NZD HEDGED GLOBAL FIXED INTEREST FUND LYDIA SERAFIM DECEMBER 2016
NZD HEDGED GLOBAL FIXED INTEREST FUND | 1
FIXED INCOME RETURNS
• Going down in credit quality
was a winning trade in
2016, as the ‘junkiest’ parts
of fixed income markets
performed best
• Tight spreads / elevated
prices in these lower
quality sectors reduce the
margin for error (caution is
warranted)
.
NZD HEDGED GLOBAL FIXED INTEREST FUND | 2
Source: Morgan Stanley Investment Management
PERFORMANCE AS AT 31 DECEMBER 2016
| 3
NZD HEDGED GLOBAL FIXED INTEREST FUND
1m 3m 6m 1 Year 2 Year 3 Year
NZD Hedged Global Fixed Interest Fund 0.44% -1.88% -0.74% 5.19% 4.19% 6.27%
Barclays Global Aggregate Index Hedged NZD 0.39% -2.02% -1.07% 5.82% 5.14% 7.10%
Relative 0.05% 0.14% 0.33% -0.63% -0.94% -0.83%
Colchester 0.26% -2.17% -1.46% 4.76% 3.92% 5.98%
Barclays Global Treasury GDP Weighted by Country 0.38% -2.61% -1.96% 4.95% 5.03% 6.81%
Relative -0.12% 0.44% 0.50% -0.19% -1.10% -0.83%
Morgan Stanley 1.00% -1.34% 1.10% 7.36% 5.03% 6.97%
Barclays Global Aggregate Corporate Index 0.85% -1.79% 0.46% 7.98% 5.54% 7.36%
Relative 0.15% 0.45% 0.64% -0.62% -0.51% -0.39%
Wellington 0.23% -1.56% -0.37% 4.00% 4.40% 6.38%
Barclays Global Aggregate Securitised Index 0.17% -1.49% -0.35% 4.01% 4.42% 6.17%
Relative 0.06% -0.07% -0.01% -0.01% -0.02% 0.21%
• Colchester outperformed by 44bp over the quarter. From a rates perspective, underweights in Europe, the UK and the US
contributed to returns. In currencies, overweights to the British Pound and South African Rand also contributed.
• Morgan Stanley outperformed by 45bp over Q4. An overweight to Financials, specifically Banking within the IG space, was a
positive contributor to returns over the period. Positioning within Utilities detracted over the quarter
• Wellington underperformed by 7bps. Duration and yield curve positioning detracted from performance over Q4, as did security
selection within agency pass-throughs
PERFORMANCE ANNUAL ATTRIBUTION
NZD HEDGED GLOBAL FIXED INTEREST FUND
4
NZD Hedged Global Fixed Interest Fund: as at 31 December 2016
Q4 1 Year
NZD Hedged Global Fixed Interest Fund -1.88% 5.19%
Benchmark (Barclays Global Aggregate hedged to $NZD) -2.02% 5.82%
Relative Return 0.14% -0.63%
Decomposition of Relative Return Q4 1 Year
Benchmark differences - difference between Barclays Global
Aggregate and the weighted manager benchmarks -0.25% -0.34%
Manager alpha 0.40% -0.25%
Residual 0.00% -0.03%
Relative Return 0.14% -0.63%
Benchmark Mismatch –
negative over Q4 and the
year, as JGB’s continued to
rally (structural underweight)
Manager Alpha – MSIM &
Colchester significantly
underperformed (see
previous slide)
NZD HEDGED GLOBAL FIXED INTEREST FUND
PORTFOLIO POSITIONING – AS AT 31 DECEMBER 2016
NZD HEDGED GLOBAL FIXED INTEREST FUND | 5
MARKET OUTLOOK
SOURCE: AMP CAPITAL, MANAGERS
Bond Markets:
> US rates spiked up post election on expectations of Trump enacting growth friendly fiscal policy – but rate rises to
remain capped
> Rates began drifting lower in mid January (despite better economic data) on concerns Trump may implement
restrictive trade policies (“border adjustment tax”)
> Eurozone data continues to improve, however ECB is expected to continue to provide accommodative monetary
policy through 2017
> Government bond yields therefore expected to be reasonably well behaved
> Uncertainty is elevated however, with general elections in various countries and further potential
banking crises (flowing through to the sovereign) posing risks
Credit markets:
> Despite ongoing record issuance in the corporate sector, credit continues to hold up
> Markets may not be fully pricing in the effects of lower corporate tax rate in a Trump administration
> A cut in the corporate tax rate from 35% to ~20% will be positive for corporate balance sheets all else equal,
as more cash flow becomes available to service debt
> This may lead to less issuance going forward, as the tax shield benefit of debt would be reduced at lower tax
rates, effectively increasing the after tax cost of debt
> Investors have begun to push back on aggressive covenant terms, particularly in the investment grade space
> In particular, investors are demanding ‘make whole premiums’ are re-inserted into bond indentures (to
compensate for early call backs)
> A potential one-time repatriation tax holiday for US companies holding overseas corporate cash has the potential to
reduce corporate issuance, as funds brought back are used to pay down debt
> Yields are edging below 10 year averages, but not at extreme levels – potential to tighten further given better
growth prospects and points above
| 6 NZD HEDGED GLOBAL FIXED INTEREST FUND
MARKET OUTLOOK
High Yield / Bank Loans:
> Lower quality outperformed in 2016
> CCC rated loans (25.6%) and bonds (33.1%) outperformed their BB rated counterparts by 18.7% and 21%
respectively
> On a risk adjusted basis, we anticipate going up in credit quality will be better in 2017
> Declining default rates and improving macroeconomic conditions should sustain positive returns in leveraged credit,
but tight spreads and high bond prices make the sector vulnerable to volatility
> Highly levered firms continue to lever up
> Current valuations favour Bank loans over HY
> European CLOs/ABS – lack of liquidity and unfavourable growth prospects has meant this segment remains unloved
– however valuations are better than US, so worth keeping an eye on
ABS:
> ABS issuance continues to grow whilst trading volumes fall, raising concerns about market liquidity
> FELP student loan downgrades from Moody’s have been finalised
> Approximately 8% of securities on ‘Watch’ were ultimately downgraded to sub-investment grade, far lower
than market expectations
> Prices have held up in the face of downgrades, with further spread tightening possible –good for our
mandates (Wellington and TCW)
CMBS and agency / non-agency mortgages:
> Underwriting standards appear to have morphed in the CMBS sector, with originators now ‘barbelling’ higher quality
loans with lower quality loans to hit average LTV targets (ahead of risk retention implementation that occurred in
Dec)
> This is leading to large variations across loan qualities within collateral pools – caution is needed
> Majority of non-agency MBS coupons are floating rate and indexed to Libor, providing a hedge against a potential
rising rate environment
> The sector remains attractive, as home prices continue to increase and loans amortise more quickly
| 7 NZD HEDGED GLOBAL FIXED INTEREST FUND
APPENDIX
CORPORATE HEALTH
* SOURCE: AMP CAPITAL AS OF SEPTEMBER 30, 2016. Q4 DATA NOT AVAILABLE.
