Seix Advisors FIXED INCOME INVESTMENT REVIEW January 27, 2012
Charles B. Leonard, CFA Managing Director Seix Investment Advisors LLC 404‐845‐7667 [email protected]
City of Miami G.E.S.E. Retirement Trust
Contents • Portfolio Review
• Current Environment & Strategy
• Quarterly Letter
Organizational Highlights Disclosures
City of Miami G.E.S.E. Retirement Trust Annualized Performance Comparisons Periods Ending December 31, 2011 10 8.70
7.98 7.65 7.19 6.77
6 5 4 3 2 1.20
1 0 4th Qtr 2011
City of Miami GESE
Barclays Aggregate Index
*Return is Annualized 6
City of Miami G.E.S.E. Retirement Trust Portfolio Characteristics (as of 12/31/11)
Market Value ($000) Yield to Maturity Average Credit Quality Portfolio Duration
City of Miami GESE $40,385 2.43% AA 4.92 Yrs
Barclays Aggregate Index 2.24% AA 4.95 Yrs
Sector Distribution (as of 12/31/11)
% Duration Contribution City of BC Agg Miami GESE Index U.S. Treasury Government Related Investment Grade Corporate Financials Industrials Utilities
35.8% 4.2 27.1 4.5
High Yield Bonds
Securitized MBS CMBS/ABS Cash
31.1% 29.0 2.1 0.0%
% Market Value City of BC Agg Miami GESE Index
27.6% 7.2 16.5 3.9 ‐ 20.0% 18.4 1.4 ‐ 100.0%
27.3% 4.4 20.0 2.9 4.7% 40.8% 37.4 3.4 1.4% 100.0%
19.9% 6.5 11.1 2.3 ‐ 34.1% 31.9 2.2 ‐ 100.0%
CURRENT ENVIRONMENT & STRATEGY
Economic Environment December 2011
Improved Economic Data and Consumer Sentiment Have Reduced the Fears of a “Double Dip”; Q4 Tracking Estimates Put GDP in the 3% Range
2012 Forecasts Are for Continued Sub‐Par Economic Growth with the Median Estimate For the First Half of the Year at 2%
Real Wage Growth Is Negative as Wages & Salaries Up 3.3% Y‐O‐Y Fail to Match a 3.5% Y‐O‐Y Gain in the CPI
Payroll Expansion Remains Subdued as the Recovery (Since July ‘09) Has Only Seen 1.2 Million in Non‐Farm Payroll Growth After the Recession Eliminated 7.5 Million Jobs
Housing Remains Depressed with Prices Down 3.6% Y‐O‐Y (Case‐Shiller), Further Stressing Housing Market Sentiment as Well as Consumer Balance Sheets
The Rebound in Personal Consumption in the Second Half Is Unsustainable as It Has Been Achieved Through Dissaving (Savings Rate Back Down to 3.5%)
Europe’s Sovereign/Banking Debt Crisis Persists with the Periphery Finally Infecting the Core (Italy and Spain) and the Union Remains Very Divided Regarding any Credible Bailout Plan
State and Local Government Spending Remains Under Pressure with Layoffs, Austerity Measures and Tax Increases All Being Enacted to Close Deficits in Many of the Country’s Most Populous States
Economic Environment UNDEREMPLOYMENT RATE U6 1/31/94 – 11/30/11
Headline Rate Understates Depth of Job Loss 10/09 17.4%
November 2011 15.6% 15
10/09 10.1% 10/00 6.8%
Underemployment Rate Unemployment Rate
U6 represents total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers (persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past).
