Schroder ISF* Global Corporate Bond Portfolio positioning & global credit market outlook March 2013 Wesley Sparks, CFA Head of US Fixed Income Lead Fund Manager, Schroder ISF Global Corporate Bond For professional advisors only. Not suitable for retail clients. *Schroder International Selection Fund is referred to as Schroder ISF
Topics for discussion Global Credit market review – A brief recap of 2012 Global Credit market outlook – Opportunities & risks in 2013 – The macro backdrop – Assessing the corporate bond market today Schroder ISF Global Corporate Bond – Portfolio positioning – Performance & performance attribution Schroders approach to Global Credit – Team & process Appendix – Biographies of investment professionals – Compliance disclosures 1
Global Credit market review A brief recap of 2012
Performance of broad market indices in 2012 Investment grade corporate bonds performed well, in-line with their beta profile 2012 total return by asset class (in %) 20 18.23 18.14 16.35 16.00 15 13.29 10.26 10.35 10 5.72 5.30 4.64 4.49 5 0 Global Global Global Agg Global Agg Global Agg Global Agg Global Agg Global Global S&P Russell Aggregate Treasury Agencies Securitized Covered Credit* Sovereigns Emerging High Yield** 500 2000 Bonds Markets *Barclays Capital Global Aggregate Credit Index, USD Hedged ** Barclays Capital Global High Yield Corporate ex CMBS &EMG 2% Issuer Capped Bond Index, USD Hedged Note: All fixed income sectors reflect Barclays Capital indices; total returns for equity indices include the reinvestment of dividends; all total returns are expressed in USD for the 2012 year-to-date period through 31 December 2012 Source: Barclays Capital Live, Bloomberg 3
Returns across the credit quality spectrum in 2012 Lower quality credit outperformed higher-rated bonds 2012 total return (in %) 40 GHY Index** = +18.23% 35 32.54 30 25 20.89 GAC Index* = +10.35% 17.94 20 17.18 13.66 15 10.37 10 7.23 6.08 5 0 -5 AAA AA A BBB BB B CCC CC YTW: 1.33% 1.73% 2.26% 3.28% 4.80% 6.00% 9.42% 22.07% OAS: +38 +81 +123 +208 +367 +502 +834 +1927 * Barclays Capital Global Aggregate Credit Index, USD Hedged ** Barclays Capital Global High Yield Corporate 2% Issuer Capped Bond Index, USD Hedged Note: Total returns for all quality tiers reflect Barclays Capital indices; YTW is the average yield-to-worst of each quality tier Source: Barclays Capital Live; 2012 data through 31 December 2012 Past performance is no guarantee of future results 4
Returns across investment grade sectors in 2012 Insurance & banking were star performers; technology and non-corporates lagged 2012 total return by sector (in %) 20 17.7 Global Aggregate Credit Index = +10.35% 15 14.4 13.3 12.0 11.7 11.1 10.7 10.7 10.1 10.4 10.0 10.0 10 9.1 8.9 8.7 8.5 8.3 8.4 7.7 7.2 7.2 7.1 4.9 5 3.4 0 Gov't Guarantee Cons Non-Cycl Gov't Owned Gov't Sponsored Basic Industry Energy Technology Other Industrial Natural Gas Other Utility Banking Brokerage Insurance REITS Local Authority Sovereign Capital Goods Communications Consumer Transportation Electric Finance Co's Other Financial Supranational Cyclical Note: Data reflect the total returns of the sectors of the Barclays Capital Global Aggregate Credit Index, USD Hedged, for the full year 2012 through 31 December 2012 Source: Barclays Capital Live 5
Various macro risks flared up at different times during 2012 Macro risks sparked a wave of volatility in Q2, but cleared the way for a Q3 rally US fiscal policy mismanagement (falling over the “fiscal cliff” in 2013) ▲ Spain & renewed European contagion crisis ▲ Eurozone austerity measures Soft patch (“growth scare”) in US in Q2/Q3 ▲ China hard landing & slowdown across EM ▲ French election & policy rift with Germany on policy issues for fiscal unity in Eurozone ▼ Oil price spike & rising gasoline prices ▼… then ▲ …and then… ▼ Surge in corporate bond supply and shareholder friendly activities ▲ As some of the macro risks dissipated in recent months, credit rallied significantly The views contained herein are those of the Fund Manager; comments as of 31 December 2012; direction of arrows indicate whether risks were ascendant or descendant Forecast risk warning: Please refer to the important information slide at the end of the presentation 6
Global Credit market outlook Opportunities & risks in 2013
