Andrew Wilmont, Fondsmanager, "AXA WF Global High Yield Bonds A C (EUR)" (22.07.2011): "While global manufacturing was strong in late 2010 and early 2011, the disruptions to trade and production that resulted from the Japanese earthquake have slowed growth in the sector. Meanwhile, the post-recession balance sheet adjustments in the household and government sectors are constraining aggregate spending growth. It is difficult to see this situation changing in the next quarters as debt levels remain high. However, the recent slowing of growth looks like a soft patch and fears of a double dip recession should ease in the second half of the year. The central scenario is therefore continued weak growth with periods of slightly stronger and periods of slightly weaker economic activity. Something that is not unfavourable for the High Yield asset class that relies on companies with stable to improving fundamentals to invest in. In terms of the interest rate outlook, the European Central Bank has been the first to raise rates while the Fed and BoE remain committed to keeping rates low for as long as possible. The ECB has acted before inflationary expectations have risen while the Fed and BoE are likely to only act in a responsive way, once there is evidence of core inflation or wages rising. Markets are pricing in no rate hikes from the Federal reserve or the Bank of England until well into 2012. On the whole, for the remainder of 2011, there is little chance of any significant increases in policy interest rates unless we start seeing a run of much stronger economic data, which will help support higher yielding parts of the fixed income market where the carry trade is still attractive. The longer term view is that yields will move higher as economic growth recovers further and central banks eventually move to normalise policy. Although detrimental for the higher duration fixed income classes which are more exposed to government rates, the High Yield asset class with its lower duration and higher credit spreads should be more insulated to an eventual move up. Downside risks to this view include any further market volatility related to sovereign issues, rising inflationary pressures and the potential for a slowdown in growth, the result of fiscal tightening, specifically in Europe, and de-leveraging in the financial and housing sectors." Ralph M. Gasser, Senior Product Specialist Fixed Income, "Julius Baer BF Global High Yield-EUR B" (26.07.2011): "For western economies, we expect an extended period of below potential growth with reasonably contained inflationary pressures. In contrast, emerging markets are set to continue to materially outperform western peers and cyclical inflation prints should peak in the later part of 2011, but core inflationary pressures may prove to be more “sticky”.
In general, moderate economic growth across western economies is a favourable macro backdrop for high yield bonds as companies remain cautious in the spending habits, be it in terms of operating cost, capital expenditure, dividend payments, share buybacks or acquisition activities, and focus on de-leveraging their balance sheets instead, which in turn provides for positive credit dynamics for bondholders."
Rashid Mohamed, Investment Specialist, Global Credit, "BNP Paribas L1 Bond World High Yield C C" (28.07.2011): "We expect moderate macroeconomic growth over the next 12 months, with expectations in the region of 2 to 3% in the US and 1 to 2% in Europe. We believe this slow to moderate growth environment will be supportive of high yield credit as slow growth still allows companies to continue to service their debt obligations yet restrains them from resuming aggressive shareholder-friendly behavior. Furthermore, default rates are low globally and expected to remain low as balance sheets have improved over the past couple of years with companies largely having termed out short-dated maturities.
Markus Wiedemann, Fondsmanager und Head of Portfolio Management Investment Grade Credit, "DWS High Income Bond Fund" (25.07.2011): "Wir gehen generell von einer Fortsetzung des wirtschaftlichen Wachstums aus und halten die aktuelle Schwäche für ein temporäres Phänomen, das durch mehrere Einzelfaktoren und Sondereffekte ausgelöst wurde."
e-fundresearch: "Which are the most important elements in your investment process?"
Andrew Wilmont, Fondsmanager, "AXA WF Global High Yield Bonds A C (EUR)" (22.07.2011): "The AXA IM High Yield investment team adopts a fundamental, bottom up investment process combined with a strong, top-down component Based on our investment philosophy, the process is highly disciplined, robust and repeatable. The approach has been successfully tested over time, throughout various market- and economic conditions, and has been the driver of our performance track record.
In summary, our global fixed income teams come together on a bi-monthly basis, deciding on our three month outlook for the different (sub) asset classes
In addition, the High Yield team incorporates an in depth investment philosophy and process summarised in the diagram below."
