This document is solely for the use of professionals and is not for general public distribution. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
It’s all about Margaret….
September 2016
Nicholas Ware Director of Strategic Fixed Income
Henderson Fixed Interest Monthly Income Fund Henderson Fixed Interest Monthly Income Fund performance since fund mergers % 140 IA OE £ Strategic Bond +28.0% 135 Henderson Fixed Intr Mth Inc X Inc +35.8% Henderson Fixed Intr Mth Inc I Inc +38.9% 130 125 120 115 110
Fixed Interest Monthly Income Fund*
IA £ Strategic Bond Sector
Quartile
1 year
7.89%
7.74%
2nd
3 years
23.90%
17.42%
1st
Since merger*
38.89%
28.04%
1st
105 100
95 90 May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Source: Morningstar, as at 31 August 2016 Note: Past performance is not a guide to future performance. All performance presented net of fees. Based on cumulative GBP midday pricing, nav-nav, net income reinvested The Henderson Extra Monthly Income Fund and High Yield Monthly Income Fund merged into the Henderson Fixed Interest Monthly Income Fund on 4 May 2012. * Henderson Fixed Interest Monthly Income Fund, I Inc share Class, as at 31 August 2016. Yield may vary and is not guaranteed.
5.3% distribution yield* 1
Who is “Margaret”? • •
The “average” investor in Fixed Interest Monthly Income Fund (I Inc Distribution yield = 5.3%) Fund size £831m*
•
Seventy-six years old and lives in Bournemouth
•
She holds approximately £8,800 in the Fund
Age distribution of Fixed Interest Monthly Income Fund 40% 30% 20% 10%
* Source:
101-110
91-100
Age
81-90
71-80
61-70
51-60
41-50
31-40
21-30
11-20
0%
Henderson Global Investors, as at 31 August 2016
Based on underlying analysis of the direct shareholder register of the Fund; comprises 35% of the holders in Fixed at end March 2016 2
What does Margaret expect? • Delivering an output
providing a sensible, consistent income
• Ignore the index • Means saying “No” most of the time • Important to manage downside risk, the income will take care of itself
• Understandable investments with predictable outcomes
Antithesis of the over-engineered bond fund 3
A traditional bond fund – bonds are for income
Credit Suisse US high yield index 300%
Cumulative total return Cumulative income return
250% 200% 150% 100% 50%
Dec-15
Dec-14
Dec-13
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Dec-98
Dec-97
Dec-96
Dec-95
Dec-94
Dec-93
Dec-92
Dec-91
Dec-90
Dec-89
Dec-88
Dec-87
Dec-86
Dec-85
0%
Source: Credit Suisse, as at 31 August 2016 Past performance is not a guide to future performance
Let the carry do the hard work! 4
Income output
Henderson Fixed Interest Monthly Fund distributions over time I Inc share class: • Distribution yield 5.3% • Underlying yield 4.7%
pence 1.00 0.80 0.60 0.40 0.20
Aug-16
Jul-16
Jun-16
May-16
Apr-16
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
0.00
Fund inception in 1979; • • • •
Began life as Aberdeen Fixed Interest New Star Fixed Interest in 2003 Henderson Fixed Interest Monthly Income Fund in 2011 Merged with Henderson High Yield and Extra Monthly Income in May 2012
Current management took over the Fund in mid-2011 5
Investment style
Blend of income assets • Focused on investment grade bonds, non-cyclical high yield bonds, subordinated financial bonds in the UK, Europe & US
Ignore the index • It corrupts the investment process
Large-cap, non-cyclical bias • Offers superior risk-adjusted returns
Aggressive sell discipline • What you don’t own is more important than what you do for bond funds
Working with the cycle • Be wary of late cycle behaviour and don’t be herded into these trades
6
Overheard on the Strategic Fixed Income desk
Covenants don’t make a bad credit good
“Di-worse-ification” Does the business have a reason to exist? Some businesses don’t suit leverage Get paid for illiquidity
Steer clear of the 3 R’s
Positive Free Cash Flow yield
Don’t ski off piste in the afternoon
7
Avoiding yield traps
Henderson Fixed Interest Monthly Income Fund asset allocation since fund mergers 70%
High Yield Preference Shares
Investment Grade Cash/Other
