Centuria Capital Alex Clamen – Macquarie Investment Specialist, Fixed Interest and Currency October 2011
Important information >
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The Financial Review Smart Investor Blue Ribbon Award Global/Australian Bonds was awarded to MIML in 2011 for the Macquarie Master Diversified Fixed Interest Fund. 2
Capital structure Corporate funding structure or how a company raises capital
Lower risk of loss of capital
Senior Debt Sub Debt Hybrids Equi%es Higher risk of loss of capital
> Senior and sub debt securi/es rank the highest on insolvency > First access to the assets of the corpora/on > Hybrids rank behind tradi/onal debt obliga/ons > Some debt and equity characteris/cs > Rank lowest on insolvency but poten/al for upside > Most expensive form of funding
> Insolvency examples : Bear Sterns, General Motors, Lane Cove Tunnel…
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What are bonds (or debt securities)? >
Governments and companies borrow money and raise capital through debt and issuance of bonds
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An investor in a bond is a lender of capital
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A lender will supply the money (the investment) and the borrower will write an IOU (the bond)
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Example: In 2010, Telstra issued a 10 year bond with a 7.75% coupon
Lends
$100
Receives $7.75 a year for 9 years $107.75 on the last year
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Government bonds are also called sovereign bonds or treasuries
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Corporate bonds are also called credit
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Bonds are a defensive investment given that the principal is, usually, repaid to the investor 4
Why do we need defensive assets > Markets can go down and defensive assets can provide protec%on > Markets have long periods of stagna%on
> The current environment remains uncertain - Europe con%nues to be under sovereign stress - Economic growth is slowing down considerably
> Low growth for longer - Unsustainable fiscal posi%ons in many advanced economies - Ageing popula%on can impact on growth 5
A quick recap - Asset pricing can go down! > During the Global Financial Crisis, risk assets lost significant value > A diversified por_olio with alloca%on to defensive assets would have offset some losses > Defensive assets can provide protec%on through business cycle downturn
ASX 200 8000
1800
7000
1600
6000
Annual change in S&P Case Shiller House price index ($000s)
US S&P 500
-‐54%
230 210 190
1400
5000
1200
4000
1000
3000
800
2000
600
-‐55%
170 150
-‐33%
130 110 90 70 50
1996
1999
2002
2005
2008
Source: Bloomberg
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Economic outlook and backdrop: Low growth for longer
Banking crises have been followed by protracted periods of debt reduction
Financial and banking crises tend to be protracted and the aaermath is characterised by: >
Deep and prolonged asset price declines
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Profound declines in GDP growth and unemployment (average 7% over the down phase of cycle)
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A long period of debt reduc%on nearly always follows a major financial crisis
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Debt reduc/on…. lasts six to seven years on average
Source: Mad King (Ci%group) -‐ Addicted to Credit 8
The impact of public debt on economic growth General Government Fiscal Position for 2010
Gross debt (% of GDP)
250
Japan
200
France
150
US UK
50
> Structural reforms, fiscal consolida%on and austerity measures
Iceland
Greece
100
> European countries will have to reduce their large deficits
Public debt in industrialised countries expected to exceed 100% of GDP in 2011
OECD Spain
Italy Euro area Belgium Germany Portugal
> Poten%al social unrest - Correla%on between level of unrest and size of fiscal consolida%on (UK, Greece…)
Luxembourg Australia
0 -‐12
-‐8
-‐4
0
Financial balance (% of GDP) The lucky country!
THE CURRENT ENVIRONMENT > Difficult to reduce debt in an environment of low growth > Private sector and consumers are not spending
“Unprecedented build up of debt – world war size without the world war” -‐ Niall Ferguson
> Employment/growth unlikely to return to pre-‐ crisis levels in the foreseeable future > Ageing popula%on
Source: OECD
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An ageing population will increase pressure on governments
> Baby boomers support for assets prices to begin waning > Earnings and spending are highest in the middle of the working age popula%on > Poten%al nega%ve impact on tax revenues > Rising pension and healthcare costs > Unfunded liabili/es arising from ageing are very large
Old-‐Age Dependency Ra/os (popula/on 65+ / working age, %) 0.90
Median age (2030) West Europe: 47 yrs Japan: 52 yrs
0.80 0.70
UK France Mexico Germany
0.60 0.50
Median age (1980) West Europe: 34 yrs Japan: 33 yrs
Japan Turkey US
0.40
Brazil China
0.30
> Lower growth environment very likely > Popula/on will increasingly seek defensive and income producing assets
India Russia
0.20
Australia
0.10 0.00 1950
Greece Korea
1970
1990
2010
2030
2050
Source: United Na%ons, OECD
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Corporate balance sheets are in excellent health > Corpora%ons have benefited from the V-‐shape recovery in Emerging Markets and loose monetary policies > Companies have generated cash flows to pay off their debt and now have very strong balance sheets > In the current environment companies are hoarding cash and do not ini%ate corporate projects 1200 1000
120
Net Debt Per Share (lhs)
100
Free Cash Flow Per Share (rhs) 800
80
600
60
400
40
200
20
0 0 Jun 98 Jun 99 Jun 00 Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Source: Bloomberg
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Defence wins championships > As the world con%nues to reduce its debt, market vola%lity will remain elevated > Structural trends should benefit income and defensive investments > Australia remains the lucky country 7% 6% 5%
Yield = 6%
4% 3% 2% 1% 0% Inflation
Return
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Managing your defensive solutions
How we manage money Inves/ng in corporate bonds - We do not invest in things that are too complex or that we don’t understand
Private Debt
- We are aware of the risk we take
CLOs
- We do not chase yield at any cost
Hybrids Complex Structured Credit
Managing corporate bonds - We focus on seeking to avoid the nega%ve events rather than on chasing the small posi%ves - We do not ‘buy and hold’ and have a strong sell discipline
CDOs High yield
- We recognise that liquidity risk is the highest risk
We believe that preserving the value of YOUR investment should be your first priority 14
Attractive opportunities in credit markets
> Corporate bonds currently offer a much higher yield than their long term average > Adrac%ve returns from bonds that are posi%oned high in the capital structure ANZ
AMP
GOODYEAR
Return above cash rate
Return above cash rate
Return above cash rate
Pre crisis: ~0.15% pa Sept 11: +3.20% pa
Jan 07: +0.12% pa Sept 11: +2.20% pa
Jan 07: +1.99% pa Sept 11: +6.10% pa
Sub debt
Source – Bloomberg
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