INCREASING LEVERAGE HAS NEGATIVELY IMPACTED CORPORATE
HEALTH*
| 9
• Low interest rates
have encouraged
corporates to lever
(first week of 2017
was fourth largest
issuance week on
record)
• Whilst increased
leverage flags as
the greatest risk,
other measures of
corporate health
have also trended
down
NZD HEDGED GLOBAL FIXED INTEREST FUND
Souce: AMP Capital. As at 30 September 2016 (Q4 data not available as yet)
MARKET OUTLOOK AS AT 31 DECEMBER 2016
| 10
Source: JP Morgan. As at 31 December 2016
Yields
continue
to hover
around
their 10
year lows
Fixed
income
may
struggle
in a
period of
sustained
rate rises
– only
High
Yield
insulated
by
duration
effects
NZD HEDGED GLOBAL FIXED INTEREST FUND
MARKET OUTLOOK AS AT 31 DECEMBER 2016
| 11
Source: JP Morgan.
HY Energy
spreads have
compressed
post Q1 2016
HY spread
& default
rates are
below 30
year
average
NZD HEDGED GLOBAL FIXED INTEREST FUND
PRODUCT OVERVIEW .
| 12 NZD HEDGED GLOBAL FIXED INTEREST FUND
Targeted returns
Suggested timeframe
Distributions
Liquidity
88bps above the Fund’s benchmark
(Barclays Global Aggregate Index, $NZ Hedged)
Three years
Hedging Foreign exposures fully hedged
Half yearly
Daily, Sell Spread
Key guidelines Tracking error of 150 - 200bps
Universe of securities
Global Government Bonds, Global Credit Securities & Securitised
SOURCE: AMP CAPITAL
FUND STRUCTURE
| 13 NZD HEDGED GLOBAL FIXED INTEREST FUND
SOURCE: AMP CAPITAL. AS AT 30 JUNE 2016
FD NZ International
Bond Fund
Global Government
(63%)
Global Credit (22%)
Securitised (15%)
Colchester
Morgan Stanley
Wellington
KEY INVESTMENT PROFESSIONALS
| 14
Michael Dennis
Fixed Income Analyst
BBus, CFA
Michael joined AMP Capital in July 2014 as an Analyst within the Public Market Solutions team. Michael works closely with portfolio
managers in undertaking manager research, selection and monitoring. Prior to joining AMP Capital, Michael was an Analyst at IOOF,
focusing on fixed income manager research. He holds a Bachelor of Business (Finance and Economics) from the University of
Technology, Sydney. Michael is also a CFA charterholder, and is a member of the CFA Institute and the CFA Society of Sydney.
Lydia Serafim
Senior Portfolio Manager, RIL Diversified Fixed Income Fund
BCom (Hons) (Economics)
Lydia is the Senior Portfolio Manager for the fixed interest funds within the Public Markets Solutions team within the Multi-Asset Group.
Her single sector funds form part of the Future Directions, Responsible Investment Leaders, MySuper, AMP Life, NMLA, ipac and
Experts Choice range of diversified portfolios. Asset sectors covered include Australian and global government bonds, global credit,
inflation linked bonds, bank loans and high yield credit. Lydia internally transferred to the Multi-Asset Group in 2008 from AMP Capital’s
Fixed Interest team, where she was an Investment Specialist. In this capacity, she was responsible for the planning and development
of the team’s capabilities, promoting the fixed interest product range. Here Lydia was spokesperson for the investment capabi lity,
liaising with internal and external parties. Lydia joined the Fixed Interest team in 2000, and her roles included Portfolio Controller and
Co-Head, Quantitative Analysis & Risk Management. Responsibilities in this latter role included managing portfolio positions for the
fixed interest portfolios in line with the team’s strategy, improving and developing systems, and risk management. Prior to joining AMP
Capital, Lydia held a number of positions at GIO Asset Management, including Fixed Interest Investment Analyst and Money Market
Dealer. Lydia holds a Bachelor of Commerce and Administration, with first class Honours in Economics, from Victoria University in New
Zealand.
NZD HEDGED GLOBAL FIXED INTEREST FUND
IMPORTANT NOTE
| 15
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NZD HEDGED GLOBAL FIXED INTEREST FUND