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Kames Strategic Global Bond Fund
September 2013Colin Finlayson – Investment Manager Fixed IncomeColin Finlayson Investment Manager, Fixed Income
The Great Rotation?
2
Then and now – is history repeating itself? y p g
20
1994 Total return20
Is history repeating?
5
10
15
5
10
15
10
-5
0
-10
-5
0
-20
-15
-10
-25
-20
-15
bt ty 00 ts Ts ps Y 00-25
EM
$ d
ebt
EM
Equ
ity
FTS
E10
0
Gilt
s
US
Ts
US
Cor
ps
US
HY
S&
P 50
0
EM
$ d
eb
EM
Equ
it
FTS
E10 Gilt
US
T
US
Cor
p
US
H
S&
P 50
1994 returns to end August 2013 returns to end August
Source: BoA Merrill Lynch, Morgan Stanley, FTSE, S&P, Bloomberg, Kames Capital as at 31 August 2013
E E U 1994 returns to end August 2013 returns to end August
3
Bond market in forward looking shockerg
3
The US yield curve is very steep
2
1Yie
ld %
0
-1
983
984
985
986
987
988
989
990
991
992
993
994
995
996
997
998
999
000
001
002
003
004
005
006
007
008
009
010
011
012
013
Source: Bloomberg, Kames Capital as at 30 August 2013
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 2 20 20
4
Kames Strategic Global Bond Fund – Flexibilitiesg
Government bonds
Investment grade corporate bonds
What we own and will own
g p
High yield bonds
Emerging market bonds
Index-linked bonds
Asset backed securities
Cash
Foreign Exchange
What we haven’t owned and won’t ownOrdinary Equity
Private Placement Debt
5
Convertible Bonds
2013 – Volatility and divergent returnsy g
Asset type Total return %
Drawdown %
US Corporates -3.2 -5.01%
3%
US Treasuries -3.3 -6.4
Emerging Market Debt -9.3 -11.3-3%
-1%
1%
urn
%
US TIPS -8.7 -10.7
Kames Strategic Global Bond 0.2 -3.9%
-7%
-5%
Tota
l ret
u
-11%
-9%
Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13
Kames Strategic Global Bond US TreasuriesEmerging Market Debt US TIPSUS C t
Source: Bloomberg, Kames Capital and BoA Merrill Lynch as at 31 July 2013
6
US Corporates
Kames Strategic Global Bond Fund performance
70
Cumulative 5 year medians
g p
40
50
60 58.3%
10
20
30
% g
row
th 28.9%
-10
0
10
-20
Aug
08
Oct
08
Dec
08
Feb
09A
pr 0
9Ju
n 09
Au g
09
Oct
09
Dec
09
Feb
10A
pr 1
0Ju
n 10
Au g
10
Oct
10
Dec
10
Feb
11A
pr 1
1Ju
n 11
Aug
11
Oct
11
Dec
11
Feb
12A
pr 1
2Ju
n 12
Aug
12
Oct
12
Dec
12
Feb
13A
pr 1
3Ju
n 13
Aug
13
7
Kames Strategic Global Bond B Inc USD Lipper Global - Bond Global median
Source: Lipper as at 30 August 2013. NAV to NAV, income re-invested. Total return, local currency, B Inc USD class. Launch date 8 November 2007. Past performance is not a guide to the future.
Strong risk adjusted performanceg j p
Key
Return Return volatility Sharpe ratio
15 14 2 0Kames FundMedian Fund
3 ye
ars
12.4
5.25
10
15 13.3
6.568
101214
0 3
1.8
0.90.51.01.52.0
Sector range
Quartile range
3 2.4
-2.9-5
0 4.0
1.50246 0.3
-0.6
-1.0-0.50.0
ears 14.7
10
15
20
15.615
20
1.5
1.0
1.5
2.0
5 ye
3.6
-0.2
7.9
-5
0
5
10
6.7
2.2
9.9
0
5
100.4
-0.3
0.8
-0 5
0.0
0.5
1.0
8
Source: Lipper Hindsight, Kames Capital as at 28 June 2013. Kames Strategic Global Bond Fund B (Inc) USD, returns, volatility and sharpe ratio are calculated on a monthly basis (annualised). Volatility is standard deviation.