Data Source: Bureau of Labor Statistics 11
Economic Environment PERCENT JOB LOSSES IN POST WWII RECESSIONS
Data Source: CalculatedRISK 12
Economic Environment DEBT TO DISPOSABLE INCOME 3/31/52 – 9/30/11
Consumer Leverage Remains Elevated 1.50
Debt Outstanding in Household Sector, End of Period Basis; Includes Mortgage and Consumer Credit Debt. Disposable Personal Income (SAAR Nominal $$)
Debt : $13,208 Billion DPI: $11,565 Billion
Q3 2011 1.14
Average Since '70 Average 1970s Average 1980s Average 1990s Average 2000s
0.85 0.62 0.71 0.86 1.14
High (Q4 ‘07)
Data Source: Federal Reserve, Bureau of Economic Analysis 13
Economic Environment S&P/CASE‐SHILLER HOME PRICE INDEX 1/31/00 – 10/31/11
Latest Housing Prices Remain Near Cycle Lows
Data Source: Bloomberg 14
Economic Environment HOUSING STARTS 1/31/60 – 11/30/11
Housing Starts Remain Near 50+ Year Low
Data Source: Bloomberg 15
Portfolio Strategy – Corporates
Outlook for Corporate Issuers Remains Favorable Although Clouds Are on the Horizon ‒ Expect Spreads to Stay Volatile as Global and Domestic Considerations Weigh on Valuations ‒ Fundamentals Remain Good Although the Peak in Credit Quality Has Likely Already Passed ‒ Technicals Are Still Strong as Corporates Remain the Primary Place to Get Long Maturity Spread ‒ Idiosyncratic Risk Is Increasing Although it Has Primarily Been in the More Benign Form of Stock Buybacks and Dividend Increases as Opposed to LBOs ‒ Continue to Think Commercial Banks Are Uniquely Exposed to a Double Dip in Housing and European Contagion Strategy Remains Focused on Companies with Defensive Revenue Streams that Offer Attractive Risk Adjusted Returns ‒ In June, Decreased Market Risk in the Portfolio by Selling Financials and Buying High Quality Defensive Industrials ‒ Overweight in Technology, Pipelines and Gold Miners; Underweight in Banking, Electric Utilities and Retailers
Portfolio Strategy – Securitized Market Technicals ‒ Net New Supply Remains Light as Demand for Purchase Loans Remains Subdued in the Current Environment and Higher Coupons Continue to Run Off at Current Rates ‒ Refi Index Remains Relatively Subdued and Stable Despite the Decline in Mortgage Rates and Government Action ‒ Headline Risk Regarding Potential Policy Changes Is the Biggest Driver of Volatility ‒ Fed Reinvestment Helps Distribute Long Duration New Issue 30 Year MBS Residential Mortgage Backed Securities ‒ In this Environment, CMOs, Low Loan Balance, Specific Vintage, Higher Coupon and Investor Only MBS Offer Better Value than Current Coupon Issuance in 30 Year Space ‒ 15 Year Current Coupon Looks Very Attractive and Rolls Well ‒ Longer Duration, Lower Dollar Price CMO Structures with 15 to 20 Year Legal Final Maturities Remain Attractive at Current Spreads Given their Convexity Profile Commercial Mortgage Backed Securities ‒ Focused on Seasoned CMBS with Lower Loan to Value Ratios and Exposure Predominantly at the Top of the Capital Structure ‒ Buying Well Underwritten New Issue Public CMBS which We Are Seeing for the First Time Since 2008
Portfolio Strategy – Opportunistic
5% Bank Loan Allocation Shifted to a 5% High Yield Bond Allocation in August ‒ Wider Bond Spreads Amidst the Rapid Summer Repricing Made the Risk/Reward Profile of High Yield Bonds More Compelling vs. Loans ‒ Following the FOMC’s Two Year Commitment to a Zero Interest Rate Environment, the Demand for Floating Rate Assets May Diminish
Investment Environment RELATIVE VALUE ACROSS SECTORS Index Comparisons OAS Since Index Inception*
OAS Averages as of 12/31/11
Low Today (12/31) 51 bps 234 bps
5 Year Average 231 bps
10 Year Average 175 bps
Average Since Inception 132 bps
BB High Yield
B High Yield
Corporate Bond AAA CMBS
Bank Loans **
High 607 bps
*Barclays Capital Indexes were used for all of the above except for Bank Loans which is represented by the CS Institutional Leveraged Loan Index. High Yield Index, BB Index, and B Index OAS data from 1/31/94, Bank Loan Index Inception 1/31/92, Corporate Index Inception 6/30/89, MBS Index Inception 5/31/89, Gov’t Related Index Inception 1/31/94, AAA rated CMBS Index Inception 7/31/99 ** Bank Loan Discount Margin to Maturity Spread vs. TSY for all others
Data Source: Barclays Capital, Credit Suisse 19
Seix Investment Advisors LLC
Charles B. Leonard, CFA Senior Investment Manager
January 19, 2012 Ms. Sandra Elenberg Pension Administrator City of Miami G.E.S.E. Retirement Trust 2901 Bridgeport Avenue Coconut Grove, FL 33133 Re: Miami General Employees’ & Sanitation Employees’ Retirement Trust Q4: 2011 Report Dear Sandra: As a result of the uncertainty and volatility caused by the crisis in the Eurozone and a lackluster economic recovery at home, fixed income achieved the best returns among all traditional asset classes in 2011. In addition, the strategic decisions and tactical adjustments employed by Seix over that period added attractive relative value and helped us rank highly against our most prominent competitors. As a result, your portfolio recorded a return of 8.70% vs. 7.84% for the Barclays Aggregate Index over the past year. At the beginning of the year optimism prevailed and expectations were high for the recovery to finally gain traction, but robust growth failed to materialize and the contagion emanating from Europe’s Sovereign and banking debt crisis only compounded the concerns of investors globally. Having been skeptical of the growth consensus in the first half of the year and cognizant of the magnitude of Europe’s challenges, we managed your portfolio accordingly to weather the storm. Plenty of time has elapsed since our own financial crisis peaked in the fourth quarter of 2008, but little progress has been made in addressing what still ails our economy. This recession has never been cyclical in nature. This is a balance sheet recession brought on by the end of a debt super-cycle that coincided with the popping of a massive credit and housing bubble. Normal counter cyclical monetary