Aviva investors global credit absolute return (gcar) may 2013 montreux complied

AVIVA INVESTORS

May 2013

This document is for professional clients and/or qualified investors only. The content is not to be viewed by or used with retail investors or pension scheme members.

GLOBAL CREDIT ABSOLUTE RETURN (GCAR) STRATEGY CITYWIRE EVENT - MONTREUX

Mark Wauton

AGENDA

– Why Credit Absolute Return?

– Investment Philosophy & Process

– Performance & Positioning

– Appendix

WHY CREDIT ABSOLUTE RETURN?

Global Credit Absolute Return

– Global fixed income investors face historically low absolute yields

– A global high yield focused strategy delivers incremental yield and less rate sensitivity

– Active hedging reduces volatility and minimizes downside during periods of market stress

– True global diversification and dynamic geographic exposure management expands the credit opportunity set

– Ability to deliver high returns with very attractive Sharpe ratios

3 Credit lends itself well to absolute return strategies

– Strong technicals continue to be supportive of credit due to net negative primary issuance, and continued inflows into the asset class

– Liquidity has been hampered due to regulatory change with dealers holding less inventory which will be a continued trend

– Despite the recent spread tightening credit spreads over a period of 50years have traded tighter to treasuries

THE ABSOLUTE RETURN CREDIT OPPORTUNITY - VALUATION


4 Source: Bloomberg, Federal Reserve Bank of New York, Moody’s, S&P, Citigroup Fixed Income Indices, Morgan Stanley Research: “What We’re Watching”, 15 April 2013.

0

100

200

300

400

500

600

700

1925 1935 1945 1955 1965 1975 1985 1995 2005

Spread (bps)

Average

US BBB Credit Spread to Treasury

Primary Dealer Holdings of Corporate Bonds

– High levels of cash that still reside on corporate balance sheets have reduced leverage from the pre-crisis levels.

– In addition projected default rates remain low

THE ABSOLUTE RETURN CREDIT OPPORTUNITY - FUNDAMENTALS


5 Note (1st Graph): Implied defaults calculated using 35 % recovery rate. Historic defaults calculated using Moody’s default data since 1970 and current index ratings composition. Source: Bloomberg, Moody’s, Company Data, Morgan Stanley Research: “What We’re Watching”, 15 April 2013.

Net Leverage

1.0 x

1.5 x

2.0 x

2.5 x

3.0 x

3.5 x

4.0 x

Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

HY

IG

Credit vs. Historical Loss Rates

OUR EDGE


6

Global team with 9+ years

experience working together

on absolute return strategies

Minimize downside

by dynamically

hedging market,

sector and name

specific risk

Focus on issuers

with larger capital

structures to

maintain investment

flexibility

Active exposure

management based

on identified stop-

loss and target

levels and

quantitative inputs

Diligent

fundamental

research with an

extensive

quantitative

overlay

People

Deep Analysis

Active Hedging

Liquidity

Dynamic Trading

α

INVESTMENT FOCUS

7


CMBS/RMBS

Collateralized Debt

Obligations

Credit

Indices

Sovereign

Bonds

IG Corps

(Bonds, CDS)

Financials

(Bonds, CDS)

HIGH YIELD

(Bonds, CDS)

Stressed

Credits

High

Liquidity

Risk - Low

Risk - High

Hybrid

Bonds

Distressed

Credits

Peripheral Corps

(Bonds, CDS)

Equities –

Cash, Options

Equity

Index

Options

Peripheral

Sovereigns

Our investment strategy is high yield centric and invests mainly in liquid senior and secured issues of

companies in the US and Europe

Reorg

Equity

Credit

Index

Options

Low

Liquidity

INVESTMENT STYLE


8

70 60

FUNDAMENTALS TECHNICALS

LONG TERM SHORT TERM 40 80

TOP DOWN BOTTOM UP 70 60

TEAM INDIVIDUAL

70 30

MOMENTUM VOLATILITY 65 70

TRADING BUY & HOLD 80 20

Our range

Current

INVESTMENT PROCESS SIX STEPS

9


Step One Step Two Step Five Step Four

Cycle

analysis

Beta

positioning

Sizing

Timing

Scaling

Execution Ongoing

Risk

Management

Step Six

Alpha

Appraisal

Step Three

Constant Research & Development

STEP 1: TOP DOWN CYCLE ANALYSIS

– Reduce long bias

– Increase market hedges primarily via indices

– Reduce beta of longs

– Market neutral to net short bias

– Maintain index hedges

– Add single name and thematic sector basket hedges

– Increase net long position

– Reduce index hedges

– Take profit / unwind single name CDSs

– Increase beta of longs

– Long bias

– Strategic carry trades plus event driven tactical trades

– Selective tactical shorts

– Capital structure hedging Rising VolatilitySteady Volatility

Declining

Volatility

Market Stress

How do we identify the volatility regime we are in?

