GLMF presentation Dec 12 UK

M&G Global Macro Bond Fund
Jonathan Willcocks, Managing Director, Global Head of Retail Sales
November 2012
M&G Global Macro Bond Fund
Fund facts
2
• Fund manager:
Jim Leaviss
• Deputy fund manager:
Mike Riddell
• Launch date:
October 1999
• Fund structure:
UCITS III
• Size:
£258 million
• Sector:
IMA Global Bond sector
Source: M&G as at 31 October 2012. Ratings as at 30 September 2012 and should not be taken as recommendations.
Global opportunity set and designed to achieve lower volatility
M&G Global Macro Bond Fund
Total return
180
73.1%
Total return, indexed to 100
160
60.7%
60.4%
52.3%
42.5%
Credit crisis
140
120
100
80
60
M&G Global Macro Bond Fund X Acc
European High Yield
Sterling Investment Grade Corporates
Emerging market local currency sovereign debt
Gilts
Our most flexible bond fund
3
Source: M&G, Bloomberg, Morningstar as at 2 November 2012. Sterling X Acc class shares, UK database, net income reinvested, price to price. European High Yield refers to the ML European High Yield Constrained Index, Emerging
Market Local Currency Sovereign debt to the JPM EM-GBI Global Diversified Index, Gilts to the ML UK Gilts Index, and Sterling Investment Grade Corporates to the ML Sterling Corporate & Collaterlized Index.
Fund manager
Jim Leaviss
4
•
Jim joined M&G in 1997 from the Bank of England.
He is Head of M&G Fixed Interest
•
Manager of the M&G Global Macro Bond Fund since
October 1999
•
Manager of the M&G Gilt & Fixed Interest Income
Fund since April 1998
•
Co-Manager of the M&G UK and European Inflation
Linked Corporate Bond Funds since September 2010
•
Has 20 years of experience in fixed income markets
M&G Global Macro Bond Fund
Jim Leaviss, Head of Retail Fixed Interest
Fund Manager
November 2012
Agenda
Fixed Interest at M&G
Central Bank Regime Change
Emerging markets are not a safe haven
The US economy– a comeback story
M&G Global Macro Bond Fund
6
Fixed Interest at M&G
7
Introduction to M&G
One of Europe’s leading
asset managers
8
Fixed
income
Total assets:
£216.9
£134.0bn
One of Europe’s largest
corporate bond fund
managers
Corporate
bonds:
One of Europe’s largest
fixed interest credit
research teams
Fixed income
analysts based in
London
An active global reach
Access to Prudential
resources in the US,
Asia and South Africa
Source: M&G, as at 30 September 2012
Investment
grade
High
yield
£75.8bn
£5.0bn
86
M&G Retail Fixed Interest team
7 fund managers and 6 other investment professionals
Richard Woolnough – (26)
Stefan Isaacs– (11)
Fund Manager
Fund Manager
Ben Lord– (10)
James Tomlins – (10)
Mike Riddell – (10)
Fund Manager
Fund Manager
Fund Manager
Matt Russell – (8)
Anthony Doyle – (10)
Gordon Harding – (9)
Deputy Fund Manager
Investment Director
Investment Specialist
Jim Leaviss
(20 years experience)
Head of Retail Fixed Interest
Markus Peters – (4)
Nicolo Carpaneda – (8)
Investment Specialist
FMA
Investment Specialist
Ana Gil – (4)
Investment Specialist
9
Source: M&G, November 2012
James Thompson – (2)
Central Bank Regime Change
10
Central Bank Regime Change: the 4 regimes
1880-2012
0.6
The Volker years and inflation
fighting Central Banks
1981-2010
Frequency distribution
0.5
Post WWII debt reduction
and financial repression
1945-1980
0.4
0.3
The Gold Standard.
Monetary stability and
fixed exchange rates
1880-1939
The credit crisis and
sovereign debt crisis
2008-2012
0.2
0.1
0.0
-5
-4
-2
0
2
4
Real interest rate (deposit rate less RPI)
11
Source: International Monetary Fund (1880-2010), M&G (2008-2012). Real interest rates refer to the UK.
6
8
Reliance on imported oil in the 1970s did not
necessarily cause inflation
16%
120%
100%
Inflation rate %
12%
80%
10%
8%
60%
6%
40%
4%
20%
2%
0%
0%
UK
Australia
Canada
Average Inflation (1975-1983), LHS
US
Japan
Germany
Dependence on imported oil (1974-1980), RHS
So what did cause average inflation rates of 8% and higher?