policy has not been an effective response, punishing savers with a zero interest rate policy, and trying to induce a system already overwhelmed with debt to take on even more debt! Hence, the economy is left with excessive debt, high levels of unemployment and underemployment, declining real median household income, a massive supply/demand imbalance in housing, and trillion dollar budget deficits for years to come. Unfortunately, despite the lack of progress to date, policymakers show no sign of changing their response to dealing with these structural issues. No amount of quantitative easing, yield curve manipulation or further unconventional easing of financial conditions will solve these problems. Domestic Weakness and Global Macro Challenges Dominate 2011 Domestic growth challenges were ubiquitous this year, ranging from extreme weather to natural disasters to energy/commodity price spikes to a historic downgrade of our sovereign debt rating. Over the summer, with the release of the second quarter GDP data and revisions to the last few years, it became apparent that the economic recovery was not where many believed it was. In short, the revisions recalibrated the fundamental data such that the recession was actually worse than originally reported, the recovery was consequently that much weaker, and the growth trajectory at that stage was less favorable than the existing consensus. While some hope still persisted for a second half rebound, the European debt crisis quickly put an end to any remaining optimism.
3333 Piedmont Road, Suite 1500, Atlanta, GA 30305 Phone: 404.845.7667 • Fax: 404.845.7691 • Email: [email protected]
Seix Investment Advisors LLC Q4: 2011
The role of policy makers took center stage in the second half of the year because of the markets’ renewed focus on the European Sovereign debt/banking crisis. The crisis is daunting and the magnitude of the potential losses massive, but what seems even more overwhelming at times is the number of voices speaking on behalf of the Eurozone. We must remember that while the Euro is one currency, it is comprised of 17 sovereign nations with different issues to contend with simultaneously. The markets have been and remain captive to a litany of pronouncements from the European Central Bank, the European Union bureaucracy, or any of the 17 individual sovereign nations within the currency union. While offering very little in the way of consistency in message, given the vastly different constituencies within the Eurozone, the result is tremendous volatility and a re-pricing of risk across all asset classes. The capital markets have consequently become more binary in nature, where a “risk on” or “risk off” mentality dominates market sentiment for periods as short as a few hours at a time. Bottom Up Focused and Top Down Aware While wary of the macroeconomic backdrop, our strategy was not as simple as overweighting Treasuries and riding out the storm. Our primary theme last year was “safe income at a reasonable price” and it remains our emphasis today. We were actually overweight spread product in 2011, but defensively positioned to deal with the inevitable volatility that accompanies a risk re-pricing. It was our security selection that carried the day. Within corporate bonds, our allocation to the sector was reduced modestly over the course of the year, bringing our overweight to the lowest level in several years. More importantly, our June de-risking into lower beta industrials was very timely and greatly enhanced our returns in this sector for the balance of the year. In the securitized sector, our commercial mortgage backed overweight was also reduced to a multi-year low in the first half of the year. Offsetting these sector shifts was a growing overweight to residential mortgage backed securities. We saw the sector as a haven for safe income versus exceptionally low Treasury yields and brought our allocation to RMBS to a multi-year high. By choosing to barbell higher coupon pass-through exposure with longer duration structure (CMOs with greater average life stability) our RMBS portfolio was defensively positioned to outperform in the Treasury rally that ensued in the second half of the year. Having been positioned for a flatter yield curve for most of the year, the Treasury rally and significant flattening that took place in the second half of the year also contributed nicely to returns. With the curve flatter and closer to its trailing ten year average, we reduced this curve positioning in the fourth quarter to protect some of these gains. Rates Will Stay “Lower for Longer” Each year historically kicks off with a debate about the level of rates. Similar to the expectations of the past few years, the 2012 consensus anticipates higher rates. While we have no investment strategies that rely solely on the direction of rates, we believe there are many real reasons why rates are this low that extend beyond the overused “flight to quality” bias. First and foremost, sub-par economic growth is a consensus over most forecast horizons as a result of the massive deleveraging that will continue for several years. As we enter the fourth year of ZIRP (zero interest rate policy), traditional risk averse investors are being forced out the yield curve, pushing longer rates lower. Powerful demographic trends are forcing more investors to seek safe income as their investment horizon shortens. These same investors continue to flee the volatility of the stock market leaving the risk/reward profile to favor bonds; mutual fund flows since 2007 attest to this bias. Finally, regulation/repression going forward should continue to push large institutional investors towards Treasuries in the name of safer risk based capital requirements. We anticipate a 1.50% to 2.50% trading range for the ten year Treasury in 2012, with the yield curve remaining directional, meaning a steeper curve when rates rise and a flatter curve when rates decline.