Ralph M. Gasser, Senior Product Specialist Fixed Income, "Julius Baer BF Global High Yield-EUR B" (26.07.2011): "Global High Yield as an asset class is as a “broad church” in terms of investment philosophies and styles followed by individual houses, be it in terms of geographical preferences, credit positioning, approaches towards managing underlying benchmark duration and FX risks, or individual instrument selection. The investment philosophy and style of the Julius Baer Global High Yield Bond Fund can be summarised as follows:
• We follow a distinctly active, high conviction, bottom-up and fundamentally driven investment style (typically ca. 100 – 130 individual issuers or 175 – 200 individual bonds). The issuer/security selection process is the key pillar of our investment process.
By comparison, the benchmark universe (BofA ML Global High Yield Constrained) comprises 2’672 bonds. Indeed, most peers follow a more Beta-oriented, benchmark-near approach with portfolios of 500 – 750 bonds.
• Clean-cut focus on sub-investment grade (min. 80%) corporate bonds.
In contrast, some peers are focusing on the higher end of the High Yield universe/lower end of the Investment Grade spectrum, while others run Global High Yield as a High Income strategy, incorporating not just corporate bonds, but also to a material extent emerging markets sovereigns, convertibles, structured debt, or indeed equities and warrants.
• Global approach, typically with typically some 75-85% in North American High Yield issuers, 10-20% in European High Yield issuers and 5-15% in emerging markets High Yield issuers along the line of global market capitalisation of High Yield corporate bonds.
• Focus on Credit rather than Rates. We typically run a modified duration of approx. 0.5-1.0 years below benchmark levels.
Most of our peers – given their Beta-oriented, benchmark-near approach – run modified duration about in line with the benchmark.
• FX risk systematically fully hedged.
While most of our peers take a similar approach, some of them partially/tactically open their FX hedges from time to time.
• No financial or synthetic leverage.
Some peers, although not many, use synthetic leverage through CDS or CDS indices."
Rashid Mohamed, Investment Specialist, Global Credit, "BNP Paribas L1 Bond World High Yield C C" (28.07.2011): "In line with our general outlook for global growth, we believe issuer selection and relative value assessment will be crucial in a low growth context where companies have repaired balance sheets but where volatility remains.
Our investment process blends top-down macro views and bottom-up issuer selection, combined with disciplined systematic risk control. Our top down approach is focused on (i) monthly meetings which enable portfolio managers, the team’s credit strategist, CIO, and credit analysts to share their views of the market and define our portfolio orientation going forward, and (ii) model portfolio definition by high yield portfolio managers with validation by the portfolio strategy committee. Monthly meetings are chaired by Martin Fridson, our Global High Yield Strategist. Martin Fridson is "perhaps the most well-known figure in the high yield world," according to Investment Dealers´ Digest. Over a 25-year span with brokerage firms including Salomon Brothers, Morgan Stanley, and Merrill Lynch, he became known for his innovative work in credit analysis and investment strategy.
On the high yield asset class, bottom-up analysis is paramount, as selection of issuers is key to generating performance. Our issuer selection is based on the work of our in-house research team of 13 credit analysts. Having in house sector-specialised credit research is key to generating alpha, particularly in the market environment prevailing during 2011, where we believe value will ultimately come from security selection (as opposed to 2009 which was largely a beta driven market). Each credit analyst produces an Investment Scorecard for each sector, ranking the various issuers within the sector. Both industry trends and structural factors are considered in order to compare companies across sectors and issuer fundamentals are dissected into business profile, financial profile, potential event risk, and quality of management. After considering default probability and recovery value estimations, analysts assign each issuer a fundamental value. The issuer final ranking also takes into consideration the relative value of the company’s bonds based on their trading levels."
Markus Wiedemann, Fondsmanager und Head of Portfolio Management Investment Grade Credit, "DWS High Income Bond Fund" (25.07.2011): "Der Fonds strebt eine attraktive Ausschüttung an, die jährlich in Abhängigkeit vom Marktniveau adjustiert wird. Aktuell ist es das Ziel, 6% p.a. per halbjährlicher Ausschüttung für die Investoren zu erwirtschaften.