12
Source: Bloomberg, BP Statistical Review, Nomura Research as at April 2011
Imported oil as a % of total oil consumption
14%
"Inflation is always and everywhere a monetary
phenomenon"
Milton Friedman
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
UK
Australia
Canada
US
Average excess money supply growth (1975-1983)
Japan
Germany
Average inflation (1975-1983)
The role of policymakers in causing or controlling inflation
can't be underestimated
13
Source: Bloomberg, Nomura Research as at April 2011
Inflation protection is cheap
5 year breakeven rates
3
RPI*
US 5y
2.5
2
UK 5y (RPI)
CPI target
%
1.5
1
0.5
0
The market expects inflation to average significantly below
the ECB’s and BOE’s target over the next five years
14
Source:Bloomberg,
M&G, as atas
30atDecember
2011.
Source:
31 October
2012, *based on the assumption of a current differential of 1% between UK RPI and UK CPI
Germany 5y
UK 5y (CPI)
Emerging markets are not a safe
haven
15
China – the world’s biggest credit bubble since 2009
Annual change in private credit, 2009-11
% of GDP - World Economic Outlook 2012
2011
55
2010
45
2009
35
25
15
5
-5
The question is not if, but when China’s bubble will burst
16
Source : IMF Global Financial Stability Report, April 2012
China’s extraordinary growth is now held up by credit
Chinese GDP growth rate should be nearer to 5% than 10%
Credit to GDP in % (2010) relative to per capita income in USD
Spain
UK
250
Ireland
US
China*
200
Japan
HK
150
Korea*
100
50
0
1000
11000
21000
31000
41000
51000
Per capita income (USD)
The Chinese government has a lot of policy firepower
– but the days of 10%+ growth are behind us
17
Source : World Bank, IMF, HSBC, January 2012. *China and Korea data have been adjusted by HSBC.
61000
Credit to GDP (%) 2010
Portugal
EM external sovereign debt credit spreads are reaching
pre-crisis levels
2000
1800
1600
1400
Z-Spread in bps
Bps
1200
1000
800
600
400
200
0
Brazil 8 ⅞ 04/15/24
Colombia 8 ⅛ 05/21/24
Mexico 8 09/24/22
Peru 7.35 07/21/25
Philippines 10 ⅝ 03/16/25
Barely compensating for liquidity risk, let alone credit risk
www.bondvigilantes.com
18
Source: Bloomberg, M&G, as at October 2012.
Emerging market local currency debt – what goes in can
also come out (but not very easily)
Foreign holdings as % of government bonds outstanding
% (end of period)
2007
2008
2009
2010
2011
Q1 2012
Hungary
30
22
20
23
34
36
Poland
20
14
18
26
30
32
South Africa
13
16
15
23
25
22
Turkey
13
10
9
13
16
23
Brazil
5
7
9
11
11
12
Mexico
11
12
12
19
26
29
Peru
30
30
21
46
48
58
Indonesia
16
17
19
31
31
29
Malaysia
15
14
17
22
26
36
Thailand
0.20
2
2
6
8
8
Emerging market economies have changed for the better –
but valuations have run ahead of fundamentals
19
Source: JP Morgan, September 2012.
A China slowdown has a significant impact on its
trading partners
200
Assessment of US ‘fiscal cliff’ risks (Barclays Research)
180
CDS spread in bps
160
140
120
100
Which one do you want
to be long or short of?
80
Jan-12
Mar-12
May-12
Brazil 5y CDS, BBB
Jul-12
Sep-12
Nov-12
Berkshire Hathaway 5y CDS, AA-
We have bought protection on Brazil and other EM countries
20
Source:
21 November
Source:Bloomberg,
M&G, as at as
30at
December
2011.2012.
The US economy – a comeback story
21
US is likely to become energy independent
Shale gas extraction will turn the US into a net gas exporter
Net oil & gas import dependency
22
Source: International Energy Agency, World Energy Outlook 2012, November 2012.
Chemicals sector
Stock example Ineos
EUR 7.875% 2016
• World’s fifth largest chemicals company,
European headquartered with large US
presence.
• Old and resilient business. Gas is used
as both raw material and energy input
• M&G company rating: B. M&G senior
unsecured issue rating CCC+
• Current yield-to-maturity = 9.0%
• Improving credit, favoured play on US
energy and chemicals market
23
Source: M&G as at 21 November 2012
US housing market indicates a solid economic recovery
US new one family homes months’ supply (3m average) vs US GDP yoy
2
10
8
short supply
strong growth
6
4
4
2
6
0
8
-2
-4
10
-6
12
large supply
weak growth
-10
1963
1965
1966
1968
1969
1971
1972
1974
1976
1977
1979
1980
1982
1984
1985
1987
1988
1990
1991
1993
1995
1996
1998
1999
2001
2003
2004
2006
2007
2009
2010
14
The US economy looks in much better shape than the UK and the
Eurozone – so how can this be reflected in the portfolio?
