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Jupiter Strategic Bond
Citywire Wealth Manager Conference & Awards
Park Plaza, Westminster Bridge, 4-5 March `13
FOR INVESTMENT PROFESSIONALS ONLY, NOT FOR RETAIL INVESTORS
Presented by: Ariel Bezalel, Fund Manager Director
Contacts 2
Louis Wood Business Development Director Wealth Management, UK Wholesale
0207 314 4788
07900 055 188
John Tevenan Sales Director Global Financial Institutions, International
0207 314 7491
07841 451 425
Agenda
Who we are & what we offer
The macro environment: threats & opportunities for credit investors
Our holdings: some examples
Portfolio overview
Conclusions
3
Profile
Fund Management Director Ariel Bezalel Jupiter Asset Management Ltd.
Current Role Fund Manager, Fixed Interest/Multi-Asset Team
Current Responsibilities Manager, Jupiter Strategic Bond Fund (Unit Trust), Jupiter Dynamic Bond SICAV and the fixed interest component of Jupiter High Income Fund (Unit Trust) and Jupiter Monthly Income Fund (Unit Trust)
2000 – Jupiter Asset Management Fund Manager, Fixed Interest Team
1998 – 1999 Jupiter Asset Management Assistant Fund Manager, Fixed Interest Team
1997 – 1998 Jupiter Asset Management Back Office
Qualifications Economics (Middlesex University)
4
5
Fixed Income and Multi-Asset Team
*Source: Jupiter as at 31.12.12. Note: Years of experience as at 08.02.13. Past performance is no guide to the future. Note: Miles Geldard was recognised in the Sauren Awards with two gold medals in the convertibles category, two gold medals in the absolute return category and two gold medals in the multi strategy international category. Ariel Bezalel won the “Best Strategic Bond Fund Manager” at the Investment Week Fund Manager of the Year awards.
Ariel Bezalel Fixed Income
Fund Manager
15 years industry exp.
Hilary Blandy Fixed Income
Senior Credit Analyst
11 years industry exp.
Lee Manzi Multi-Asset
Fund Manager
15 years industry exp.
Miles Geldard Head of Team &
Fund Manager
30 years industry exp.
Nicole Weiss Fixed Income Credit Analyst
(Maternity leave)
13 years industry exp.
Rhys Petheram Fixed Income
Fund Manager
12 years industry exp.
Joseph Chapman Multi-Asset
Quantitative Analyst
2 years industry exp.
Total Assets: €3.6bn*
Michael Poole Specialist Dealer
9 years industry exp.
Steve Naish Specialist Dealer
27 years industry exp.
Convertibles Absolute Return
Luca Evangelisti Fixed Income Credit Analyst
5 years industry exp.
Harry Richards Fixed Income Credit Analyst
1 year industry exp.
Jupiter Strategic Bond Fund net performance 6
Ranked 2nd in sector since launch (02.06.08)
Source: FE, bid to bid, net income reinvested in GBP to 31.01.13. Fund launched 02.06.08. Ranked 2 / 53 in IMA Sterling Strategic Bond sector since launch. Past performance is no guide to the future.
-20
-10
0
10
20
30
40
50
60
70
Jun 08 Mar 09 Dec 09 Oct 10 Jul 11 Apr 12 Jan 13
% G
row
th
Jupiter Strategic Bond TR in GB 69.05 iBoxx Stg NON-GILTS ALL MATURITIEs TR in GB 42.30IMA Sterling Strategic Bond TR in GB 34.59
7
Jupiter Dynamic Bond SICAV net performance
Performance since launch
Source: FE, bid to bid, gross income reinvested in EUR, net of fees 08.05.12 to 31.01.13. Fund launched 08.05.12. Past performance is no guide to the future.