Government Loans
60% 50% 40% 30% 20% 10% 0% May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Source: Henderson Global Investors, desk classifications, as at 31 August 2016
Maintaining discipline as business cycle matures 8
Asset allocation – buying US investment grade Buying US investment grade bonds (June 2015 to June 2016) • •
Locked in long-term yield from large non-cyclical issuers in sectors such telecoms, tobacco & food High spread and long duration instruments with 10 and 30 year maturities yielding 4-5%
Altria Group 4.25% 2042 Price 115 110 105 100
•
We believed these bonds would perform well in both a deflationary or modest reflationary environment
95 90 Initiated holding at price of 92.1c
85
•
Fixed Interest Monthly Income Fund had 15.8% in US investment grade corporate bonds at end of August 2016
80 May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Security
Date purchased
Verizon 6.55% 2043
2 July 2015
5.3%
AT&T 4.75% 2046
2 July 2015
5.3%
Reynolds 4.75% 2042*
30 October 2015
5.0%
Altria 4.25% 2042
24 November 2015
4.8%
Kraft Heinz 5.2% 2045
1 March 2016
4.7%
Walgreens 3.8% 2024*
28 January 2016
4.1%
McGraw Hill 4% 2025*
25 November 2015
4.0%
Sky 3.75% 2024
30 October 2015
3.8%
* Note:
Yield at purchase
Position has subsequently been sold
9
Some thematic opportunities remain Legacy banking bonds • Over the last two years we have been buying legacy tier 1 (T1) securities issued by European banks with call dates as long as possible
• By 2022 these bonds will have lost all T1 capital benefit under Basel III regulation Issuer
Currency
Yield to call
Call date
Issue outstanding
Lloyds 6.657%
USD
5.7%
2037
$434m
Lloyds 7.881%
GBP
4.8%
2031
£245m
HSBC 5.844%
GBP
4.5%
2031
£700m
Commerzbank 8.151%
USD
6.1%
2031
$1.0bn
Barclays 6.278%
USD
5.6%
2034
$581m
Source: Bloomberg, as at 31 August 2016 Note: Examples are not indicative of the historical or future performance of any particular strategy
10
Legacy tier 1 banking bonds 75% of market to be called away by 2020 USD equivalent call dates by year – T1/UT2 $bn 7
GBP ($ equiv)
6
USD
EUR ($ equiv)
5 4 3 2 1
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050
0
Source: Citi, as at 31 August 2016 Note: T1: tier 1, UT2 : upper tier 2
11
Investing environment • Low growth Chronically low nominal GDP growth • Low inflation • Europe; low default environment but headline risks
Avoid the landmines – commodities, EM, releveraging corporates 12
Diverging corporate fundamentals
US versus European high yield default rates % 7.0
US HY defaults Europe HY defaults
6.0 5.0 4.0 3.0 2.0 1.0
Jul-16
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
0.0
Source: Bank of America Merrill Lynch, as at 31 August 2016
US HY index exposure to commodities has proven costly relative to Euro HY 13
Investors want yield but also market depth
Investment grade corporate bond market size & yield comparisons $trn
7 6
%
7.0
Market Value Yield (RHS) (%)
6.0
5
5.0
4
4.0
3
3.0
2
2.0
1
1.0
0
0.0 Euro IG
UK IG
US IG
Euro HY
UK HY
US HY
Euro Loan
US Loan
Source: Bank of America Merrill Lynch, as at 31 August 2016
14
But net issuance has fallen
EUR IG Non-Financial Rolling 12M Net Issuance 300
EUR HY Non-Financial Rolling 12M Net Issuance 80 70
250
60 50
200
40 150
30
20 100
10 0
50
-10 0
-20 '94
'97
'00
'03
'06
'09
'12
'15
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
Source: Morgan Stanley Research & Dealogic, as at 31 August 2016
15
Amid an increasing buyer base
Central bank monthly asset purchases $bn 16000 FED SNB BOE BOJ ECB 14000 12000 10000 8000 6000 4000 2000 0 Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Source: Bank of America Merrill Lynch, as at 31 August 2016
As investors in competition with central banks have to cast their net wider for yield 16
Conclusion • 2016 is more about navigating headline risk (ie Brexit, Spanish elections) than defaults for European investors
• We will continue to think of Margaret, seeking out “sensible” yields on offer… • ….in an increasingly global competition for these shrinking pool of assets • Technicals, technicals, technicals..