Seix Investment Advisors LLC Q4: 2011
Safe Income at a Reasonable Price Consensus expectations for growth in 2012 remain low, with the median 2012 GDP outlook at 2.3%. Downside risks currently outweigh any upside potential with the European Sovereign and banking crisis the most prominent wildcard, leaving markets highly volatile and prone to violent shifts between “risk on” and “risk off”. Fund flows continue to favor taxable bond funds over domestic equity funds and money market funds. This should remain supportive of investment grade spread sectors in 2012 and beyond as the Fed affirms its commitment to near zero interest rates through 2013. Corporate bonds remain attractive despite an expectation for spreads to stay volatile. Our strategy remains focused on companies with defensive revenue streams that offer attractive risk adjusted returns. Residential MBS spreads are very appealing, particularly higher coupon exposure when compared to paltry front end treasury yields. Structure, using low coupon, longer duration CMO exposure, remains a significant part of our RMBS strategy. Commercial MBS have similarly attractive characteristics and our focus continues to be seasoned product near the top of the capital structure and well underwritten new issue public deals. We currently have a 5% exposure to high yield bonds, an allocation we have maintained since the sector came under pressure in August. The sector offers spread levels commensurate with the risk being taken and possesses a better risk reward profile than some of the higher yielding sectors of the investment grade corporate bond market, particularly financials. Performance Your portfolio generated a fourth quarter return of 1.20% vs. 1.12% for the Barclays Aggregate Index. For the past five years, returns of 7.65% exceed the benchmark’s results of 6.50% by 115 basis points. The longer ten year period generated annualized returns for your portfolio of 6.33% vs. the 5.78% return of the benchmark. As we look forward to another prosperous year, please feel free to contact me with any questions or issues that may arise. I look forward to speaking and visiting with you over the next few months. As always, we appreciate your loyalty and commitment to Seix Advisors. Sincerely,
Charles B. Leonard, CFA Senior Investment Manager cc:
Thomas J. Winters, Sr. Senior Investment Manager
Hilda Thompson, Southeastern Advisory Services, Inc.
Disclosure: The information in this letter is intended as supplemental material. This analysis is believed to be reliable but accuracy cannot be guaranteed. Past performance is not indicative of future returns. Manager opinions are subject to change. You are urged to compare the information regarding your account in this letter to the information in the statements provided by the custodian for this account.
Firm Profile Firm Update
Recent Highlights RidgeWorth Seix Total Return Bond Fund Ranked 1st Percentile for 2011 in Lipper Fund Universe
RidgeWorth Seix Corporate Bond Fund Ranked 13th Percentile for 2011 in Lipper Fund Universe
Firm AUM (12/31): Investment Grade: High Yield:
Seix Now Offers a Core Bond Institutional Mutual Fund
$26.1 Billion $12.9 $13.2
SPECIALTY CREDIT FUNDS
Key Investment Professionals
Key Investment Professionals
Jim Keegan, CIO & CEO Perry Troisi, PM – Liquid Markets Adrien Webb, CFA, PM – Corporate Credit Michael Rieger, PM – Securitized Assets Seth Antiles, PM – EMD & Non‐Dollar
George Goudelias, PM – High Yield Loans
Seix Credit Dislocation Fund Series 2 Inception Date: 3/2/09 Fund AUM (1/1): $152 mil. Mgmt. Fee: 0.50%
Inception Key Strategies Date Intermediate Bond 10/1/95 Core Plus 4/1/96 Corporate Bond 10/1/95 Core Bond 1/1/93 Stable Value 1/1/97 Long Duration 1/1/00 Short Maturity 1/1/93
12/31 AUM (mil.) $2,940 $2,743 $1,957 $1,911 $1,159 $994 $922
Brian Nold, PM – High Yield Bonds Michael Kirkpatrick, PM – High Yield Bonds
Long Only Credit Fund Active Rotation – Investment Grade & High Yield No Leverage, Derivatives or Shorting
Inception 12/31 AUM Seix Credit Opportunities Fund Key Strategies Date (mil.) Inception Date: 6/1/07 High Yield 7/1/97 $5,798 Fund AUM (1/1): $73 mil. HY Plus/Unconstrained 10/1/04 $1,509 Mgmt. Fee: A shares 1.50% / 20% B shares 1.25% / 20% (5% hurdle) Bank Loans 7/1/06 $5,928 Long/Short Credit Fund High Yield Bonds & Loans Moderate Use of Leverage
Please see the Composite Performance Full Disclosure Presentation in the appendix for more information. Past performance is not indicative of future results.