24
-8
Source:: Bloomberg,
M&G, as at 30
December
2011. 2012
Source
as at
30 September
US GDP YoY (%)
Housing inventory – months’ supply
(inverted scale)
0
Building materials & construction sector
Stock example Cemex
EUR 9.625% 2017
• Global construction materials
• Cyclical business, volatile cash flow
• Unsecured, NA/B• M&G rating: B
• Current yield-to-maturity = 7.1%
• Improving credit, favoured play on US
housing market
25
Source: M&G as at 31 October 2012
USD looks attractively valued
JPM Real Broad Effective
Exchange Rate, indexed to 100
160
UK current balance as % of GDP
Particularly relative to sterling
4
3
2
1
0
-1
-2
-3
-4
-5
-6
150
140
AUD
130
120
110
GBP
100
90
70
USD
Default Rate %
80
1975-76 sterling
-28% vs US dollar,
-29% vs Deutsche mark
1990-91 sterling
-20% vs US dollar,
-15% vs Deutsche mark
We have hedged GBP and AUD exposure into USD
26
Source:Bloomberg,
M&G, as atONS,
30 December
2011.2012. Rebased to 100 at 31 January 1970.
Source:
as at October
2008-09 sterling
-19% vs US dollar,
-17% vs euro
M&G Global Macro Bond Fund
27
Performance levers to pull
Invests globally in government bonds, corporate bonds, high yield,
emerging market debt, inflation-linked bonds
Positive or negative duration
Positive and negative positions in sovereign and corporate debt
Can invest in both developed market and EM currencies
Ability to perform in both rising and falling markets
28
Fund manager objectives
Aims to outperform the
average fund in its peer group
as well as the fund’s
composite benchmark
over the medium term
Aims to deliver steady returns
with lower volatility than the
average fund in its peer group
throughout the economic
cycle
M&G Global Macro
Bond Fund
Aims to construct a
diversified portfolio by
investing in a range of liquid
fixed interest assets across
geographies
Total return focus
29
Source: M&G, as at 13 January 2012.
Aims to take high conviction
views. Not benchmarkconstrained
A fully flexible global bond fund
Historical credit risk and duration positioning
10 years
Duration
(interest rate risk)
8 years
1
6 years
2
Feb 2009
Jul 2011
4 years
3
4
August 2012
Oct 2012
2 years
0 years
-2 years
-4 years
AAA
30
Source: M&G, as at 31 October 2012.
AA
A
BBB
Credit risk
BB
B
CCC
Fund positioning summary
M&G Global Macro Bond Fund
Key portfolio themes
Credit rating breakdown
25
Duration
Low interest rate duration of around
2.5 years
Inflation
Central banks no longer care about
inflation, so we have 18% in linkers
20
Government Quality dominates. Generally we prefer
bonds
credit over government bonds
15
%
Investment
grade
We prefer corporate issuers – although
covered bonds + RMBS are good value
High yield
Still overcompensates for default, but
valuations have come closer to fair value
Emerging
markets
Currencies
31
We are very selective – some corporate
exposure, but short positions in Brazil,
Indonesia, Russia, South Africa & Turkey
We like the USD and have short
positions in sterling, the Aussie dollar
and Kiwi dollar as well as the SA rand
Source: M&G, as at 31 October 2012.
10
5
0
AAA
AA
A
BBB
BB
B
CCC &
below
Currency exposure
M&G Global Macro Bond Fund
65
55
45
35
%
25
15
5
-5
USD
EUR
JPY
Fund
32
Source: M&G, as at 31 October 2012.
CHF
SEK
NOK
ZAR
AUD
Neutral position
NZD
GBP
Geographic allocation, gross exposure
M&G Global Macro Bond Fund
30
25
20
%
15
10
5
0
Europe, core
33
Europe,
periphery
Source: M&G, as at 31 October 2012.
Europe, noneurozone
UK
US
Japan
Emerging
markets
Others
www.bondvigilantes.com
www.twitter.com/bondvigilantes
34
Prices may fluctuate and you may not get back your original investment.
For Financial Advisers only. Not for onward distribution. No other persons should rely on any information contained within. This Financial Promotion is issued by M&G
Securities Limited which is authorised and regulated by the Financial Services Authority and provides investment products. The registered office is Laurence Pountney Hill, London, EC4R
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