5 0 0.5
Kames Strategic Global Bond Fund positioningg p g
Asset allocation Dec 2007 – Jul 2013100
Active asset allocation
Min (%) Max (%)
Cash -3.90 17.60
60708090
sets
Government 0.00 48.00
Index-Linked 0.00 1.91
Investment Grade 35.40 85.0030405060
% o
f ass
High Yield 4.20 32.50
US RMBS 0.00 5.5701020
07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13
Emerging Markets 0.00 3.39
Nov
0Fe
b 0
May
0A
ug 0
Nov
0Fe
b 0
May
0A
ug 0
Nov
0Fe
b 1
May
1A
ug 1
Nov
1Fe
b 1
May
1A
ug 1
Nov
1Fe
b 1
May
1A
ug 1
Nov
1Fe
b 1
May
1
Cash Govt Index Linked IG HY US RMBS Emerging Markets
Source: Kames Capital as at 31 July 2013.
9
Kames Strategic Global Bond Fund duration allocationg
8
Duration by currency bloc excluding high yield
4
6
mi a
nnua
l)
0
2
dur
atio
n (s
em
4
-2
0
Mod
ified
-4
Nov
07
Jan
08M
ar 0
8M
a y 0
8Ju
l 08
Se p
08
Nov
08
Jan
09M
ar 0
9M
a y 0
9Ju
l 09
Se p
09
Nov
09
Jan
10M
ar 1
0M
a y 1
0Ju
l 10
Se p
10
Nov
10
Jan
11M
ar 1
1M
a y 1
1Ju
l 11
Sep
11
Nov
11
Jan
12M
ar 1
2M
a y 1
2Ju
l 12
Sep
12
Nov
12
Jan
13M
ar 1
3M
a y 1
3Ju
l 13
AUD CAD EURO GBP NZD SEK CHF USD YEN Grand Total
Source: Kames Capital as at 31 July 2013
10
Asset class flexibility is keyy y
Asset class Current environment Strategy
Government • Monetary cycle turned in the US Remain underweight interest rateGovernment bonds • Rest of the world not immune
• A large part of the move already in the price
Remain underweight interest rate risk, but temper position
Investment • Valuations still attractive on a long term basis Core part of strategic bond funds. Investmentgrade
• Valuations still attractive on a long-term basis• Avoid re-leveraging event risk Capture spread and manage
duration risk
Hi h i ld• Total return prospects attractive
P f f US Hi h Yi ld E Hi h Sti k t hi h lit hi h i ldHigh yield • Preference for US High Yield over European High Yield
Stick to higher quality high yield
Emerging markets
• Sell-off brings some realism back to markets• Fund outflows mean it is too early to catch the falling Selected exposure to stock specific
corporates too earl to bmarkets y gknife corporates, too early to buy
RMBS• US housing market strong even with increasing
mortgage rates• Supportive technicals
Non Agency RMBS (Option ARM sub-segment ) offers value and diversification
11
• Supportive technicals diversification
Ignore technicals at your peril
• FOMC: “exceptionally low levels… at least through late 2014”
g y p
1600
Quantifying quantitative easing
• ECB: “we will do all that it takes (to save the Euro)”
SNB no o n more than 10% of1200
1400
• SNB: now own more than 10% of the entire stock of Bunds*
• BoE: QE program at £375billion and 800
1000
$ bi
llions
forward guidance
• BoJ: ¥140 trillion of planned asset purchases over two year period
400
600
purchases over two year period
0
200
Fed BoE ECB SNB BoJ
Source: Central Bank websites as at 31 March 2013. *SNB assumes 50% of CHF 400bn+ balance sheet. Ignores ECB covered bonds €70bn, US MBS $1.5trn
12
Investment grade strategyg gy
800
900
600
700
read
(sa)
300
400
500
ench
mar
k sp
r
0
100
200
Be
0
Jan
07
Apr
07
Jul 0
7
Oct
07
Jan
08
Apr
08
Jul 0
8
Oct
08
Jan
09
Apr
09
Jul 0
9
Oct
09
Jan
10
Apr
10
Jul 1
