MACQUARIE INVESTMENT MANAGEMENT | Teleconference Series Macquarie Income Opportunities Fund BRETT LEWTHWAITE HEAD OF FIXED INCOME AND CURRENCY July 2013 FOR LICENSED ADVISER USE ONLY - NOT FOR DISTRIBUTION TO RETAIL INVESTORS
IMPORTANT NOTICE For licensed adviser use only - not for distribution to retail investors This information has been prepared by Macquarie Investment Management Limited ABN 66 002 867 003 AFS Licence 237492 (MIML), the issuer of units in the Macquarie Income Opportunities Fund ARSN 102 261 834 (Fund). This information is confidential and is provided to licensed financial advisers and professional advisers only. It is not to be distributed to, or disclosed to retail clients. The information may be based on assumptions or market conditions and may change without notice. The information in this presentation is provided for general information purposes only and does not take into account the investment objectives, financial situation or needs of any person. It should not be relied upon in determining whether to invest in the Fund. In deciding whether to acquire or continue to hold an investment in the Fund, an investor should consider the Fund’s product disclosure statement. The product disclosure statement is available on our website at macquarie.com.au/pds or by contacting us on 1800 814 523. Past performance information is for illustrative purposes only and is not indicative of future performance. This presentation may include forward-looking statements that represent opinions, estimates and projections, which may not be realised. We believe the information provided herein is reliable, as of the date hereof, but do not warrant its accuracy or completeness. Certain parts of this presentation may have been obtained or are based upon information obtained from third parties which may not have been checked or verified. Investments in the Fund are not a deposits with, or other liabilities of, Macquarie Bank Limited or of any other member of the Macquarie Group and are subject to investment risk, including possible delays in repayment and loss of income and principal invested. Neither Macquarie Bank Limited nor any other member of the Macquarie Group guarantees the performance of the Fund or the repayment of capital from a Fund, or any particular rate of return. FOR LICENSED ADVISER USE ONLY - NOT FOR DISTRIBUTION TO RETAIL INVESTORS PAGE 2
Agenda 01 Macquarie Income Opportunities 4 Fund – a quick recap 02 Economic and market environment 6 03 Positioning and performance 14 04 Contact details 19 STRICTLY CONFIDENTIAL
01 Macquarie Income Opportunities Fund – a quick recap STRICTLY CONFIDENTIAL
Macquarie Income Opportunities Fund Income strategy A conservative philosophy - Credit opportunities we believe in preserving 1 0% - 20% capital rather than chasing Hybrid yield Core income securities 0% – 10% portfolio 20% - 100% The Fund invests in Emerging credit/corporate bonds and market debt 2 0% - 15% has a flexible, multi strategy Global and opportunistic structure investment grade credit Global high 0% - 40% Trust a manager that yield 0% - 15% performed well through the 3 global financial crisis FOR LICENSED ADVISER USE ONLY - NOT FOR DISTRIBUTION TO RETAIL INVESTORS PAGE 5
02 Economic and market backdrop STRICTLY CONFIDENTIAL
H2 2013 outlook With or without quantitative easing (QE)? Strong start to 2013 by markets has given way to fears of QE ‘tapering’ Aims of QE Raise asset prices Create a wealth effect on economic growth Remember 2013’s ‘game changer’ - where central banks embraced ‘growth targeting’ meaning risk assets rallied, even though there was little evidence QE worked. Outcomes Nine months since the US Federal Reserve (Fed) embarked on QE3 unlimited - both economic growth and inflation have actually slowed and are being revised down Where is the QE wealth effect and the stronger economic growth? — Monetary policy for all intents and purposes appears ineffective in what remains a ‘Liquidity Trap’ — Now in a QE world of unconventional and experimental monetary policy with many unknown consequences. With asset prices now at lofty levels and stronger economic growth remaining elusive, how will markets live with or without QE? FOR LICENSED ADVISER USE ONLY - NOT FOR DISTRIBUTION TO RETAIL INVESTORS PAGE 7