STABILITY QUALITY DEPTH
Organizational Chart (75) Investment Management (11)
Investment Research (26)
Client Service & Marketing (10)
Portfolio Managers Jim Keegan CIO & CEO
Investment Grade Carlos Catoya Leo Goldstein Scott Kupchinsky David Schwartzman Claudia McPherson Elena Fyodorova Jon Yozzo William Davis Jeannell Anthony Tom Lennon Michael MacDevette Robert Guy
Mark Meyer Michelle Gallo Sharon Moran Lisa Milos Christopher Marlin Julie Vinar Rebecca Ehrhart Chris DeGaetano Karen Ormiston Susan Shannon
George Way COO & CFO
Investment Grade Perry Troisi – Liquid Markets Adrien Webb – Corporate Credit Michael Rieger – Securitized Assets Seth Antiles – EMD & Non‐Dollar High Yield George Goudelias – Bank Loans Brian Nold – HY Bonds Michael Kirkpatrick – HY Bonds Investment Managers Ellen Welsh Tom Winters Charlie Leonard
High Yield Biron Lim Vince Flanagan Ray Kramer Ania Wacht Brian Reid Andrea Pagnozzi James Fitzpatrick Eric Guevara David Chou Atul Sibal Daman Singh Norm Kopack Bryan Trowbridge Ambuj Chaudhary
Legal & Compliance (4) Deirdre Dillon, CCO Cynthia Panebianco Stephen Gavlick Joseph Carucci
John Murphy Kimberly Galletta Portfolio Admin & Trade Support Gerard Leen Soo Kim Paul Rowe Alvin Fletcher Beth Dizon Debbie Crespo‐Su Sal Toledo Dara Kotzker Mark Schneider Christina Milisits Megan O’Shea Laurel Conner Enterprise Data Management Stacy Culver Laura Linnartz Tony Capone Ann Williams Andrea Dapolito Paula Madonna Technology Nat King Robert Stampfl Armando Alorro
All features in this pack are current at the time of publication but may be subject to change in the future.
Unless otherwise stated, the source of information is Seix Advisors.
Any forecasts or opinions are made by Seix Advisors at the date of this document and may change. They should not be regarded as a guarantee of future performance.
This document is intended for investment professionals only and should not be relied upon by private investors.
No modifications or amendments to this presentation may be made without the prior permission of Seix Advisors.
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Depending on the investor’s currency of reference, currency fluctuations may adversely affect the value of investments and the related income.
The purpose of the Representative Client List at Seix Advisors is to demonstrate the depth and variety of our account base. This is the only criteria used in the compilation of this list. While each of the listed clients has authorized Seix Advisors to use their name, it is not known whether the listed clients approve or disapprove of Seix Advisors or the advisory services provided. The selection of clients for the list is not based on performance criteria.
Past performance is not an indication of future performance.
Unit prices may go down as well as up, particularly in the short term.
A complete list and description of Seix Advisors’ composites, performance results, and policies regarding calculating and reporting returns are available upon request.
The value of an investment may fluctuate and cannot be guaranteed.
Seix Investment Advisors LLC Headquarters 10 Mountainview Road Suite C‐200 Upper Saddle River, NJ 07458 201‐391‐0300 (phone) 201‐391‐5023 (fax) www.SeixAdvisors.com
Atlanta Office 3333 Piedmont Road Suite 1500 Atlanta, GA 30305 404‐845‐7700 (phone) 404‐845‐7691 (fax)