Wie in allen Credit Fonds liegt der Fokus auf der Selektion der einzelnen Anleihen, der eine fundamentale Analyse des Emittenten sowie eine Relative Value-Analyse der Anleihe vorausgeht. In Abhängigkeit vom Ausblick für den Credit Markt, das Zinsumfeld und einzelne Sektoren steuert der Portfoliomanager die Allokation unter Berücksichtigung der Anlageziele. Dabei reflektiert das Portfolio im Allgemeinen die besten Ideen unserer Analysten. Um das Ausschüttungsziel risikominimierend zu erreichen, investiert der Fonds auch in Investment Grade Anleihen mit längerer Duration und nachrangigen Anleihen von Banken und Industrieunternehmen."
Question 3
e-fundresearch: "How do you assess the current development of the spreads vs. government bonds as well as the default rate?"
Andrew Wilmont, Fondsmanager, "AXA WF Global High Yield Bonds A C (EUR)" (22.07.2011): "We believe that spreads are inline with long term medians based on the spread differential between Investment grade and High Yield but also looking at Global High Yield spreads by themselves on a historical basis. If we compare that with where we are in the economic cycle and our outlook for slow growth and on the other hand with our bottom up observations of continued improvements in company earnings, which is born out by historically low default rates and the positive ratio of rating upgrades to downgrades."
Ralph M. Gasser, Senior Product Specialist Fixed Income, "Julius Baer BF Global High Yield-EUR B" (26.07.2011): "To us, global high yield bonds continue to rank as one of the most compelling value propositions in fixed income, both tactually as well as strategically. Unlike for the past two years, however, we believe that investors should take a much more selective, focused and tactically flexible approach towards the asset class.
What favours global high yield bonds, in our view, is an economic environment with only moderate growth, strong fundamental credit trends within the high yield asset class, still attractive absolute and relative valuations, solid supply/demand dynamics, as well as the inherently low interest rate sensitivity that high yield bonds offer.
As a result, we consider a return expectation of approximately 8% to 10% - including credit costs – as realistic on a 12-month time horizon, while for traditional core fixed income asset classes like government or investment grade corporate bonds, our forecasts are near neutral territory.
Attractive absolute & relative valuations
Global high yield bonds currently price for a yield-to-maturity of 7.6%, or at a premium of 5.5% versus western government bonds with similar duration. Credit spreads in high yield are still running above the long-term average, while for investment grade corporates, they are near their all-time lows. Also, and if one considers the credit spread actually required to cover the net cost of credit defaults within the universe (currently some 1.5%), credit spreads for high yield bonds continue to materially overcompensate for the actual credit risk profile of the asset class. Taking into account that default rates are set to remain low for the foreseeable future, this should allow spreads to tighten to a cyclical low of about 3.25% to 3.75% from the current 5.5%. Remember that every 1% of spread tightening would correspond to an annualised capital gain – on top of the running yield – of approximately +4.6%.
Positive credit dynamics
What speaks for such a scenario are the strong fundamental trends in the credit profiles of high yield companies, which have materially improved over the past 2 to 3 years, which is reflected by dramatically reduced default rates as well as substantially more ratings upgrades than downgrades for high yield issuers, particularly in North America, with represents some 85% of the market capitalisation of high yield corporate bonds. Also, given an only moderate growth outlook for western economies, this should continue as companies remain cautious in the spending habits, be it in terms of operating cost, capital expenditure, dividend payments, share buybacks or acquisition activities, and focus on de-leveraging their balance sheets instead, which in turn provides for positive credit dynamics for bondholders.
Positive supply/demand dynamics
Buying of high yield bonds over the past 2 years or so has mainly come from non-leveraged, long-only strategic accounts and while issuance may be running at a record pace this is actually largely offset by maturing, tendered or called bonds, coupon payments, rising stars as well as fund flows. Therefore, the market remains very well balanced and in solid shape.
Low interest rate sensitivity
Unlike for traditional core fixed income investments, like western government bonds or investment grade corporate bonds, interest rate shifts have only a very mild impact on the performance of high yield bonds. Therefore, and assuming that interest rates in the West should continue to nomalise over time, high yield bonds would not be materially affected. Besides, a yield-to-maturity of 7.75% offers a considerable additional buffer."
