GLOBAL HIGH YIELD BONDS June 2012 This document has been prepared by and contains the views of Aviva Investors North America, Inc. It is being circulated in the UK and a limited number of European countries by Aviva Investors Global Services Limited for information purposes only. The content is for investment professionals and institutional/qualified investors only. It is not to be viewed by or used with retail clients. All data contained herein is as of March 31, 2012, unless otherwise noted.
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GLOBAL HIGH YIELD BONDS
June 2012
This document has been prepared by and contains the views of Aviva Investors North America, Inc. It is being
circulated in the UK and a limited number of European countries by Aviva Investors Global Services Limited for
information purposes only. The content is for investment professionals and institutional/qualified investors only. It is
not to be viewed by or used with retail clients. All data contained herein is as of March 31, 2012, unless otherwise
noted.
IMPORTANT INFORMATION
This presentation is a presentation of Aviva Investors North America, Inc. (“AINA”), the lead adviser to U.S. clients with respect to the strategy discussed
herein. In performing its services, AINA utilizes the services of investment professionals of affiliated investment advisory firms who are best positioned to
provide the expertise required to manage a particular strategy or product. In keeping with applicable regulatory guidance, each such affiliate entered into a
Memorandum of Understanding ("MOU") with AINA pursuant to which such affiliate is considered a "Participating Affiliate" of AINA as that term is used in
relief granted by the staff of the Securities and Exchange Commission allowing US registered investment advisers to use portfolio management and trading
resources of advisory affiliates subject to the supervision of a registered adviser. Investment professionals from the Participating Affiliate may render
portfolio management, research or trading services to clients of AINA. Investment professionals from the Participating Affiliate may also render
substantially similar portfolio management research or trading services to clients of advisory affiliates which may result in performance better or worse than
presented herein. This means that the employees of the Participating Affiliate who are involved in the management of funds and other products offered to
US investors are supervised by AINA.
AINA and each of its Aviva Investors investment advisory affiliates, including Participating Affiliates, are subsidiaries of Aviva plc (AV listed on LSE, FTSE
100). The combined Aviva companies constitute the world’s sixth largest insurance group. AINA and its investment advisory affiliates employ over 1,300
people in 17 countries (USA, Canada, UK, India, France, Luxembourg, Romania, Poland, Germany, Sweden, Switzerland, Netherlands, Ireland, Australia,
China, Singapore, and Taiwan) and manage in excess of $408 billion (USD), as of December 31, 2011, in segregated mandates, pooled funds and
alternative strategies spanning asset classes which include: real estate, equities, fixed income, derivatives and money market instruments.
The name “Aviva Investors” as used in this Presentation refers to the global organization of affiliated asset management businesses operating under the
Aviva Investors name. Each Aviva Investors affiliate is a subsidiary of Aviva plc, a publicly-traded multi-national financial services company headquartered
in the United Kingdom.
Past performance is not indicative of future results. There can be no guarantee that any investment strategy discussed in this Presentation will achieve its
investment objectives. As with all investment strategies, there is a risk of loss of all or a portion of the amount invested. No chart, graph, or formula can by
itself determine which securities an investor should buy or sell. All amounts herein are USD unless otherwise indicated.
This Presentation contains the current opinions of AINA and is not intended to be, and should not be interpreted as, a recommendation of any particular
security, strategy or investment product. Such opinions are subject to change without notice. This Presentation is distributed for informational purposes only
and is not intended to be a recommendation or investment advice. The information herein is based on sources which AINA believes to be reliable but is not
guaranteed to be accurate or complete. Individuals identified in this Presentation are employees of AINA or other Aviva Investors affiliates.
No Aviva Investors affiliate is engaging in or holding itself out as engaging in the business of advising others as to investing in securities or the business of
buying or selling securities in any jurisdiction where it is not qualified to do so.
This Presentation is qualified in its entirety by the GIPS® compliant presentation and disclosures contained in the Appendix, which must be read in
conjunction with statements contained in this Presentation.
2
Global High Yield Bonds
OUR GOAL IS TO BE YOUR PARTNER IN HIGH YIELD
Past performance is not a guide to future performance.
