earnings
Q3 Earnings
Midcaps
et Periphery
: The perfect cocktail Manutencoop
: Italien leader in Facility
Management
Company Profile2012
Revenues 1 073 M€EBITDA 114 M€Net debt 336 M€Leverage 3.4xFFO / ND 15.3%
ICR 5.5x
Spread vs leverage 2013e
480
500
520
540
560
580
600
620
640
660
680
3 3.5 4 4.5 5 5.5 6 6.5Leverage 2013e
Spr
ead
MANTEN 08/20 - B
LOXAM 01/20 - BB-
ATALIA 01/20 - B
CLAYAX 08/19 - CCC+
Evolution of bond price
Past performance is not a reliable indication of future return and is not constant over time.These securities are not investment recommendations. Source: Oddo AM, Bloomberg. Data as of 31/01/2014
15
OW - SALINI 18 – 6.125% / BB/BB- / 4.7% yield 1.25% of the portfolio, vs 0.22% of the benchmark
UW - LAFARGE 18 – 5.375% / Ba1/BB+ / 3.1% yield1.10% of the portfolio, vs 3.00% of the benchmark
OW - FTE Automotive 20 – 9.00% / B1/B / 5.4% yield0.94% of the portfolio, vs 0.15% of the benchmark
UW - RENAULT 18 – 3.625% / Ba1/BB+ / 2.6% yield1.49% of the portfolio, vs 1.81% of the benchmark
CONSTRUCTION
AUTOMOBILE
96
98
100
102
104
106
108
Jul.-13 Aug.-13 Sep.-13 Oct.-13 Nov.-13 Dec.-13 Jan.-14
SaliniLafarge
Benchmarked but conviction-based management Examples of intra-sector convictions
Past performance is not a reliable indication of future return and is not constant over time.These securities are not investment recommendations. Source: Oddo AM, Bloomberg. Data as of 31/01/2014
Evolution of bond prices
FTE AutomotiveRenault
16
30
40
50
60
70
80
90
100
110
Apr.-10 Jan.-11 Oct.-11 Jul.-12 Apr.-13 Jan.-14
Agreement with the banks and
new CEO
Profit warning
Announcement of debt restructuring
Survival of the company in doubt
First fruits of restructuring
Confirmation of the improvement
in trends
Return to the bond market
The importance of momentum High Yield bonds are alive!
Past performance is not a reliable indication of future return and is not constant over time.These securities are not investment recommendations. Source: Oddo AM, Bloomberg. Data as of 31/01/2014
THOMAS COOK – Evolution of bond price
17
96
97
98
99
100
101
102
103
104
105
106
Mar.-13
Apr.-13
May-13
Jun.-
13
Jul.-1
3
Aug.-1
3
Sep.-1
3
Oct.-13
Nov.-1
3
Dec.-1
3
Jan.-
14
Downgrade to HY by Moody’s
Downgrade to HY by S&P
Redemption of bonds by the company at
101
Very bad Q1 numbers
The importance of market specifics Performance is also influenced by market dynamics and bond specific features
Past performance is not a reliable indication of future return and is not constant over time.These securities are not investment recommendations. Source: Oddo AM, Bloomberg. Data as of 31/01/2014
TELECOM ITALIA HYBRID – Evolution of bond price
18
4.61
2.89 3.03
4.13
4.89
3.20
4.60
5.98
5.055.51
6.68
5.53 5.37
6.766.30
6.75
7.44
6.74
7.89
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
Royaume-Uni
Allemagne France Italie Espagne Portugal Etats-Unis
Yie
ld (%
)
BB B CCC
Portfolio construction Combination of Bottom up and Top down approaches
Source: Oddo AM, Bloomberg. Data as of 31/01/2014
Spain: Sovereigns vs non-fin Corps
Italy: Sovereigns vs non-fin Corps
For peripherals, correlations between Sovereigns and Corporates remain significant
Average performance of HY bonds by rating and country
BB-rated securities of peripheral countries and B-rated securities still offer value
BB-rated securities of core countries are too expensive
19
2.93 3.01
4.323.98
5.264.56
5.22 5.48
10.52
6.53
7.90
0
2
4
6
8
10
12
Basic Industry Automotive Telecom Media
Yie
ld (%
)
BB B CCC
Portfolio Construction Positioning in relation to the sector bias of the universe
Source: Oddo AM, Bloomberg. Data as of 31/01/2014
Average yields of HY bonds by sector
Value in BB- and B-rated debt in telecoms and media, and B-rated cyclical debt
Cyclical sectors are too expensive or too risky
Upon analysing ratings and sectors (4 sectors represent 60% of the European HY universe), two observations are apparent:
fallen angels represent a significant part of the Auto and Construction sectors, and drag down the average performance of these sectors
a top-down sector approach is difficult in some sectors, but helps guide our search for opportunities
20
Portfolio construction Positioning in terms of maturity
Source: Oddo AM, BofA Merrill Lynch. Data as of 31/01/2014