0
Oct
10
Jan
11
Apr
11
Jul 1
1
Oct
11
Jan
12
Apr
12
Jul 1
2
Oct
12
Jan
13
Apr
13
Jul 1
3
N G A t d BBB t d Fi i l
Source: Barclays as at 31 July 2013
Non-Gov A rated BBB rated Financials
13
High yield: cheap relative to any realistic default scenariog y p y
44.8%41 1%
50%
e
Implied default rates vs actual experiences2,00020%
High yield spreads and default rates
30.1% 29.5%
39.3%
23.0%
41.1%
25.0%30%
40%
ativ
e de
faul
t rat
e
1,50015%
bps
rate
%
14.2% 15.2%
5.8%1.9%
10.1%10%
20%
5 ye
ar c
umul
a
500
1,000
5%
10%
Spr
ead
Def
ault
r
0%
BB
B
BB B
Credit Rating
00%
Jan
85S
ep 8
6M
ay 8
8Ja
n 90
Sep
91
May
93
Jan
95S
ep 9
6M
ay 9
8Ja
n 00
Sep
01
May
03
Jan
05S
ep 0
6M
ay 0
8Ja
n 10
Sep
11
May
13
Implied 5yr cumulative default rate, 40% recovery rate EUR
Implied 5yr cumulative default rate, 40% recovery rate USD
Actual 5yr cumulative default rates (since 1970) worst
Actual 5yr cumulative default rates (since 1970) average
J S M J S M J S M J S M J S M J S M
Global Speculative DRAverage DRProjected Global Speculative DRHY SpreadsA S d
Source: Left hand chart - Moody’s Investors Service, Merrill Lynch and Kames Capital as at 31 July 2013. Right hand chart - Deutsche Bank, Kames Capital, data as at 30 June 2013, average recovery rates and default experiences since 1970
Average Spread
14
Emerging Markets – the perfect storm
• Growing list of problems:
– Over-owned asset class
g g p
2.0
1 5
0
100– Fed “Tapering”
– EM currency depreciation
– Slower Chinese GDP
1.5
1.0
0 5
100
200
300M Slower Chinese GDP
• Inevitable result:
0.5
0.0
-0.5
300
400
500
% A
U
bps
– Outflows and wider spreads...
– ….prompting more outflows?
0 5
-1.0
-1.5
500
600
700
-2.0 8002007 2008 2009 2010 2011 20132012
EMBI GI Spreads (rhs) 4wma flows to EXD funds (lhs)
Source: EPFR Global, Thomson Reuters Datastream, HSBC
15
EMBI GI Spreads (rhs) 4wma flows to EXD funds (lhs)
Non Agency RMBS – very attractive fixed income asset class
• US housing market is recovering
– Non Agency RMBS a great way of gaining exposure to this
g y y
– Specifically the sub-sector Option ARMs (Adjustable Rate Mortgages)
Desired attribute Benefit
High original mortgage balance c.$500k House still has some value, aids recovery
P f f j di i l t t i C lif iPreference for non-judicial states i.e. California over Florida Speeds up any repossession process
Selected original underwriters Relatively better quality of borrowers and assets
2006/07 vintages with fast amortisation Capital payback opportunity greatest
Super senior tranches only, with lots ranking below you Subordinated bonds absorb losses first
16
Kames Strategic Global Bond Fund
• Strategic global bond portfolio
– Total return fixed income fund
g
– Managed fixed income solution; delegate your fixed income strategy
– €/$/£/¥/CHF/SGD – track your clients’ needs
1 year 2 years 3 years 4 years 5 years
Fund 3.37% 12.36% 16.23% 33.21% 58.29%
Median 0.01% 5.22% 7.11% 17.69% 28.88%
Quartile 1 1 1 1 1
Outperformance 3 36% 7 14% 9 12% 15 52% 29 41%
17
Source: Lipper as at 30 August 2013. NAV to NAV, income re-invested. Total return, local currency, B Inc USD class. Launch date 8 November 2007. Past performance is not a guide to the future.