Our objective is to outperform the market and with less risk
3
Global High Yield Bonds
Characteristics of the
Global High Yield Market
Presenting both a strategic and current
opportunity
An experienced team and
disciplined process
Experienced leadership in
global high yield management
Consistent results with
strong performance
A process that has resulted in strong
relative and risk-adjusted performance
CHARACTERISTICS OF THE GLOBAL HIGH YIELD MARKET
Global High Yield Bonds
4
CHARACTERISTICS OF THE HIGH YIELD OPPORTUNITY THE POWER OF THE COUPON
Total Annualized
Return = 9.6%
Income Return = 10.6% or 110%
Price Return = -1.0% or -10%
Source: 10/31/1984 – 3/31/2012; J0A0 Index; Bloomberg. Past performance is not a guide to future performance. 5
Global High Yield Bonds
CHARACTERISTICS OF THE GLOBAL HIGH YIELD MARKET RISK AND RETURN CHARACTERISTICS OF VARIOUS ASSETS
Sources: J.P. Morgan; Bloomberg. Note: 25-years ending December 31, 2011
High yield bonds have an attractive risk-return profile
6
Global High Yield Bonds
5-year Treasury
10-year Treasury LB Agg. Bond Index
Investment Grade
High-yield bonds
S&P 500
Wilshire 5000 Russell 2000
FTSE 100
DAX
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
An
nu
ali
zed
Retu
rn
Annualized Volatility
Gold
US Inflation
CHARACTERISTICS OF THE GLOBAL HIGH YIELD MARKET CORRELATION DEPENDS ON LEVEL OF SPREADS
*EMD since 1994 Source: Barclays Capital; 1984 to 3/31/2012 Source: BofA Merrill Lynch Global Research; 1/4/1991 – 12/31/2011 Past performance is not indicative of future return.
Monthly Return
Correlations (since 1984) High Yield
Credit 0.5
S&P 500 0.6
EMD* 0.6
Govt 0.1
Agg 0.3
Behavior of high yield is idiosyncratic, offers low correlation to other asset classes
7
Global High Yield Bonds
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
52-w
k T
rail
ing
Co
rrela
tio
n
HY Spread < 500bp
CHARACTERISTICS OF THE GLOBAL HIGH YIELD MARKET QUALITY TIER PERFORMANCE COMPARISON
Sources: Barclays Capital, Bloomberg; 6/30/1983 – 3/31/2012 Past performance is not indicative of future return. For illustrative purposes only.
BBs have outperformed and with less risk
8
Global High Yield Bonds
$1,506
$1,143
$1,030
$565
$50
$150
$250
$350
$450
$550
$650
$750
$850
$950
$1,050
$1,150
$1,250
$1,350
$1,450
$1,550
$1,650
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Growth of a $100 Investment 6/30/1983 to 3/31/2012
Barclays Capital U.S. High Yield Ba Index
Barclays Capital U.S. Credit Baa Index
Barclays Capital U.S. High Yield B Index
Barclays Capital U.S. High Yield Caa Index
CHARACTERISTICS OF THE GLOBAL HIGH YIELD MARKET AVERAGE ANNUAL DEFAULT RATE BY RATING TIER
Source: Moody’s; 1983 – 2011. Annual Issuer-Weighted Global Default Rates by Letter Rating * Investment grade = Aaa through Baa; rate is the average annual default rate of securities within tiers defined as Investment Grade ** High yield = Ba through Caa - C; rate is the average annual default rate of securities within tiers defined as High Yield. Past performance is not indicative of future return. The definition of default in respect of a debt security includes missed or delayed payments of interest and/or principal, bankruptcy or insolvency of the issuer, and certain distressed issue exchanges.
Aaa 0.00%
Aa 0.04%
A 0.04%
Baa 0.20%
Ba 1.17%
B 5.23%
Caa - C 23.29%
Triple-C and lower rated bonds are over five times more likely to default than the high yield market.