-2
0
2
4
6
8
10
12
14
May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13
% T
otal
Ret
urn
Jupiter Dynamic Bond L Inc EUR TR in EU 10.67 Jupiter Dynamic Bond I Inc EUR TR in GB 11.28Barclays Pan-European Aggregate: Corporate TR in EU 4.60
Performance 8
Jupiter Strategic Bond Fund1
Cumulative 1 year
% 3 year
% Since launch
%
Jupiter Strategic Bond 13.82 33.07 69.05
IBOXX Stg Non Gilts All Maturities
9.80 26.93 42.30
IMA Sterling Strategic Bond sector average
10.75 23.41 34.59
Sector ranking 20 / 69 8 / 61 2 / 53
1. Source: FE, bid to bid, net income reinvested in GBP to 31.01.13. Jupiter Strategic Bond Fund launched 02.06.08 2. Source: FE, bid to bid, gross income reinvested, net of fees in Euro to 31.01.13. Jupiter Dynamic Bond Fund launched 08.05.12. Past performance is no guide to the future.
Discrete years 2012
% 2011
% 2010
% 2009
%
Jupiter Strategic Bond 16.09 4.50 11.19 42.52
IBOXX Stg Non Gilts All Maturities
13.05 6.91 8.38 10.78
Sterling Strategic Bond sector average
13.39 2.71 8.09 20.75
Sector ranking 26 / 69 19 / 65 13 / 61 2 / 55
Jupiter Dynamic Bond SICAV2
Cumulative 3 month
% 6 month
% Since launch
%
Jupiter Strategic Bond 3.73 7.55 10.67
Barclays Pan European Aggregate: Corporate
-0.90 1.45 4.60
FO Fixed Interest Global sector average
-2.89 -4.19 0.78
Sector ranking 9 / 236 8 / 228 10 / 219
Post “Whatever it Takes” speech, where are we now?
Major central banks appear to have backstopped markets… for now
US appears to be establishing sustainable economic recovery. Positive tailwinds from the Far East
Europe: Macro picture looks bad. Peripheral economies to struggle. Core economies likely to be pretty stagnant
Expect plenty more volatility in FX markets
9
Fund manager views at the time of writing and will change in the future. Chart source: FRB, BEA, ECB, Eurostat, BoE, UK Office for National Statistics, BoJ, Japan Cabinet Office, JP Morgan, 25.09.12.
To infinity… and beyond!
Don’t fight the FED… or the ECB, BofE, BofJ, SNB
10
Strategic asset allocation since launch
Truly strategic…
Source: Jupiter as at 31.01.13. The fund manager has the power to use derivatives but it is intended that these will only be used for efficient portfolio management and not for investment purposes.
-40%-30%-20%-10%
0%10%20%30%40%50%60%70%80%90%
100%110%
Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
Sovereign (long) Sovereign (short) High Yield Investment Grade Cash
Exploiting opportunities across the ratings spectrum
Europe: Austerity + bank recaps + high oil prices = recession 11
Manufacturing activity Non-manufacturing activity
30
35
40
45
50
55
60
65
Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12
US Eurozone UK
30
35
40
45
50
55
60
65
Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12
UK Eurozone US
Expansion
Contraction
Expansion
Contraction
Source: Bloomberg as at 31.12.12.
Sustainable economic recovery taking shape in the US 12
Housing is a big part of consumer net worth
Broadly speaking, it makes more sense to buy than rent
NAHB housing market index1 Household cash balances & cheaper homes2
% of metropolitan statistical areas Percent of GDP
0
20
40
60
80
100
120
140
160
0
10
20
30
40
50
60
70
80
Dec 99 Mar 02 May 04 Jul 06 Sep 08 Nov 10 Jan 13
NA HB Housing Market Index (LHS)US Consumer Confidence (RHS)
Last price Last price
Source: 1) Bloomberg as at 31.01.13. 2) JP Morgan, AxioMetrics, CoreLogic, FHLMC, BEA June 2012. Fund manager views at the time of writing and will change in the future.
Existing home inventory 13
Source: NAR / TIS Group 2013.
Big improvement on the supply side
US Consumer net worth on track to make new high 14
This reflects increases in house prices, stock prices, cash, bonds, insurance, etc., as well as declines in mortgage debt Source: US Consumer Net Worth (ISI) Q1 2013 $64.3 e.
“In the Fed we Trust?”