Rashid Mohamed, Investment Specialist, Global Credit, "BNP Paribas L1 Bond World High Yield C C" (28.07.2011): "Credit spreads within the High Yield space remain attractive and are expected to be impacted less than investment grade by European sovereign peripherals. Furthermore, the benchmark used by BNPP L1 Bond World High Yield excludes the Financial sector which we expect to be most susceptible to contagion from the European sovereign debt crisis. The Fund currently has no positions in the Financial sector (as defined by Merrill Lynch).
The average spread for our benchmark (Merrill Lynch Global High Yield BB-B Rated 2% Constrained Ex Financial) is little changed since the beginning of the year at 470bps over treasuries. Spreads have fluctuated during this time, however, as tightening earlier in the year on optimism about a potential recovery was met with pessimism later in the half as European sovereign concerns flared up along with concerns about the US debt ceiling and budget deficit. Our proprietary model, the Fridson-Kong Model, suggests a fair value for US spreads of 470bps compared to an actual level of 535bps (this model is geared to the ML US HY Master II index). With current spreads 65bps wider than fair value, we believe spreads could tighten modestly should concerns about European debt problems and the US debt ceiling abate.
As a result, we continue to remain constructive on the asset class as credit risks inherent to issuers is largely on the decline and default rates remain low, (1.74% for the US and 2.50% for Europe over the last 12 months according to Credit Suisse at the end of June 2011). Default rates are expected to remain low over the coming year as many companies have been able to refinance at low cost. The projected default rate for 2011 as end of December 2010 was 1-3% in both the US and Europe which should continue to support high yield spreads going forward."
Markus Wiedemann, Fondsmanager und Head of Portfolio Management Investment Grade Credit, "DWS High Income Bond Fund" (25.07.2011): "Die Ausweitung der Spreads zu Staatsanleihen in den vergangenen Wochen ist in erster Linie durch die europäische Schuldenkrise ausgelöst worden. Vor diesem Hintergrund halten wir die aktuellen Renditeniveaus für fair bewertet, sehen allerdings mittelfristig ein Performance-Potential gegenüber Staatsanleihen. Vor dem Hintergrund einer zumindest soliden wirtschaftlichen Entwicklung und nach wie vor günstigen Refinzierungsbedingungen sollte die Ausfallrate auf niedrigen Niveaus bleiben."
Question 4
e-fundresearch: "Which over- and underweight positions are currently implemented in the High Yield portfolio?"
Andrew Wilmont, Fondsmanager, "AXA WF Global High Yield Bonds A C (EUR)" (22.07.2011): "Between the US and European high yield markets, valuations are now back in line with long-term median. Considering the state of the economic cycle, and the volatile macro economic environment, we remain underweight the European high yield market versus the US market, content to wait for a better entry point. Within Europe, financials still seem to have the most upside potential in terms of capital appreciation."
Ralph M. Gasser, Senior Product Specialist Fixed Income, "Julius Baer BF Global High Yield-EUR B" (26.07.2011): "Strategy-wise, we continue to make bottom-up, issuer/security-specific relative value adjustments but maintain our long-standing credit positioning, i.e. being o/w the middle of the curve (single Bs) vs. BBs and distressed paper while holding smaller out-of-index positions in the lower IG space, centred mainly upon US/UK financials. The fund´s Ø credit exposure - ex. cash – remains broadly unchanged at a split B/B+ or ½ notch below implied index levels.
Sector-wise, albeit mainly a function of bottom-up selection decisions, we run an o/w in more globally-oriented and/or lower cyclical industries like consumer goods, transportation, basics, TMT and utilities vs. “pricey” industrials and energy names as well as more US consumer-centric sectors like leisure & entertainment, sub-IG US financials or consumer services. Regionally, we stay o/w N American vs. W European issuers in light of fundamental, valuation and liquidity considerations, and run in the aggregate a slight u/w in EM corporates. Also, we maintain a comparatively defensive yield curve and duration positioning vs. corresponding BM levels."
Rashid Mohamed, Investment Specialist, Global Credit, "BNP Paribas L1 Bond World High Yield C C" (28.07.2011): "In terms of sectors, we maintain an overweight in Cable as the sector is still experiencing growth in phone services, internet adoption, and advanced cable boxes (HD, DVRs), yet remains defensive as consumers are not willing to give up TV/Internet, even in a downturn. Cequel Communications, for example, is a rural US provider with relatively low penetrations of phone and internet services which we expect will provide them a longer growth runway than peers. We expect the company to IPO in a couple of years which should further help them deleverage.