Investment Grade
0.09%*
High Yield 4.67%**
9
Global High Yield Bonds
THE HIGH YIELD OPPORTUNITY THE RELATIONSHIP BETWEEN DEFAULT RATES AND SPREADS
THE HIGH YIELD OPPORTUNITY HIGH YIELD RETURN SCENARIOS USING SOME SIMPLE MATH
Barclays Global
High Yield Index Scenario 1 Scenario 2 Scenario 3
Default Rate 5.0% 2.5% 2.0%
Date: 4/30/2012 Expected Recovery 35% 40% 40%
Price: $100.1 Spread Change, bps +250 +0 -200
OAS 604bps % Change from Spreads -10.1% 0.0% 8.1%
YTW: 7.4% % Change from Defaults -3.2% -1.5% -1.2%
Current Yield: 8.0% Expected current yield 7.8% 7.9% 7.9%
Forecast Return -5.6% 6.4% 14.8%
Past performance is not a guide to future performance. The above scenarios are hypothetical, intended solely to illustrate the possible effects of changes in default rates, recovery rates and market spreads on potential returns in the high yield bond market. No scenario can predict all potential changes in rates, investor behaviors or economic conditions, or how such changes might affect returns. Any such changes could significantly alter the potential returns discussed above; past performance is not indicative of future results. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and other risks. High-yield, lower-rated securities involve greater risk than higher-rated securities, and portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. The discussion of risks associated with the high yield bond investment strategy is not intended to set forth an exhaustive list of the risk but only those risks believed to be the most significant by Aviva Investors. Benchmark (index) performance does not reflect the deduction of transaction costs, management fees, or other costs which would reduce returns. References to market indexes , benchmarks or other measures of relative performance over a specified period of time are provided for your information only and do not imply that a portfolio will achieve similar returns, volatility or other results. An index is unmanaged and the composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or actual returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which may change over time. An investor cannot invest directly in an index. Source: Barclays Capital, Inc., Barclays Global High Yield Capped Index ; Aviva Investors North America, 3/31/2012 Option adjusted spread is used for spread calculations. Forecasted returns are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Potential returns are based on a number of assumptions, may not be realized and are subject to risk. All references to “forecast” and “forecasted” returns in this presentation relate to the period 4/30/2011 – 4/30/2012.
Today’s valuations can produce compelling returns in a low default environment
14
An Opportunity in Global High Yield
THE HIGH YIELD OPPORTUNITY A SUMMARY OF OUR RECOMMENDATION
We continue to recommend a Marketweight allocation
15
An Opportunity in Global High Yield
– Moody’s trailing 12 month global high yield default rate ending April is 2.6%. The 12 month forecast is
for a moderate increase to 2.8%.
– Corporate profitability is expected to grow, although at a slower pace. Corporate balance sheets have
been materially strengthened over the past 2-3 years due mainly to maturity extension.
– High Yield valuations have been impacted by uncertainty over European sovereign and recessionary
risk, as well as a decrease in liquidity due to new regulations.
– Demand is strong with year-to-date high yield fund flows at $23 bn compared to $15.6 bn in 2011.
Bank loan flows have been modest this year with $2 bn inflows compared to $13.9 bn last year.
Fundamentals robust, with companies generating healthy FCFs and maintaining strong balance sheets
(4)
Technicals favorable, due to vigorous demand from retail and institutional investors
(4)
Valuations Spreads are compelling though yields are low (2)
OUR GOAL IS TO BE YOUR PARTNER IN HIGH YIELD
Past performance is not a guide to future performance. *No assurance can be given that the investment objective will be achieved
Our objective is to outperform the market and with less risk*
An experienced team and
disciplined process
Experienced leadership in
global high yield management
Consistent results with
strong performance
A process that has resulted in strong
relative and risk-adjusted performance
16
Global High Yield Bonds
AN EXPERIENCED TEAM AND DISCIPLINED PROCESS HIGH YIELD PORTFOLIO MANAGEMENT TEAM
*3/31/12; Preliminary and unaudited, Aviva Investors North America, Inc. **Investment management and other service provided by personnel of Participating Affiliates.