“Our expectation is that the decline in activity or the slowing in activity will be moderate; that house prices will probably continue to rise but not at the same pace that they had been rising.” 15th February 2006
“At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be constrained.” 28th March 2007
“The Federal Reserve is not currently forecasting a recession.” 10th January 2008
15
Ben Bernanke, Chairman of the Federal Reserve
Source: Grant’s, Interest Rate Observer, Vol. 30, No.19, 5th October 2012.
Corporate bond valuations 16
European Investment Grade spreads* IG Non-Financials Saw Small Uptick in Leverage**
Still scope for further tightening
0
20
40
60
80
100
120
140
160
0x
1x
2x
3x
Dec 99 Jun 02 Dec 04 Jun 07 Dec 09 Jun 12
Net Leverage Gross LeverageSPL (RHS) Avg SPL (RHS)
*Source: RBS Credit Strategy, Bloomberg, 27.11.12. **Source: Morgan Stanley Research, Bloomberg, Markit, Company Data as at 28.08.12.
ASW spreads by rating, bp
17
Disciplined approach still essential
*Source: Morgan Stanley Research, ECB, 19.10.12. **Source: Morgan Stanley Research, SNL Financials, Bloomberg, company data, 19.10.12. ***Source: Morgan Stanley Research, SNL Financials, CEIC, various national regulatory bodies, 19.10.12. The views expressed are those of the fund manager at the time of writing and may change in the future.
European Bank Funding Costs Now Lower than Spreads on New Loans*
Capital Ratios Vary Greatly – Periphery Systems Generally Stronger than Average**
Loans-to-Deposits Ratio Progress on Track***
Banks in vast parts of Europe are still under-capitalised
“It all boils down to capital. If you don’t have enough simple common equity you will run into problems.” Stefan Ingves, Chairman of the Basel Committee on Banking Supervision
Progress against plan: RBS 18
Capital, funding and liquidity positions robust
Safety and soundness remains a key priority
Group: Key performance indicators Worst point Q3 2012 Medium-term target
Balance sheet & risk (group):
Loan: deposit ratio (net of provisions) 154%1 102% c.100%
Short-term wholesale funding2 £297bn3 £49bn <10% TPAs
Liquidity portfolio4 £90bn3 £147bn >1.5x STWF
Leverage ratio5 28.7x6 15.4x <18x
Core Tier 1 Capital ratio 4%7 11.1%8 >10%
Value drivers (core)
Return on Equity (RoE)10 -31%9 10% >12%
Cost: Income ratio12 97%11 59% <55%
Achieved
Source: RBS Group October 2012. 1) As at October 2008. 2) Amount of unsecured wholesale funding under 1 year including banks deposits <1 year excluding derivatives collateral. 3) As at December 2008. 4) Eligible assets held for contingent liquidity purposes including cash, government issued securities and other securities eligible with central banks. 5) Funded tangible assets divided by Tier 1 Capital. 6) As of June 2008. 7) As of 01.01.08. 8) Includes APS benefit of 0.7%, CT1 ex. APS 10.4%. 9) Group return on tangible equity for 2008. 10) Indicative: Core attributable profit taxed at 28% on attributable core average tangible equity (c.80% of group tangible equity based on RWAs). 11) 2008. 12) Adjusted cost: Income ratio net of insurance claims.
High yield valuations 19
High Yield: coupon clipping year
Geographic exposure still important here
Prefer secured debt & defensive industries
Outside the box themes: oil rig financing and pub securitisation
Financial repression, low default rates, low growth and low inflation could push spreads tighter
European high yield spreads and default rates
0
500
1000
1500
2000
2500
0%
5%
10%
15%
20%
25%
May
-99
May
-00
May
-01
May
-02
May
-03
May
-04
May
-05
May
-06
May
-07
May
-08
May
-09
May
-10
May
-11
May
-12
Spread to Worst
Def
ault
rate
High yield default rate High yield spreads
14 year average = 712 bp
14 year average = 4.6%
Source: Source: Moody’s, JP Morgan, as at 31.01.13. Note: Default rates are sourced from Moody’s. The inclusion of banks in their data tends to inflate default rates, particularly in 2009 – 2010.