17
Appendix
Henderson Fixed Interest Monthly Income Fund Portfolio composition Credit breakdown
Asset allocation NR 6.8%
A 5.8%
Investment grade non-financial corporate bonds 19.7%
Cash and derivatives 4.2%
Investment grade financial corporate bonds 15.8%
CCC & below 8.7%
Loans 5.1% B 14.3% Cash and derivatives 4.2%
BBB 30.3%
ABS/mortgage 0.9% Preference shares 1.6%
BB 29.9%
High yield non-financial corporate bonds 34.4%
High yield financial corporate bonds 18.1%
Source: Henderson Global Investors desk classifications, as at 31 August 2016
19
Managing for an output
Total return funds
Size
Henderson Strategic Bond Fund
Distributions
Distribution yield
Underlying yield
£1.7bn
Quarterly
4.3%
3.7%
Henderson Preference & Bond Fund
£750m
Quarterly
4.8%
4.2%
Henderson Diversified Income Ltd
£154m
Quarterly
5.4%
-
Henderson Fixed Interest Monthly Income Fund
£831m
Monthly
5.3%
4.7%
Income funds
Age distribution of Fixed Interest Monthly Income Fund* 40%
•
We are client-focused
•
The underlying investor is skewed to retirement age – they do not want a manager wasting income on option strategies, energy bonds and African sovereigns trying to chase outsized returns
•
We remain fixated on large-cap firms with a reason to exist offering solid yields
•
Client communication is important, follow us on Twitter; John & Jenna @StrategicBond for latest desk thoughts
30% 20% 10%
91-100
81-90
101-110
Age
71-80
61-70
51-60
41-50
31-40
21-30
11-20
0%
Source: Henderson Global Investors, as at 31 August 2016 Note: * Sample size of Fixed Interest Monthly Income Fund represented 35% of investors as at 31 March 2016
20
Investable universe of securities is shrinking
DM* net supply of securities, 4q rolling sum $tn
Eurozone net supply of securities, 4q rolling sum €bn
Source: Citi Research, Haver, Fed, BoE, ECB, SNB, BoJ,. as at 31 August 2016 Note: * Covers US, Eurozone, Japan, UK & Switzerland
21
Diverging corporate behaviour
US and western European share buy-backs
US and western European M&A activity
$bn 350
$bn 900
Western European share buy-backs US share buy-backs
300
800
Western European deal volume US deal volume
700 250 600 200
500
150
400 300
100 200 50
100 0
Q103 Q403 Q304 Q205 Q106 Q406 Q307 Q208 Q109 Q409 Q310 Q211 Q112 Q412 Q313 Q214 Q115 Q415
1Q02 4Q02 3Q03 2Q04 1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14
0
Source: Bloomberg & JP Morgan, as at 30 June 2016
UK & Europe = mid-cycle, US = late-cycle 22
Leading to bifurcation of yields in the US
Yield dispersion in US & Europe high yield indices Weight 50%
US HY (Index Yield = 6.8%) Euro HY (Index Yield = 3.8%)
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 10%
Source: Bank of America Merrill Lynch, as at 31 July 2016 Note: Weights are proportion of total market face issuance
High yield was never cheap in aggregate 23
Henderson Global Investors 201 Bishopsgate, London EC2M 3AE Tel: 020 7818 1818 Fax: 020 7818 1819 Important information This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored. Ref: 34S
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