Firm/product 1 YR RANK 2 YR RANK 3 YR RANK 5 YR RANK
Aviva Investors US High Yield Unconstrained 7.8 14 11.5 12 22.1 31 8.7 17
Aviva Investors Global High Yield 6.6 45 10.6 38 22.7 25
1 YR 2 YR 3 YR 5 YR
Aviva Investors US High Yield Unconstrained Aviva Investors Global High Yield
eVestment Alliance US High Yield Fixed Income Universe
Gross Returns as of March 31, 2012 0%
25%
Median
75%
100%
Retu
rn (
%)
19
Global High Yield Bonds
75%
U.S. HIGH YIELD UNCONSTRAINED COMPOSITE JUNE 30, 2005 THROUGH DECEMBER 31, 2011
20
Global High Yield Bonds
Composite Disclosures Description: The composite includes all strategies and portfolios which invest in U.S. dollar denominated high yield corporate bonds from issuers in developed countries. The strategy typically seeks unsecured fixed-rate obligations in firms with credit ratings of BB+ or lower. In 2009, the composite’s name was revised from High Yield Fixed Income II to U.S. High Yield Unconstrained. Benchmark: Barclays U.S. Corporate High Yield 2% Issuer Cap Index is the composite’s benchmark. It covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, 144-As and pay-in-kind bonds (PIKs, as of October 1, 2009) are also included. Inception: The creation and inception date of the composite is July 01, 2005. The return for the year ended 12/31/2005 represents the return from the inception date to year end. Currency: All returns and amounts are expressed in U.S. Dollars. Management Fee: The management fee ranges from 40 to 50 basis points based on the assets under management. The minimum fee is $125,000. General Disclosures Firm: Aviva Investors North America (AINA) consists of three legal entities: Aviva Investors North America, Inc., Aviva Investors Canada Inc. (January 01, 2009), and River Road Asset Management, LLC (February 24, 2010), which together form the North American region of Aviva Investors, a global organization including the asset management affiliates of Aviva plc. The Firm manages a variety of fixed income, equity, derivative, convertible bond and alternative investments for institutional clients. GIPS®: AINA claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. AINA has been independently verified for the periods from January 1, 2005 to March 31, 2011. A copy of the verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. Performance: Total Return - Gross of Fees is reduced by transaction costs and the returns are presented before AINA’s management fee. Total Return - Net of Fee is calculated after AINA’s actual management fees. Returns include the reinvestment of all income. Return Variability: AINA measures variability of returns by computing the 3 Year Standard Deviation of the Composite’s Total Return - Gross of Fee and the Composite’s Total Return – Benchmark using the most recent 36 monthly returns. If the composite has been outstanding less than 36 months, this measure is not applicable. Dispersion is calculated on composites with more than 5 accounts using the asset-weighted standard deviation of all portfolios included in the composite for the entire year. Other Information: A listing of AINA’s composites and descriptions are available upon request. Information regarding AINA’s policies & procedures for valuing portfolios, computing & reporting performance returns, and preparing compliant presentations is available upon request. Past performance is not indicative of future results.
Total Return (%) 3 Year St. Deviation Assets (in millions)
GLOBAL HIGH YIELD COMPOSITE SEPTEMBER 30, 2008 THROUGH DECEMBER 31, 2011
21
Global High Yield Bonds
Composite Disclosures Description: The composite includes all strategies and portfolios with the flexibility to invest in multi-currency high yield debt securities within the developed global markets, primarily North America and Europe. Derivatives can be used to hedge currency risk. Benchmark: Barclays Global High Yield 2% Issuer Capped Bond Index excluding CMBS and Emerging Markets hedged to USD is the composite’s benchmark. Inception: The creation and inception date of the composite is September 30, 2008. The return for the year ended 12/31/2008 represents the return from the inception date to year end. Currency: All returns and amounts are expressed in U.S. Dollars. Management Fee: The management fee ranges from 40 to 50 basis points based on the assets under management. The minimum fee is $125,000. General Disclosures Firm: Aviva Investors North America (AINA) consists of three legal entities: Aviva Investors North America, Inc., Aviva Investors Canada Inc. (January 01, 2009), and River Road Asset Management, LLC (February 24, 2010), which together form the North American region of Aviva Investors, a global organization including the asset management affiliates of Aviva plc. The Firm manages a variety of fixed income, equity, derivative, convertible bond and alternative investments for institutional clients. GIPS®: AINA claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. AINA has been independently verified for the periods from January 1, 2005 to March 31, 2011. A copy of the verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. Performance: Total Return - Gross of Fees is reduced by transaction costs and the returns are presented before AINA’s management fee. Total Return - Net of Fee is calculated after AINA’s actual management fees. Returns include the reinvestment of all income. Return Variability: AINA measures variability of returns by computing the 3 Year Standard Deviation of the Composite’s Total Return - Gross of Fee and the Composite’s Total Return – Benchmark using the most recent 36 monthly returns. If the composite has been outstanding less than 36 months, this measure is not applicable. Dispersion is calculated on composites with more than 5 accounts using the asset-weighted standard deviation of all portfolios included in the composite for the entire year. Other Information: A listing of AINA’s composites and descriptions are available upon request. Information regarding AINA’s policies & procedures for valuing portfolios, computing & reporting performance returns, and preparing compliant presentations is available upon request. Past performance is not indicative of future results.