We also remain favourable on the Metals and Mining sector as we believe that growth in emerging markets will fuel demand for natural resources. One of our favourite names in the space is Fortescue Metals, a low cost Australian producer of iron ore strategically positioned to supply China. We see a path to investment grade for the company over next couple of years.
Regarding underweight positions, we are underweight Homebuilders and Building Materials as we expect new home sales to continue to stagnate and we expect little upside for construction aggregates as stimulus spending rolls off."
Markus Wiedemann, Fondsmanager und Head of Portfolio Management Investment Grade Credit, "DWS High Income Bond Fund" (25.07.2011): "Aufgrund des absoluten Ertragsziels wird der DWS High Income Bond Fund nicht gegen eine Benchmark gemanagt. Ca. 20% des Portfolios sind aktuell in Investment Grade Anleihen investiert. Stark gewichtet sind die Sektoren Telekommunikation, Banken, Konsumgüter Energie sowie Utilities."
Question 5
e-fundresearch: "Please comment on the performance and risk parameters of your fund in the past year as well as over the past 3 and 5 years."
Andrew Wilmont, Fondsmanager, "AXA WF Global High Yield Bonds A C (EUR)" (22.07.2011): "Over the past year, main performance drivers for the Fund were our overweight position in yield, the underweight allocation to the European high yield market, which we initiated at the end of July 2010 and, in addition, positive contributions from strong stock selection. Our investment style is such that we tend to outperform most in bear markets due to our strong focus on company fundamentals, we tend to outperform or match in trending markets, where stock selection continue to make a difference while we tend to “just” keep up or underperform somewhat in fast rising markets, as fundamentals tend not to play a large role in those."
Ralph M. Gasser, Senior Product Specialist Fixed Income, "Julius Baer BF Global High Yield-EUR B" (26.07.2011): "According to our data, the fund has materially outpaced Ø peers not just so far in 2011 but in each year since inception (2002) except for 2005 and 2010 and at below average volatility, with cumulative excess returns over 5 years amounting to +5.92% versus Ø peers."
Rashid Mohamed, Investment Specialist, Global Credit, "BNP Paribas L1 Bond World High Yield C C" (28.07.2011): "As at the end of June 2011, BNP PARIBAS L1 Bond World High Yield posted positive performance of 3.78% (gross of fees) on a YTD basis. The fund slightly underperformed its benchmark, the Merrill Lynch Global High Yield BB-B Rated, 2% Constrained, ex-Financial as we took a more conservative posture in the portfolio considering the raised level of market volatility.
On a 3 and 5 year basis, the fund posted 7.31% and 6.10% gross of fees. The positive performance reflects the attractiveness of the asset class across the different market cycles. Note that as of 1st of January 2011, all our high Yield funds were benchmarked against a Merrill Lynch benchmark excluding CCC rated Securities and Financial sector debt. Financials entered European benchmarks during the financial crisis, in the wake of the rating downgrades of subordinated bank’s bonds. As a result, Financials subordinated debt (the bulk of it Tier 1 instruments behaving rather like equities) represented up to 20/25% of the asset class in Europe. These bonds are not driven by bottom up issuer selection consideration but rather by systemic & regulatory risk which is not in line with our high yield investment philosophy focused on issuer analysis.
In terms of risk parameters the fund, systematic risk control is an integral part of our investment process. Fund volatility stands at 3.30% (last 52 weeks) and 15.5% (last 36 months) against the benchmark volatility of 3.07% (last 52 weeks) and 17.40% (last 36 months). Tracking error has been consistently low at 0.76% (last 52 weeks) and 3.80% (last 36 months)."
Markus Wiedemann, Fondsmanager und Head of Portfolio Management Investment Grade Credit, "DWS High Income Bond Fund" (25.07.2011): "In den letzten 12 Monaten profitierte der Fonds von der positiven Performance des High Yield Marktes. Die darüber hinaus eingegangenen Positionen im Investment Grade (geringeres Kreditrisiko, höheres Zinsrisiko) erhöhten die Diversifikation im Portfolio und stabilisierten den Performancepfad.
Das Ausschüttungsziel wurde im ersten Halbjahr des Fondsgeschäftsjahres erreicht."
Performancedaten per 15.07.2011