Low yield on short maturities
HY corporate curves by maturity
Value can be found in the 5-7 year segment thanks to the primary
market and the slope of the curve
Risk of higher rates on longer maturities
21
Portfolio construction Positioning attributable to current levels and the yield levels of long-term
Investment Grade credit
Source: Oddo AM, BofA Merrill Lynch, Bloomberg, Morgan Stanley Research, Markit iBoxx, The Yield Book. Data as of 31/01/2014
Short-term HY vs long-term IG
5-7 year and 7-10 year maturities are lagging behind shorter maturities
Non-financial HY spreads
Equivalent yields between short- term HY and long- term IG
22
Conclusion
In an increasingly complex and changing credit environment, innovation and flexibility are essential ingredients of management
Our approach is based on two complementary pillars:
Fundamental analysis of credit risk, which is in our DNA
Portfolio construction techniques, including those originating from the Investment Grade segment, that are now applied in High Yield
We recommend European High Yield in the current market configuration
23
Content
1.
Credit market
overview
2.
Give
Me High Yield
3.
Oddo Bonds High Yield
The opinions expressed in this document reflect our market expectations at the time of publication. They are liable to change depending on market conditions, and in no way represent a contractual liability on the part of Oddo AM
24
Fund’s ID
Source : Oddo AM. Data as of 01/15/2014.
Launching
Benchmark index
AuM (12/31/2013)Interest rate sensitivityActuarial rate (YTW)Actuarial rate (YTM)Spread (OAS) BBG Composite rating
January, 30th 2013
BofA ML BB-B European Currency Non-Financial High Yield Constrained Index EUR Hedged (HP4N)
99m€3.49%4.61%5.24%
332BB-
Key structural points
Technical data as of 01/15/2014
Oddo Bonds High Yield Europe
25
Bottom up
Fundamental analysis of issuers
Selection of securities within the investment universe
Qualitative and technical analysis of issuances
Market momentum on issuers
Top down
Identification of business and credit cycles
Evaluation of market and monetary policy conditions
Assessment of country risk to determine our allocation (geographic, sector, etc.)
1. Combination of a top down macro approach and bottom up selection of issuers
2. Portfolio construction : flexibility in allocation and global exposure
300 issuers 80 issuers
European HYOddo
Bonds High Yield Europe -
Investment philosophy
Active management of the bond class, with the objective of maximising opportunities and minimising risks
European corporate issuers with high yield ratings, mainly members of the OECD
Fundamental analysis of issuers/issues and relative value in relation to peers:
Net debt/EBITDA
Cash-flow generation…
Classification of issuers and definition of a list of recommendations combining fundamental analysis and market value determined by managers
Ongoing monitoring of this list: issuer or market events that could change the ranking
Credit analysis Investment universe
Oddo
Bonds High Yield Europe -
Our investment process Reliance above all on careful selection of issuers with the aim of reducing default risk
BOTTOM UP
Weekly management meeting:
Review of the most likely economic scenario
Review of strategies: main credit weightings by sector
Analysis of the macroeconomic
environment
TOP DOWN
Credit portfolio construction (roughly 100
holdings)
ONGOING MONITORING OF PORTFOLIO POSITIONS, RISK EXPOSURE LEVELS, PERFORMANCE REVIEW
Sector allocation
Geographic allocation
Sensitivity adjustment of the credit portfolio based on market conditions and risk constraints
Adjustment of the portfolio beta
Implementation of top down convictions
27
Risk of loss of capital : The Fund has no guarantee or safeguard, so initial capital invested might not be returned in full.
Discretionary management risk : This risk relates to the management style which is based on anticipating movements on the various markets. There is a risk that at any point in time the Fund would not be invested in the best performing markets or in the best performing assets. Fund performance therefore depends on the ability of the fund manager to anticipate movements in the market or in the securities. This risk may lead to a fall in net asset value and/or a loss of capital for the unit holder.
