Schroders PLC · LSE:SDR
Schroders — Investor Presentation (December 2010)
35 slides from Schroders's investor presentation, Dec 6, 2010
Slide 1: Global High Yield
Global High Yield The outlook for the asset class still outshines other alternatives 6 December 2010 Wesley Sparks, CFA Head of US Fixed Income Fund Manager, Schroder ISF Global High Yield For professional investors or advisers only Schroder International Selection Fund is referred to as Schroder IS
Slide 2: That was then…
That was then… A reminder of our forecast last year at this time Our projection for 2010 total returns in High Yield… “For 2010, we estimate that the total return of the global high yield index will be in the low double-digit range, perhaps 12-13%, based on coupon income of approximately 8.8% plus a
Slide 3: …and this is now… but our outlook for 2011 is similar
…and this is now… but our outlook for 2011 is similar Our forecast for 2011 returns was published two weeks ago Our projection for 2011 total returns in High Yield… “… we remain very positive on the asset class on a 12-month view. In relative terms, we expect to see global high yield outperform all
Slide 4: Outlook for the Global High Yield market
Outlook for the Global High Yield market There’s a lot going for the asset class
Slide 5: Key points to our positive outlook for the high yield sector
Key points to our positive outlook for the high yield sector The rally in High Yield is likely to continue into 2011...but with periodic volatility Credit fundamentals are improving, but the macro backdrop will keep the Fed supportive – Economic data point to slow growth, but not a double-dip – Cred
Slide 6: High Yield bond returns are good so far in 2010
High Yield bond returns are good so far in 2010 Despite the solid rally this year, current yields should provide good prospective returns 2010 YTD total return (in %) Yield (in %) 25 20 23.17 20 15.17 GHY Index* = +13.08% 15 14.38 GHY Index* = 8.03% 15 13.66 10.92 13.36 12.80 13.07 11.91 10 8.56 7.6
Slide 7: It's a low-yield world out there
It’s a low-yield world out there So where’s an investor to go? In this environment, most roads lead to high yield bonds Yield1 (in %) 10 8.56 7.90 8 6 5.61 4.24 4.25 4 3.37 3.62 1.43 1.83 1.96 2 1.55 0.17 0.30 0 3-month 3-month US Agencies ABS MBS CMBS US Inv US High EUR/GBP Emerging Euro S&P 500 T-
Slide 8: Key issues confronting investors
Key issues confronting investors Risk markets became weighed down again in mid-November by some familiar concerns Potential positive catalysts – Fiscal stimulus package (i.e. corporate tax cuts for capex spending, tax amnesty for corporate Near-term negative risks profits at foreign subsidiaries) –
Slide 9: Periodic corrections can be expected, but a bear market is unlikely
Periodic corrections can be expected, but a bear market is unlikely Keep some exposure now, but be prepared to add more on weakness Global High Yield index valuations over the past six years Yield (in %) Spread (in bps) 24 2000 22 1800 20 1600 18 Bank 1400 losses Eurozone & sovereign 16 recession fu
Slide 10: Credit Cycle
It’s important to know what time it is on the credit cycle clock The “repair” and “recovery” phases of the credit cycle are good for high yield investors Downturn (2008-Q1’09) Repair (2002-2003, 2009-2010) both equity and credit down credit better than equity economic slowdown; rising volatility; ba
Slide 11: A virtuous investment cycle is likely to emerge in 2011
A virtuous investment cycle is likely to emerge in 2011 Capital markets transactions are going to have a positive impact on High Yield The M&A cycle is still in the early stages of an upswing Number of deals > $1 billion The implications are positive for small High Yield companies, as larger compani
Slide 12: Economic data point to a "muddle along," not double-dip
Economic data point to a “muddle along,” not double-dip Most economic indicators improved materially in 2009 but stagnated by mid-2010 Purchasing managers surveys Initial jobless claims, (in 000s) 65 700 60 US unemployment 600 55 remains a key headwind 50 500 45 400 40 300 35 30 200 2004 2005 2006 2
Slide 13: Fundamental credit metrics have improved in recent quarters
Fundamental credit metrics have improved in recent quarters Trends on both the top line and bottom line are good High Yield universe – Revenues High Yield universe – EBITDA (year-over-year % change) (year-over-year % change) 20 50 40 15 30 10 20 5 10 0 0 -10 -5 -20 -10 -30 -15 -40 -20 -50 Mar-07 Sep
Slide 14: Fundamental credit metrics have improved in recent quarters
Fundamental credit metrics have improved in recent quarters Leverage has fallen while cash flow coverage of fixed charges has increased High Yield universe – Net Leverage High Yield universe – Interest Coverage (Net Debt / LTM EBITDA, x) (LTM EBITDA / Net LTM Interest Expense, x) 4.4 4.0 3.8 4.2 avg
Slide 15: Fundamentals … one trend that warrants caution
Fundamentals … one trend that warrants caution Actual debt reduction is still slow to happen High Yield universe – change in total debt (year-over-year % change) 25 20 15 10 5 0 -5 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Note: D
Slide 16: Default risk continues to decline
Default risk continues to decline Since banks are no longer tightening lending standards, the default rate is falling fast Default rate (%) Banks tightening lending standards (%) Trailing 12-month Default Rates 18 100 Global 3.7% 16 80 U.S. 3.6% 14 Europe 2.8% 60 12 40 Moody’s global high yield defa
Slide 17: Few companies are defaulting each month now
Few companies are defaulting each month now We expect a benign default environment of only 4-5 defaults globally per month to persist Global high yield defaults – actual monthly default count Number of issuers 50 45 44 in Mar’09 40 The peak wave of defaults 35 occurred during the 6-month 30 period o