Addictions and side effects Instability and volatility This quarter has revealed how asset prices have benefitted from QE Ben Bernanke’s announcement of the possibility of ‘adjusting’ QE had major effects across all markets with: — higher bond yields – tighter financial conditions — major equity indices declining — credit spreads wider — the only increase observed was USD! Credit spreads Rationale for the timing of the announcement varies from: — ‘positive’ economic data emerging from the US — asset prices supported by QE have outpaced underlying fundamentals & required tempering — the US Fed is preparing for the transition to a new chairperson. Source: Bloomberg, June 2013 FOR LICENSED ADVISER USE ONLY - NOT FOR DISTRIBUTION TO RETAIL INVESTORS PAGE 8
QE will prove a very hard habit to break Markets jitter on talk of ‘tapering’ ‘Tapering’ mentioned Operation Twist extended QE2 ends QE1 ends QE3 announced Operation Twist QE2 news announced (Jackson Hole) QE1 announced Source: Bloomberg June 2013 FOR LICENSED ADVISER USE ONLY - NOT FOR DISTRIBUTION TO RETAIL INVESTORS PAGE 9
Tapering Are costs beginning to outweigh the benefits of QE? Despite the lack of the QE wealth effect, Bernanke introduced the concept of altering the pace of QE. However: — the Fed is downgrading economic growth 2013 and inflation 2014 — the FOMC has a track record of being too optimistic on growth. 2015 2010 Why taper now? 2012 QE isn’t working 2011 QE risks outweigh its benefits Pre-emptive move against stronger growth Actual GDP Concern around asset prices Bernanke is preparing the transition to a new chairperson. Source: FOMC & Bloomberg, June 2013 FOR LICENSED ADVISER USE ONLY - NOT FOR DISTRIBUTION TO RETAIL INVESTORS PAGE 10
(Still) waiting for the QE wealth effect Both growth and inflation are slowing Source: Bloomberg June 2013 Source: Bloomberg June 2013 Where is QE’s impact on economic growth? Nine months since QE unlimited was announced, growth hasn’t improved FOR LICENSED ADVISER USE ONLY - NOT FOR DISTRIBUTION TO RETAIL INVESTORS PAGE 11
Its a low growth, low yield world Increasing debt burdens and modest growth 10 year bond yields through history It remains a low yield world, although a 9% volatile one susceptible to episodic panics US: 2000 - Present 8% Similar historical environments shown in the US: 1925 - 1941 chart reveal a market of grinding low bond 7% yields with moments of sharp moves higher Japan: 1990 - Present 6% Higher bond yields will affect economies 5% given heightened debt levels 4% Currency volatility is back, stronger economies see higher currencies, 3% undermining their growth 2% Indebted economies cannot afford 1% structurally higher bond yields 0% 2013 2000 2005 2000 2005 2013 1990 1995 1935 1941 1925 1930 Source: Bloomberg, June 2013 FOR LICENSED ADVISER USE ONLY - NOT FOR DISTRIBUTION TO RETAIL INVESTORS PAGE 12
Outlook Watch current and growing disconnect between growth/earnings (fundamentals) and a market buoyed by central bank support (liquidity) Expect increased volatility as the Fed decides whether or not they will reduce QE US economy performing well in the face of fiscal headwinds, but now has tighter financial market conditions to contend with Global growth is modest at best — European issues remain unresolved — Japan actions have stirred currency volatility — China growth appears to be disappointing Market belief in the ‘immaculate withdrawal’ may prove misplaced — complications could occur with or without QE — could risk assets aided by central banks move into bubble territory? FOR LICENSED ADVISER USE ONLY - NOT FOR DISTRIBUTION TO RETAIL INVESTORS PAGE 13
03 Positioning and performance STRICTLY CONFIDENTIAL
Macquarie Income Opportunities Fund Positioning Allocation as at 30 June 2013 Credit quality % of portfolio AAA 18.3 Credit opportunities AA 5.7 4.5% A 32.4 Hybrids Core income securities BBB 12.6 portfolio 0.6% 90.7% BB and below 5.8 Emerging market debt Cash 25.2 0.0% Global Statistics investment grade credit Global high Average rating AA- 0.0% yield 4.2% Yield to maturity* 4.2% pa *Yield to maturity (YTM) is the return the Fund would earn over the next year based on current market conditions if there were no changes to interest rates, and assuming there are no changes to the current portfolio. The number which is quoted is pre-fees. Yield to maturity is not the actual return that an investor can expect to receive from a holding of units in the Fund. FOR LICENSED ADVISER USE ONLY - NOT FOR DISTRIBUTION TO RETAIL INVESTORS PAGE 15
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