Credit risk : This is the risk of potential deterioration in the rating of an issuer or, in extreme cases, of default, which would have an adverse impact on the prices of the debt securities issued by that issuer and therefore on the net asset value of the Fund, which could lead to a loss of capital. The level of credit risk varies according to forecasts, maturities and the level of confidence in each issuer which might reduce the liquidity of any particular issuer and have an adverse impact on Fund net asset value, particularly in the case of the Fund liquidating its positions in a market with low transaction volumes.
Risk relating to investment in high yield speculative securities : This UCITS should be considered as partly speculative and is intended particularly for investors aware of the risks inherent in investment in securities with low or non-existent ratings and somewhat restricted liquidity. Use of high yield securities may therefore lead to a significant reduction in net asset value.
Interest rate risk : This is the risk that bond market yields may rise, which would result in a fall in bond prices, and consequently lead to a fall in Fund net asset value.
Risk
profile (1/3)
28
Convertible bond risk : Halfway between bonds and equities, convertible bonds present the peculiarity of introducing equity risk into a bond-type instrument which already carries credit risk and interest-rate risk. As volatility on equity markets is higher than that on bond markets, holding such instruments leads to an increase in portfolio risk. The value of convertible bonds depends on a number of factors: interest-rate levels, changes in prices of the underlying equities, changes in the price of the derivative embedded in the convertible bond. These various factors can lead to a fall in the UCITS net asset value.
Liquidity risk for underlying assets : Low liquidity in a market makes it sensitive to significant volumes of purchases and sales, which increases Fund volatility in respect of the assets that are traded or quoted on that market and can have an impact on the valuation of these assets and if applicable, on the price terms at which the Fund could liquidate its positions. Lack of liquidity arises particularly from [certain geographical characteristics (emerging markets)], [sectorial (small-and mid-caps, commodities)] or [certain types of securities in which the Fund may invest such as speculative (high yield) bonds]. Fund net asset value may fluctuate sharply downwards in such cases.
Counterparty risk : This is the risk of default by a counterparty leading to payment default. The Fund may be exposed to counterparty risk through using forward instruments negotiated over-the-counter with financial institutions. The Fund is therefore exposed to the risk that one of these credit institutions cannot honour its commitments in respect of these transactions.
Volatility risk : This risk relates to the propensity of an asset to fluctuate significantly upwards or downwards, either for reasons specific to it, or because of general movements in the markets. The greater the tendency of an asset to fluctuate sharply in the short-term, the more volatile it is said to be, and therefore the more risky. [Changes in the volatility of the underlying equity has a direct impact on the value of a convertible bond's conversion option. .A reduction in volatility can lead to a reduction in the price of convertible bonds and consequently to a diminution in Fund net asset value.]
Risk
profile (2/3)
29
Risk from holding small and mid capitalisation stocks : The Fund may be exposed to small and mid capitalisations. Upward and downward changes in these stocks can be both more marked and more rapid than for large capitalisations and can therefore lead to large fluctuations in net asset value. Moreover the restricted volume on these markets may present a liquidity risk. This type of investment may impact the valuation of the Fund and the price terms on which the Fund could liquidate its positions, and particularly, in the case of large redemptions, even make it impossible to sell them, with the consequent possible fall in Fund net asset value.
Secondary risks :
Emerging markets risk : This risk derives from the working and supervisory arrangements on emerging markets to which the Fund is exposed, which may deviate from the standards prevailing in major international markets and which may be subject to various types of disruption (such as changes in tax treatment, political stability and temporary lack of liquidity in these securities). These disruptions may lead to settlement/delivery problems likely to have an impact on price terms at which the Fund could liquidate its positions which could therefore lead to a sharp fall in Fund net asset value. [The Fund may be exposed to emerging markets risk in its entirety].
Exchange rate risk : This risk affects portfolios invested wholly or partly in securities denominated in foreign currencies, and arises from changes in the parities of these currencies by comparison to the fund reference currency. Thus, a security, the value of which in its own currency does not change, could nevertheless be affected by fluctuations in that currency against the Renminbi (currency of China’s Popular Republic, circulating outside of China) and might therefore cause Fund net asset value to fall.
Risk
profile (3/3)
30
Oddo Asset ManagementPortfolio management company constituted in the form of an SA (limited liability company) with share capital of €7,500,000.Accredited by the French financial markets authority (Autorité des Marchés Financiers) under visa number GP 99011. Registered on the Paris trade registry under number 340 902 857.12 boulevard de la Madeleine – 75440 Paris Cedex 09 France – Tél. : 33 (0)1 44 51 85 00. www.oddoam.com
Legal
notice