Quality junk: Two thirds of EHY are BB credits vs. just 26% in 2006
European HY fundamentals 20
HY balance sheets improving. Metrics better than 2000 – 2002 cycle
“Good quality issuance”
Uncertain economic outlook favours senior secured
FCF is above long-term averages LTM FCF to debt
LTM interest coverage still below average Interest coverage
HY non-financial leverage: Net down, gross up Net debt / EBITDA
0x
1x
2x
3x
4x
5x
Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11
Net Leverage Gross (Charting)
0x
1x
2x
3x
4x
5x
6x
7x
Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11
Interest Coverage Avg
-10%
-5%
0%
5%
10%
15%
Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11
LTM FCF to Debt Avg
Source: Morgan Stanley Research, Bloomberg, Company Data, 31.09.12.
Stock examples
Spirit Pub Company Plc.
One of the largest pub groups in the UK. Portfolio of brands with focus on eating-out market. Pubs located favourably. Bias towards south
Company’s debt consists of approx. £870m legacy securitisation put in place Nov. 2004 5 pari passu tranches, all rated Ba2 / BB-
Business demerged from Punch Taverns Aug. 2011. Bonds traded off 2H 2011 amidst economic stress and deteriorating operating environment Secular decline in beer drinking
Negative impact of the smoking ban
Higher taxation – increases in duty and VAT hike
Difficult macro economic backdrop: Stagnant UK wages and rising unemployment
22
Source: Jupiter September 2011.
Spirit Pub Company Plc. – Investment Thesis
Solid turnaround story Whilst leased pubs (30% of portfolio) have performed poorly, the managed
division (70%) seen decent growth as the eating-out market more resilient than expected
Benefit from growing eating-out
Dispose of weak leased pubs
Convert leased portfolio to franchised or managed pubs
Bonds benefit from maintenance covenants… Spirit required to maintain certain levels of cash flow cover with a loan to value
covenant that activates below certain thresholds
Restrictions on acquisitions and disposals
Annual 3rd party property valuation
…backed by substantial security package Portfolio of 1,179 pubs. EBITDA of £141m and LTV of 65%
23
Source: Jupiter December 2012.
Positions across 3 tranches of notes
Current yields to redemption: Class A3 Bonds: 4.7%
Class A4 Bonds: 7.0%
Class A5 Bonds: 6.8%
PagesJaunes: This Time It’s Different
Leading directories business in France Publishes printed and online directories and offers website creation and hosting services
Online services accessed by internet and mobile
Pajfp has experienced significant declines in print business Directories CAGR 2007 to 2011 is -5.0%
And the outlook for its customer base of French SMEs is challenging
Bonds were unloved… Tainted by concerns about the sector
…ongoing saga surrounding the company’s attempts to extend the maturity date of its bank facilities weighed on bonds
24
PagesJaunes: This Time It’s Different
Unlike other directories business, Pajfp has successfully made the transition to online… Pajfp’s mobile app. and online directory has gained high acceptance rates amongst French consumers Online growth has offset print declines EBITDA margins: 44% Strong track record of cash flow generation
Committed to deleveraging - dividends stopped until leverage <3x Decent equity cushion – €472.3m market capitalisation(2) Proven management team with proven track record in online business
Announced in Nov. 2012 extension of bank facilities now secured, future looks good
25
Source: (1) Lucror Analytics, 20.11.12. (2) Bloomberg, 27.11.12. Fund manager views at the time of writing and will change in the future.
(in EUR millions)(1) 2009A 2010A 2011A 2012E 2013E
Free Cash Flow 338 331 307 314 291
Net Debt 1,922 1,941 1,710 1,544
Net Debt / EBITDA 3.8 x 4.1 x 3.8 x 3.5 x
PagesJaunes: This Time It’s Different 26
Directories: an unloved sector experiencing structural declines… with some notable casualties… Yell / Hibu
Seat Pagine Gialle
Eniro
….but this time it’s different!
PagesJaunes: redemption yield 9.3%(1)
60
65
70
75
80
85
90
95
100
105 PagesJaunes 8 7/8% Senior Secured Notes due 2018 Indicates additional bond purchases
Position Initiated
x
Source: Jupiter January 2013. (1) As of January 17, 2012.