Qualitative perspective: We look at de-leveraging within the financial sector, sovereign/ banking sector solvency and assessment of traditional default cycle.

Quantitative perspective: We look at market correlation of risk assets and we use quantitative models that help us identify mean reversion vs. momentum

10


“Due to the inherent leverage in the developed world’s financial system, the medium to long-term will be defined by shorter exaggerated spread volatility cycles embedded within the longer traditional credit default cycle. These spikes in volatility will often erode capital without a corresponding rise in defaults thereby placing a premium on quantitative analysis, skillful trading and beta management techniques to complement sound fundamental analysis.”

1 2 3 4 5 6

STEP 2: BETA POSITIONING

Strategic Holdings Tactical Holdings Indices

Investment

Characteristics

Higher quality, lower

volatility, stable to

improving credit profile,

generally secured or

senior

Higher volatility, special

situation names with a

substantial value gap and

identified catalysts

Broad market indices

consistent with market

volatility

Primary

Objective

Carry Capital Return Carry / Capital Return

Ratings BB/B, Investment Grade BB-CCC, Investment Grade

Direction Long Long + Short Long + Short

Instruments Primarily Cash Bonds,

some CDS

Cash, CDS Credit Indices, Index

Options, Equity

options, Rate Futures

Horizon 6-12 months up to 3 months 3-6 months

% Gross 60 to 80% 20% to 80% 0 to 50%

% NAV 60 to 80% -50 to 50% -25% to 25%

Strategic +

Tactical

Longs

Tactical

Shorts Net

Exposure

Credit

Indices

11


Credit Index trades are more tactical in nature and are generally layered in to change the beta

positioning and therefore directional bias of the strategy

1 2 3 4 5 6

STEP 2: CURRENT POSITIONING

12


Short Subordinated

Spanish,

Italian Banks

Long

Subordinated

Financials

- Barclays T1s

- Axa T1s

- BNP T1s

- AIG UT2s

- Allianz T1s

Strategic Holding Tactical Holdings

Source: Aviva Investors as at 28 February 2013.

- BBVA

- Santander

- Intesa Sanpaolo

Cable Telecomm

Global HY

Strategic Names

- Charter

- Windstream

- Cablevision

- Dish

- Unitymedia

- Ziggo

Long US HY

Crossover Names

- Dollar General

- Ford

- Host Hotels

- Pioneer Natural

- Resources

Indices

- Short iTraxx

Senior Financials

Indices

TRADE IDEA: BUY HARLAND CLARK 9.5% SENIOR NOTES

13


Data is shown for illustrative purposes only.

Company: Harland Clarke (MFW) is a provider of integrated payment solutions, marketing services, and security solutions

Rationale: At the point of entry, MFW Senior Unsecured bonds were trading at c.16% YTW, a significant discount to

competitors and the market due to concerns about a secular decline in check printing and medium term maturities.

Fundamentals

– Strong 3Q12 results and reiteration of guidance for FY2012

– Price increases and a growth in Marketing Services offsetting secular volume declines.

– Improving earnings and positive FCF

– 50% excess cash flow sweep reducing secured leverage ahead of notes

Valuation

– Closest comparable Deluxe trading at 6X EV/EBITDA vs. 4.5X LTM leverage

– Positive transaction benchmark for Harland Financial Solutions division: Open Solutions was bought by FISERV for 10X EBITDA in January 2013.

Trading

– Upside for the bonds under a refinancing scenario in early/mid 2013 to June par call

– Significant decline in volatility post 3Q12 results and good technical entry point.

– Average entry price of 87.25

– Exited at a target price of 100 for an average total return of 16%

Entry post

strong Q3

numbers

Exit remaining

position at 100

target.

Added more to

existing position

FISERV buys

Open Solutions.

Sold 1/3 position

STEP 6: RISK MANAGEMENT

14


1 2 3 4 5 6

Type of

Risk

Specific

Sector

Market

Risk Free

Instrument Investment

Objective

– Capital structure hedges

– Minimize idiosyncratic tail risk

– Maximize idiosyncratic Sharpe

– Hedge adverse sector risk

– Thematic short sector baskets

– Directional bias management

– Manage embedded rate risk

Ex-Ante Analysis: Our hedging framework ensures that the risk/return trade off is appropriate for idiosyncratic

and sector specific developments and prevailing market conditions. For tail risk events, the manager has an

analytical framework to take individual positions and/or the entire fund notionally back to cash

Proprietary

Analysis

– Amplitude beta analysis

– Equivalence

– Step-wise Analysis

– Capital structure hedging Model

– Net beta adjusted positioning analysis

– Scenario analysis

– Stress tests

– Index volatility analysis

In addition to traditional standard deviation, downgrade & liquidity risk monitoring, we have developed a

sophisticated proprietary risk analysis framework.