Outperformance 3.36% 7.14% 9.12% 15.52% 29.41%
Kames Strategic Global Bond FundgLaunch date 8 November 2007
Fund manager David Roberts and Philip Milburn
Support manager Colin Finlayson
Investment policies Invests across fixed income universe, ranging from AAA government bonds through to high yield and emerging market corporate bonds in any currency.
P i f t t Second quartile over rolling 12 months and top quartile over a rolling 3 year periods in Primary performance target q g p q g y pthe Lipper global bond global sector.
Secondary performance target To outperform the Barclays Capital global aggregate index by +2% p.a. over rolling 3 year periods.
Investment grade corporate bonds 0 100%
Asset allocation ranges
Investment grade corporate bonds 0-100%
Government bonds 0-100%
High yield bonds 0-100%
Emerging market bonds 0-100%Emerging market bonds 0 100%
Unhedged currency 0-10%
Cash 0-20%
Base currency US DollarBase currency US Dollar
Hedged share classes Sterling, Euro, US Dollar, Yen, Swiss Franc, Singapore Dollar
18
Important informationThis document is not intended for retail distribution and is directed only at investment professionals. It should not be distributed to, or relied upon by, private investors.
p
All data in this presentation is sourced to Kames Capital unless otherwise stated.
The views expressed in this document represent our understanding of the current and historical positions of the market. They should not be interpreted as a recommendation or advice.
Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed.
This document is accurate at the time of writing but can be subject to change without notification Kames Capital Investment Company (Ireland)This document is accurate at the time of writing but can be subject to change without notification. Kames Capital Investment Company (Ireland) plc, is an umbrella type open-ended investment company with variable capital registered in the Republic of Ireland (Company Number 442106), registered office at 25-28 North Wall Quay, International Financial Services Centre, Dublin 1. Board of Directors: Andrew Bell (UK), Mike Kirby (Ireland) and Bronwyn Wright (Ireland). Kames Capital Investment Company (Ireland) plc is regulated by the Central Bank of Ireland. Kames Capital is an Aegon Asset Management company and includes Kames Capital plc (Company Number SC113505) and Kames Capital Management Limited (Company Number SC212159). Both are registered in Scotland and have their registered office at Kames House, 3Lochside Crescent, Edinburgh, EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Conduct Authority, (FCA reference no: 144267). Kames Capital plc is the Investment Manager and Marketing Agent for Kames Capital Investment Company (Ireland) plc. Kames Capital Management Limited is an appointed representative of Scottish Equitable plc (Company Number SC144517), an Aegon company,whose registered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (PRA/FCA reference no: 165548).g , g , g , ( )
19
Important informationThe Kames Strategic Global Bond Fund is registered in the UK, Channel Islands, Ireland, Netherlands, Switzerland, Luxembourg,Germany, Malta and Austria. Not all available shareclasses are registered in every country. Refer to the full prospectus for details.
p
For Investors in Switzerland - On March 26th 2009, the Swiss Financial Market Supervisory Authority FINMA authorised the distribution to the public of the shares of Kames Capital Investment Company (Ireland) plc (the “Company”) in or from Switzerland in conformity with article 120 of the Federal Law on Collective Investments of Capital dated June 23rd 2006. The Company was authorised as a Foreign Collective Investment Scheme. The articles of the Company, the Extract Prospectus for Switzerland, the Key Investor Information (Swiss edition), the annual and semi annual Report for Switzerland of the Company can be obtained free of charge on our website www.kamescapital.com or from the Representative in Switzerland, BGG Banque Genevoise De Gestion, 15, Rue Toepffer, 1206 Geneva, Switzerland, (Tel : + 41 22 3479040; Fax: + 41 22 3479327).
For Investors in Luxembourg - Kames Capital Investment Company (Ireland) plc is a UCITS collective investment scheme registered in Luxembourg by the Commission de Surveillance du Secteur Financier. The Prospectus, Supplement and Key Investor Information of Kames Capital Investment Company (Ireland) plc are available from CACEIS Bank Luxembourg 5, allée Scheffer, L-2520 Luxembourg.
FPID: 2013/16489
20