Total Return (%) 3 Year St. Deviation Assets (in millions)
The values of fixed income securities fluctuate in response to the condition of individual issuers, general market and economic conditions, and changes in
interest rates. High Yield securities have a greater risk of default than higher rated securities, are generally uncollateralized and subordinated to other
outstanding debt of the issuer, and are considered predominantly speculative. There are additional risks associated with international investments.
International securities may be subject to market/currency fluctuations and other risks involving foreign economic, political, monetary, taxation, auditing
and/or legal factors. The use of derivatives may reduce returns and increase volatility.
Any investment involves a degree of risk, including the risk of total loss. The risk information presented herein endeavors to capture some but not all risks
associated with a strategy or product. Actual performance results may differ from the Composite portfolio performance, depending upon the size of the
account, investment guidelines and/or restrictions, inception date and other factors. Performance information is presented solely for illustrative and
informational purposes and should not be construed as a forecast or projection.
Any statement of return or other performance by an index is not a representation or assurance that the information or performance attributed to the index
was accurately compiled or published; Aviva Investors has not independently verified index-related information. Index returns are provided to represent the
investment environment existing during the time periods shown. For comparison purposes, an index is fully invested, which includes the reinvestment of
dividends and capital gains, but index returns do not include any transaction costs, management fees, or other costs that would reduce
returns. Composition of each separately managed account portfolio in a composite may differ from securities in the corresponding benchmark index. An
index is used as a performance benchmark only, as Aviva Investors does not attempt to replicate an index. The prior performance of an index will not be
predictive of the future performance of accounts managed by Aviva Investors. An investor may not invest directly in an index.
Returns are shown gross of fees. The performance shown does not reflect the deduction of investment advisory fees. The client’s return will be reduced
by the advisory fees and other expenses incurred as a client. The net compounded effect of the deduction of investment management fees over time will
be affected by the amount of the fees, the time period and your account’s investment performance. For example, an account with a beginning value of
$100 million, gaining an annual return of 10% per year would grow to $259 million after 10 years, assuming no fees have been paid. If the same account
paid a 1% annualized advisory fee, it would grow to only $235 million over 10 years. The annualized returns over the 10 year time period would be 10%
(gross of fees) and 8.91% (net of advisory fees). A description of Aviva Investors’ fees may be found in Part II of the ADV.
Aviva Investors U.S. High Yield Constrained Composite Default Experience vs. Moody's Annual Issuer-Weighted Global Speculative-Grade Default Rate
The definition of default in respect of a debt security includes missed or delayed payments of interest and/or principal, bankruptcy or insolvency of the
issuer and certain distressed issue exchanges. Note that the default rate calculations have limitations as an indicator of manager performance as the
default rate calculations do not account for assets that have not defaulted but have been liquidated from the portfolio at a loss. Past performance is not a
guide to future performance. The since inception default rates are derived by annualizing the geometric average of the individual period rates. Aviva
Investors default rate data is as of 31/12/2011.
22
Global High Yield Bonds
IMPORTANT INFORMATION (2)
This document is for investment professionals only. The content is not approved for use with retail investors or pension scheme members.
The information provided in this document and any appendix is confidential and should only be used for the purposes requested.
Past performance is not a guide to the future. The value of an investment in the fund can go down as well as up and can fluctuate in response to changes
in exchange rates.
The distribution and offering of shares may be restricted by law in certain jurisdictions. This document should not be taken as a recommendation or offer by
anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.
This Presentation contains the current opinions of Aviva Investors North America and is not intended to be, and should not be interpreted as, a recommendation of any particular security, strategy or investment product. Such opinions are subject to change without notice. This Presentation is distributed for informational purposes only and is not intended to be a recommendation or investment advice. The information herein is based on sources which AINA believes to be reliable but is not guaranteed to be accurate or complete.