– Rates analysis

– Single Name CDS

– Subordinated Debt

– Equity + Options

– Credit Indices

– Equity Indices

– Index Options

– Futures

– Cash

GLOBAL CREDIT ABSOLUTE RETURN PERFORMANCE & RISK

Source: Lipper Hindsight & Aviva Investors, as at 30 April 2013. Data is provided net of fees in EUR. Benchmark: 3 Month EURIBOR. Past performance is not a guide to future performance. 15


Risk Statistics

Annualised volatility

since inception 3.58%

Net Beta Adjusted

Exposure 58%

1 Year Sharpe Ratio 4.24

As at 30 April 2013

2.2

4.4

4.9

0.1 0.1 0.3

0.8

0

1

2

3

4

5

6

7

3 Months 6 Months 1 Year Since Inception

Retu

rns (

%)


3 Month EURIBOR

GLOBAL CREDIT ABSOLUTE RETURN FUND POSITIONING

Source: Aviva Investors as at 30 April 2013. 16


8

9

12

28

44

GCAR Longs – Asset Allocation

Cash 8%

Investment Grade - US 9%

Investment Grade - EU 12%

High Yield - US 28%

High Yield - EU 44%

56 37

8

GCAR Longs – Geographic Distribution

Europe 56%

US 37%

Cash 8%

3%

6%

29%

14%

25%

3% 0%

5%

10%

15%

20%

25%

30%

AA A BBB BB B CCC

GCAR Longs – By Ratings

-0.4%

-1.3%

-10.0%

-1.3%

-11.0%

-9.0%

-7.0%

-5.0%

-3.0%

-1.0%

AA A BBB BB

GCAR Shorts – By Ratings

APPENDIX

17


Aviva Investors Global Credit Absolute Return

Investment policy / objective Aim to achieve a positive return under all market

conditions by investing in global corporate bonds with an

emphasis on high yield, CDS, loans and equities.

Performance target 3.5% to 5% above 3 month EURIBOR, Net*

Bloomberg Ticker AVGCIIE LX

Leverage Up to 2.5X

Base currency EUR, with hedged share classes in GBP and USD

Legal structure Sub-fund of Aviva Investors SICAV

Country Registration Luxembourg, UK, Switzerland

Liquidity Daily

Minimum investment € / $ / ₤ 500,000

Annual management fee 0.50%

Performance fee 20% of performance above 3 month EURIBOR

High Watermark Yes

Administrator JP Morgan Bank Luxembourg

Auditor Ernst & Young

Legal Counsel Elvinger, Hoss & Prussen

KEY INVESTMENT TERMS

18


*This is an internal target only. It does not form part of the fund objective.

PROPRIETARY RISK ANALYSIS


19

Source: Aviva Investors. Data is shown for illustrative purposes only.

PROPRIETARY RISK ANALYSIS


20

Source: Aviva Investors. Data is shown for illustrative purposes only.

BIOGRAPHY

Mark Wauton Head of Credit After a six year career in the Army, Mark joined investment industry in 1986

Main responsibilities Mark is responsible for our high alpha capabilities in investment grade, high yield and credit absolute return fixed income capabilities, while also ensuring that we deliver for more traditional active mandates. Experience and qualifications Mark joined Aviva Investors in April 2009. Prior to joining Aviva Investors Mark was Head of Strategic Credit trading at ABN AMRO. Mark has held Head of Fixed Income roles at Commerz International and Dunedin Fund Managers as well as Head of European Fixed Income at UBS Asset Management. He also co-managed the AlphaGen Credit Hedge Fund at Gartmore. Mark successfully completed the AIIMR in 1994 and is now an ASIP. He holds an MSc in Investment Analysis from Stirling University.

21

Jiten Joshi Portfolio Manager Joined investment Industry in 1994

Main responsibilities Jiten is managing our Global Credit Absolute Return strategy along with Mark Wauton and Dinesh Pawar. Experience and qualifications Jiten was previously a special situations analyst at Pali Capital responsible for idea generation across the capital structure of stressed and distressed credits. Prior to Pali, he was an Executive Director responsible for managing the US exposure of a global prop desk at ÅBN AMRO. Prior to ABN, he was part of a team managing the Gartmore AlphaGen Credit Hedge Fund for 3 years. Prior to joining Gartmore, Jiten was a Vice President and senior analyst covering Cable, Media and Energy for investment grade, high yield and distressed securities at JP Morgan Fleming Asset Management. Jiten’s sell side experience includes High Yield Origination at Chase Securities and Restructuring at Houlihan Lokey. He holds an MBA in Finance from the Columbia Business School and a BA in Economics from Columbia University.


