BetaShares FTSE 100 ETF · ASX:F100
BetaShares FTSE 100 ETF — BetaShares Capital — Hybrids Webinar (December 2017)
37 slides from BetaShares FTSE 100 ETF's conference presentation, December 2017
Slide 1: Hybrids – Risks, pitfalls and opportunities
Hybrids – Risks, pitfalls and opportunities
Slide 2: Important Information
Important Information Licensed financial adviser use only. Not for distribution to retail clients. The information contained in this document is general information only and does not constitute personal financial advice. It does not take into account any person’s financial objectives, situation or n
Slide 3: Before we start…
Before we start… A recording of the session will be sent to all attendees Confidential – may not be distributed without the consent of BetaShares capital
Slide 4: Today’s presenters
Today’s presenters Chris Joye Peter Harper Co-CIO & Portfolio Manager, Director – Distribution & Head Of Coolabah Capital Institutional Investments Capital Markets, BetaShares Contributing Editor - AFR Formerly with: Macquarie Bank Formerly with: ABN AMRO Goldman Sachs UBS RBA UBS Conf
Slide 5: Contents
Contents The current valuation environment for hybrids: overheated or a buying opportunity? The challenges of directly investing into hybrids An introduction into BetaShares Active Australian Hybrids Fund (managed fund) Confidential – may not be distributed without the consent of BetaShares capital
Slide 6: Contents
Contents The current valuation environment for hybrids: overheated or a buying opportunity? The challenges of directly investing into hybrids An introduction into BetaShares Active Australian Hybrids Fund (managed fund) Confidential – may not be distributed without the consent of BetaShares capital
Slide 7: What are hybrids?
What are hybrids? Hybrid securities combine debt and equity characteristics Debt like characteristics: Equity like characteristics: Rank ahead of equity in capital Perpetual Instruments structure Issuer may suspend distributions Pay a regular and defined rate of (or not make them) and/or d
Slide 8: Australian Hybrids offer a compelling risk/return profile
Australian Hybrids offer a compelling risk/return profile Asset Class Returns & Risk: From 14 February 2012 to 29 September 2017 Asset Return Yield Volatility Risk Sharpe Ratio** Max Period Adjusted Drawdown Return* Global Shares (MSCI World - 16.84% 2.39% 11.39% 1.48 1.27 -14.26% Feb-16 unhedged) A
Slide 9: Current valuations for hybrids appear reasonable
Current valuations for hybrids appear reasonable HBRD’s mandate keeps valuations front and centre 8.00% 7.00% Average Major Bank AT1 Trading Margin (>1 Year) 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Source: BondAdvisor. Past performance is not an ind
Slide 10: Contents
Contents The current valuation environment for hybrids: overheated or a buying opportunity? The challenges of directly investing into hybrids An introduction into BetaShares Active Australian Hybrids Fund (managed fund) Confidential – may not be distributed without the consent of BetaShares capital
Slide 11: Navigating Hybrids…
Navigating Hybrids… Whilst hybrids can offer attractive risk adjusted returns to portfolios, for many investors and their advisers they present some difficulties, such as: The hybrids market is relatively inefficient and thus prone to regular over and under valuation – some investors may not have
Slide 12: Overall hybrids have low volatility, but can experience declines in risk-on events
Overall hybrids have low volatility, but can experience declines in risk-on events 0% -10% -20% -30% -40% Australian hybrids Australian major bank stocks Australian corporate fixed-rate bonds -50% Australian bank floating rate bonds -60% Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Source: Bloomberg. I
Slide 13: Hybrids – can’t just set and forget…
Hybrids – can’t just set and forget… Trading Margins – Crown Subordinated Notes: May 2015-November 2017 CWNHA CWNHB 16% 14% 12% Trading Margin 10% 8% 6% 4% 2% 0% May 2015 Sep 2015 Jan 2016 May 2016 Sep 2016 Jan 2017 May 2017 Sep 2017 Source: Morningstar Confidential – may not be distributed without
Slide 14: Not all hybrids are created equal…
Not all hybrids are created equal… Source: Morningstar Confidential – may not be distributed without the consent of BetaShares Capital
Slide 15: Hybrids market is relatively illiquid – professional investors have an advantage
Hybrids market is relatively illiquid – professional investors have an advantage Bid-Offer Spread of Commonwealth Bank Equity and Hybrids Source: Morningstar Confidential – may not be distributed without the consent of BetaShares Capital
Slide 16: Contents
Contents The current valuation environment for hybrids: overheated or a buying opportunity? The challenges of directly investing into hybrids An introduction into BetaShares Active Australian Hybrids Fund (managed fund) Confidential – may not be distributed without the consent of BetaShares capital
Slide 17: The potential problems…
The potential problems… The hybrids market is relatively inefficient and thus prone to regular over and under valuation – some investors may not have the ability to accurately price these securities Most investors’ hybrid holdings tend to be relatively passive creating the potential for risks to
Slide 18: A potential solution?