Slide 18: Trends in ratings changes are improving now
Trends in ratings changes are improving now The ratio of upgrades to downgrades improved in the second half of 2009 and in 2010 Ratio of upgrades versus downgrades (by high yield issuer count on an LTM basis) # of # of Upgrades Downgrades 1.8 Last 12-months through 30 November 2010: 1.5 Q1’09 25 283
Slide 19: Periods of mutual fund outflows typically coincide with corrections
Periods of mutual fund outflows typically coincide with corrections While mutual funds comprise only 15-20% of the high yield market, fund flows do matter High yield mutual fund flows – weekly reporters 2009 & 2010 YTD (US $ millions) 2,000 1,500 1,000 500 0 -500 -1,000 -1,500 -2,000 7-Jan-09 28-Jan
Slide 20: Mutual fund flows…can provide good signals of overall demand
Mutual fund flows…can provide good signals of overall demand YTD net fund flows are only modestly positive for HY, but are very big in lev-loans & EMG Mutual fund net flows – various asset classes 2010 YTD listed in order of YTD % change (US $ millions) – beware of “bubbles” – probably a lot more to
Slide 21: New issue volume – heavy supply hasn't overwhelmed demand
New issue volume – heavy supply hasn’t overwhelmed demand Supply increased materially in recent months, but more than 60% was for refinancing Monthly high yield supply (US$ billions) Record pace of monthly supply: 6 of past 9 months have been > $30bn 45 40 41 35 High yield financing market was 36 34
Slide 22: Use of proceeds from High Yield new issues is key to monitor
Use of proceeds from High Yield new issues is key to monitor Most new issues are for refinancings while aggressive issuance remains modest Refinancing debt as a % of total supply M&A, LBO, and dividends as a % of total supply (New issues to refinance debt as a % of total High Yield issuance, in %) (
Slide 23: High Yield issuers have been refinancing distant debt maturities
High Yield issuers have been refinancing distant debt maturities Heaviest maturities are after 2011, with a mountain of bank loans coming due in 2013-14 US high yield debt maturities by year Change in maturity schedule over past 2 years (US$ billions) (US$ billions) 400 300 245 354 250 350 potential
Slide 24: High Yield new issue composition
High Yield new issue composition Senior secured issues comprise a growing portion of the high yield index New issue quality distribution New issue seniority distribution 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 1977 1980 1983 1986 19
Slide 25: Expected return
Expected return A basic guide on how to estimate the potential total return Total Return = Yield plus Capital Gain Yield-to-Worst = 8.03% (compare to US Treasury Index @ 1.55%!) Current Yield = 8.27% [ 8.17% avg. coupon / $98.72 avg. price of bonds in the index ] Capital Gain = – yield change x dura
Slide 26: High Yield market valuations
High Yield market valuations The High Yield index spent 3-1/2 years at or below current yields during 2004-2007 High Yield market yield YTW (%) 24 20 16 12 8 4 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 200
Slide 27: High Yield market valuations
High Yield market valuations On a spread basis, the High Yield market looks quite attractive versus historical levels High Yield market spreads Spread (bp) 2400 spread at Nov 30th = +608 bp 2000 1600 1200 average since 1994 = +522 bp 800 400 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 Note: “Spre
Slide 28: Why high yield bonds?
Why high yield bonds? The High Yield asset class is compelling for several reasons – Diversification – low correlation with other bond sectors and with stocks... improves portfolio efficiency – Opportunity – the repair & recovery phases of the credit cycle are a good time to be in high yield bonds –
Slide 29: Schroder ISF Global High Yield: Portfolio positioning
Schroder ISF Global High Yield Portfolio positioning
Slide 30: Portfolio positioning
Portfolio positioning Current investment themes – Stable cash flow credits – Issuers in the wirelines, consumer products, food & beverage, and pipelines sectors – De-leveraging stories – Companies paying down debt after recent acquisitions, such as Reynolds Group – LBOs where the management team’s f
Slide 31: Portfolio positioning
Portfolio positioning What we have been doing recently – Increased exposure to credits that will fare well in a slow growth environment – Added new issues and other top credit picks of bonds with yields in the 7.5% – 10% range – Added positions in the wirelines, consumer products and food & beverage
Slide 32: Key exposures vs. benchmark
Key exposures vs. benchmark Portfolio characteristics as of 30 November 2010 Summary stats Portfolio* Benchmark* Portfolio risk stats OAS +608 bp +611 bp Beta 1.10x Yield-to-Worst 8.14% 8.02% TEV (annualized) 176 bps Avg. Coupon 8.52% 8.17% Total net assets $4,602 mn Duration 4.58 yrs 4.30 yrs Curre
Slide 33: Key exposures vs. benchmark
Key exposures vs. benchmark Credit quality breakdown as of 30 November 2010 we continue to prefer the yield pick-up of Bs Market value exposure by credit rating over many BBs, and a slight overweight in (in %) CCCs reflecting recent new issues and exposure to upgrade candidates 70 60 53.1 50 44.4 40
Slide 34: Key exposures vs. benchmark
Key exposures vs. benchmark Sector breakdown as of 30 November 2010 Market value exposure by sector (in %) Overweight the pipeline sector due to Communications is our largest sector overweight stable cash flow profile 25 19.9 20 18.4 17.1 Within financials, we prefer Insurance over Banking 15.8 15 1
Slide 35: Important information
Important information The views and opinions contained herein are those of Wes Sparks, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. Risk Warnings: Investments in debt securities are primarily subject to interest rate, credit a