BIOGRAPHY

Dinesh Pawar Head of Credit Flow Trading Joined investment Industry in 2002

Main responsibilities Dinesh is responsible for credit flow trading and has over 10 years of investment experience. Dinesh has an overview of all the trading strategies within each of the credit portfolios and provides analysis on hedging, trading tactics, and the use of derivatives. Experience and qualifications Prior to joining Aviva Investors he was the Market Risk Manager for Deutsche Bank financial markets responsible for managing the banks Loan Book, Loan Trading, Credit Origination and Global Risk Syndicate. Prior to this Dinesh was a Director and worked at ABN AMRO as part of the Credit prop team focusing on EU and GBP credits. Before joining ABN AMRO, Dinesh was a Credit Trader for the AlphaGen Credit Hedge fund, and was the co-manager of the Gartmore High Yield Retail fund. Dinesh has a BA Hons in Business Finance and an MSc in Banking and International Finance from Cass Business School

22


IMPORTANT INFORMATION

Property

&

Casualty

Insurance

Life

Insurance &

Annuity

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (“Aviva Investors”) as at 30 April

2013. Any opinions expressed are based on the internal forecasts of Aviva Investors and they should not be relied upon as indicating any

guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to the

future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original

amount invested. Portfolio holdings are subject to change at any time without notice and information about specific securities should not be

construed as a recommendation to buy or sell any securities.

Aviva Investors Global Credit Absolute Return fund is a sub-fund of Aviva Investors SICAV, an open-ended investment company

incorporated as a Société d'Investissement à Capital Variable in Luxembourg. It is authorised by the Commission de Surveillance du Secteur

Financier (CSSF) and qualifies as an Undertaking for Collective Investment in Transferable Securities (UCITS) under Part I of the law of 17

December 2010 relating to undertakings for collective investment. The Management Company is Aviva Investors Luxembourg. Investment

Manager is Aviva Investors Global Services Limited, regulated and authorised by the FSA. The distribution and offering of shares may be

restricted by law in certain jurisdictions. This document should not be taken as a recommendation or offer by anyone in any jurisdiction in

which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. The content of this

document does not purport to be representational or provide warranties above and beyond those contained in the legal documentation and

subscription documentation of the Funds. The legal documentation and the subscription document contain the full terms, conditions,

representations and warranties in respect of the Fund. Nothing in this document shall be construed as forming any part of those terms,

conditions, representations or warranties. The legal documentation and the subscription documents should be read before an investment is

made. ICVC investments should not be regarded as short-term and should normally be held for at least five years. The Prospectus and Key

Investor Information Document (KIID), are available, together with the Report and Accounts of the SICAV, free of charge from Aviva

Investors Luxembourg, 2 rue du Fort Bourbon 1st Floor.L-1249 Luxembourg, Grand Duchy of Luxembourg R.C.S. Luxembourg B25708,

Aviva Investors, No.1 Poultry, London EC2R 8EJ or relevant office below. The Prospectus is available in English, French, German, Italian

and Spanish. The KIID is available in the official language(s) of your jurisdiction and currently produced in Dutch, English, Finnish, French,

German, Italian, Latvian, Norwegian, Spanish and Swedish. Austria: The "Raiffeisen Zentralbank Österreich AG", Am Stadtpark 9, 1030

Vienna, has been appointed as paying agent within the meaning of § 34 InvFG. The redemption of shares and requests for the prospectus,

the articles of association and the last annual and semi-annual reports, once published, can be made via the paying agent. Spain: Copies of

the Prospectus and KIID together with the Report and Accounts of the UCITS which are approved by and registered with CNMV are

available free of charge from the offices of distributors in Spain. The UCITS is authorised by the CNMV and registered on the relevant

CNMV register with registration number 7.

Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: No. 1 Poultry, London EC2R

8EJ. Authorised and regulated in the UK by the Financial Services Authority and a member of the Investment Management Association.

Contact us at Aviva Investors Global Services Limited, No. 1 Poultry, London EC2R 8EJ.

Compliance ref: 13/0527/310813

23


Date post:	22-Nov-2014
Category:	Economy & Finance
Upload:	citywirewebsite
View:	1,041 times
Download:	2 times

Aviva investors global credit absolute return (gcar) may 2013 montreux complied

Economy & Finance