A potential solution? We believe many of the complexities of holding hybrids can be largely addressed via the use of an actively managed hybrids exposure run by an experienced professional manager: A professional manager may have valuation models allowing them to detect and potentially profit from
Slide 19: BetaShares Active Australian Hybrids Fund (managed fund) (ASX: HBRD)
BetaShares Active Australian Hybrids Fund (managed fund) (ASX: HBRD) Confidential – may not be distributed without the consent of BetaShares Capital
Slide 20: BetaShares Active Australian Hybrids Fund
BetaShares Active Australian Hybrids Fund Product Name: BetaShares Active Australian Hybrids Fund (managed fund) Investment The Fund provides investors with a convenient way to access attractive income returns, including Objective franking credits, from an actively managed, diversified portfolio of
Slide 21: Investment Strategy for HBRD (I)
Investment Strategy for HBRD (I) HBRD will target: • Returns after fees that are greater than Australian Hybrids Index(1) • Post-fee returns > RBA cash rate + 2.5% pa over medium term • Post-fee, franked running yield generally similar to Australian Hybrids Index(1) • Post-fee volatility of 3-4% p.a
Slide 22: Investment Strategy for HBRD (II)
Investment Strategy for HBRD (II) Fund will adopt a hub-spoke strategy Core holdings will be ASX hybrids during normal conditions to meet post-fee yield targets Cash Augmented by cash, bonds and sub-debt Expecting to hold 20-50 positions across cash, bonds, hybrids ASX Actual portfolio weights will
Slide 23: Investment Strategy for HBRD (III)
Investment Strategy for HBRD (III) Deliberate flexibility to range up/down corporate capital • Senior secured covered bonds (Debt) structure depending on assessed opportunities Cannot hold ordinary • Cash deposits (Debt) shares/equities Approach assists in preserving capital when core hybrid holding
Slide 24: About HBRD’s Investment Manager - CCI
About HBRD’s Investment Manager - CCI HBRD is actively managed by Coolabah Capital Institutional Investments (“CCI”), a leading independent Australian active-fixed income specialist CCI is a specialist “active credit” investor with ~$2bn in FUM, and one Australia’s largest fixed-income boutiques • E
Slide 25: HBRD’s investment manager has shown evidence of alpha generation in the hybrids market
HBRD’s investment manager has shown evidence of alpha generation in the hybrids market Hybrids Mandate vs Index Source: CCI. Past performance is not an indicator of future performance. Mandate shown differs from the HBRD investment strategy. Illustrative only. Confidential – may not be distributed w
Slide 26: CCI Execution Alpha
CCI Execution Alpha (Excluding Post Day 1 Alpha) Past performance is not indicative of future performance. Confidential – may not be distributed without the consent of BetaShares Capital
Slide 27: Trade-by-Trade Analysis: > 97% Win Ratio
Trade-by-Trade Analysis: > 97% Win Ratio Source: CCI. Past performance is not an indicator of future performance. Confidential – may not be distributed without the consent of BetaShares Capital
Slide 28: 2016 Case Study 1: High IRRs from Hybrid Assets
2016 Case Study 1: High IRRs from Hybrid Assets Source: CCI. Past performance is not an indicator of future performance. Confidential – may not be distributed without the consent of BetaShares Capital
Slide 29: 2016 Case Study 2: High IRRs from Hybrid Assets
2016 Case Study 2: High IRRs from Hybrid Assets Source: CCI. Past performance is not an indicator of future performance. Confidential – may not be distributed without the consent of BetaShares Capital
Slide 30: Active Asset-Allocation Across Cash/FRNs/Hybrids
Active Asset-Allocation Across Cash/FRNs/Hybrids Cycles Portfolio Weight to Cash from <20% to >80% as Function of Active Asset Opportunity Set Confidential – may not be distributed without the consent of BetaShares Capital
Slide 31: Quant. and Qual. Asset-Selection Process: 12+ Models
Quant. and Qual. Asset-Selection Process: 12+ Models Investment & Governance Mandate (IGM) Rules Phase 1 • Detailed portfolio limits/targets • Approved/reviewed by Board Top-Down Quant Valuation Bottom-Up Quant Valuation Quant Credit Rating Model Traditional Credit Analysis Models Models • Use data
Slide 32: Top-Down Quant Valuation Framework: AT1s
Top-Down Quant Valuation Framework: AT1s Illustration only. Confidential – may not be distributed without the consent of BetaShares Capital
Slide 33: Bottom-Up Quant Valuation Framework
Bottom-Up Quant Valuation Framework Use several analytical Merton models to estimate fundamentals-based (market- inefficient): Probability of issuer defaulting Loss given default Required fair value credit spreads RBA recently adopted Merton model to measure corporate credit stress Can measure real-
Slide 34: Bottom-Up Quant Valuation Framework: Senior, T2, AT1
Bottom-Up Quant Valuation Framework: Senior, T2, AT1 Illustration only. Confidential – may not be distributed without the consent of BetaShares Capital
Slide 35: Re-cap: Why HBRD
Re-cap: Why HBRD We believe the hybrids market is well suited to active management for the following reasons: 1. Potential for alpha generation in a relatively inefficient market 2. Potential to mitigate : Risks to capital arising from exposure to overvalued securities Risks to capital as a resu
Slide 36: Things to keep in mind
Things to keep in mind Investment risk: Investment returns are uncertain and will be influenced by the performance of the markets as a whole and other risks. Income payments are variable. If interest rates fall, HBRD’s income payments can be expected to fall. Hybrids are, by their nature, pred
Slide 37: Stay informed
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