Yield as a starting point to estimate total returns in 2013 Coupon income will likely be the predominant driver of total returns this year Yield (in %) 8 6.13 6 4.28 4 3.39 2.42 2.39 2.24 2.13 1.80 2 1.70 1.41 1.33 0 Global Global Global Agg Global Agg Global Agg Global Global Agg Global Global S&P DAX Aggregate Treasury Agencies Securitized Covered Aggregate Sovereigns Emerging High Yield 500 Bonds Credit Markets Aa1/Aa2 Aa1/Aa2 Aaa/Aa1 Aa1/Aa2 A2/A3 A3/Baa1 Baa3/Ba1 B1/B2 average ratings of index Yields for all fixed income sectors reflect the yield-to-worst of the respective Barclays Capital index; yields for equity indices reflect the dividend yield; The Global Credit index is the Barclays Capital Global Aggregate Credit Index, and the Global HY index is the Barclays Capital Global High Yield Corporate ex CMBS & EMG 2% Issuer Capped Bond Index ;all data as of year-end 31 December 2012 Sources: Barclays Capital Live, Bloomberg 8
Investors contend with a low yield world in 2013 In seeking positive real returns, investors will take various risks to pick up yield Extend duration Go down the credit quality Go down in liquidity Accept worse bond structures (less call protection, less covenant protection) Go down the capital structure These risks must be managed as the market environment changes The views and opinions contained herein are those of the Fund Manager; comments as of 31 January 2013 Forecast risk warning: Please refer to the important information slide at the end of the presentation 9
Investment grade returns exceeded expectations in 2012 2013 has gotten off to a tougher start than last year did for several reasons 2012 total return (in %) 2013 year-to-date total return (in %) 12 12 2012 total return +10.36% 10 10 8 8 YTD 2013 total return -0.07% as at 28 Feb 6 6 4 4 2 2 0 0 -2 01-Jan-13 31-Jan-13 02-Mar-13 -2 Jan-12 May-12 Aug-12 Dec-12 Data reflect the total returns of the Barclays Capital Global Aggregate Credit USD Hedged Index; data through 28 February 2013 Source: Barclays, Bloomberg 10
Time for a potential pause after a 7-month rally? A key question is whether this is a healthy consolidation or the start of a correction Global Aggregate Credit OAS* (in basis points) 260 240 220 200 180 +130 bps as at 28 Feb 160 140 120 Okt-11 Nov-11 Dez-11 Jan-12 Feb-12 Mrz-12 Apr-12 Mai-12 Jun-12 Jul-12 Aug-12 Sep-12 Okt-12 Nov-12 Dez-12 Jan-13 Feb-13 *OAS reflects the option-adjusted spread of the Barclays Global Aggregate Credit Index Source: Barclays, Bloomberg; data through 28 February 2013 11
Global Credit market outlook The macro backdrop
Policy stimulus & muted volatility support tighter spreads Accommodative policies worldwide can dampen volatility and tighten spreads Monetary & fiscal stimulus surged in 2012 Global stimulus supports risk sentiment – There were 275 policy easings worldwide in 2012 Number of stimulative policy initiatives globally – The Fed, ECB, UK, Japan & China were all active 40 – Monetary stimulus already announced is likely to boost growth in coming quarters 30 ECB actions under Mario Draghi represented a departure from former policy approach – Reflects increased willingness to use ECB balance sheet to address peripheral funding needs 20 The Fed’s unconventional policies work in several ways to boost high yield valuations 10 – Low rates encourage the reach for yield – Fed asset purchases in MBS & Treasuries cause investors to redeploy cash into other asset classes – Lower mortgage and consumer rates encourage 0 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 refinancing activity as well as fresh borrowing – Higher asset prices contribute to the wealth effect Source: ISI, Daily Economic Report, 13 September 2012; Schroders comments through 31 December 2012 13
Monetary policy in action…reducing market volatility Volatility waves are less severe as central banks have become more active Measures of Implied Volatility MOVE (in basis points) VIX (in %) US financial crisis US downgrade by S&P Greek debt crisis and European contagion European break- up fears and global slowdown Latest data (14 Feb 2013): MOVE 59.1 VIX 12.6 Interest Rate volatility is measured by the MOVE Index which is calculated as the weighted average of implied volatility of 1 month option expirations on the current 2-, 5-, 10- and 30-year Treasuries; Equity Volatility is measured by the VIX Index which is an exchange traded contract on the CBOE based on real-time prices of options on the S&P 500 Index Sources: Bloomberg, Bank of America Merrill Lynch and Chicago Board of Options Exchange; daily data through 14 February 2013 14
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