Portfolio analysis
Portfolio breakdown by rating
Average rating BB+
28
Source: Jupiter as at 31.01.13. The fund manager has the power to use derivatives but it is intended that these will only be used for efficient portfolio management and not for investment purposes
-60%
-40%
-20%
0%
20%
40%
60%
80%
High YieldCorporates
InvestmentGrade
Corporates
Sovereignlong
Cash Sovereignshort
Jupiter Strategic Bond Fund Jupiter Dynamic Bond SICAV
-40%
-20%
0%
20%
40%
60%
80%
High Yield InvestmentGrade
Cash Sovereign(long)
Sovereign(short)
Average rating BB
Jupiter Strategic Bond Fund portfolio breakdown 29
Country – currently a European bias Sector split
5.9% exposure to GIPSI nations
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Brit
ain
Aus
tral
iaN
orw
ayG
erm
any
Spai
nIre
land
Sout
h A
fric
aIta
lyC
zech
Rep
Net
herla
nds
Mex
ico
Switz
erla
ndC
ash
Pola
ndD
enm
ark
Cro
atia
Finl
and
Swed
enB
razi
lSa
udI A
rabi
aB
elgi
umIs
rael
Ber
mud
aSN
AT
Can
ada
Aze
rbai
jan
Sing
apor
eA
ustr
iaFr
ance US
Fina
ncia
ls
Indu
stria
ls
Con
sum
er D
iscr
etio
nary
Rig
Fin
anci
ng
Med
ia
Pack
agin
g
Hea
lthca
re
Tele
com
mun
icat
ions
Cab
le
Util
ities
Con
sum
er N
on-D
iscr
etio
nary
Tech
nolo
gy
Bus
ines
s Se
rvic
es
Cas
h
Toba
cco
Prop
erty
Supr
anat
iona
l
Sove
reig
n
Source: Jupiter as at 31.01.13. The fund manager has the power to use derivatives but it is intended that these will only be used for efficient portfolio management and not for investment purposes
Jupiter Dynamic Bond SICAV portfolio breakdown 30
Country – currently a European bias Sector split
0%
5%
10%
15%
20%
25%
30%
35%
40%
Uni
ted
Kin
gdom
Euro
pe
Nor
th A
mer
ica
East
ern
Euro
pe
Far E
ast E
x Ja
pan
Sout
h A
mer
ica
Sout
h A
fric
a
Mid
dle
East
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Fina
ncia
ls
Indu
stria
ls
Con
sum
erdi
scre
tiona
ry
Med
ia
Cas
h
Pack
agin
g
Rig
Fin
anci
ng
Hea
lthca
re
Tele
com
s
Bus
ines
s Se
rvic
es
Con
sum
erN
on-D
iscr
etio
nary
Tech
nolo
gy
Util
ities
Prop
erty
Sove
reig
n
Source: Jupiter as at 31.01.13. *Other includes Belgium, Saudi Arabia, Italy, Bermuda, Singapore, Canada, Luxembourg, Azerbaijan and Austria all between 0% and 0.5%. The fund manager has the power to use derivatives but it is intended that these will only be used for efficient portfolio management and not for investment purposes.
Top 10 holdings by Issuer 31
Source: Jupiter as at 31.01.13.
%
Australian Government 11.9
Eksportfinans 4.1
Royal Bank of Scotland 4.0
Lloyds 2.9
Barclays Bank 2.5
Ardagh Glass 2.1
Spirit Issuer 2.1
PagesJaunes Finance 1.8
Unique Pub Finance 1.8
Co-operative Bank 1.7
Jupiter Strategic Bond Fund Jupiter Dynamic Bond SICAV
%
Australia Government 4.75% 21/04/27 3.35
Eksportfinans 5.5% 26/06/17 2.69
Pagejaunes 8.875% 01/06/18 2.50
Unique Pub Finance 6.542% 30/03/21 1.99
Mark IV Europe 8.875% 15/12/17 1.76
Punch Taverns 7.274% 15/04/22 1.71
Barclays Bank 4.75% VRN PERP 1.69
CET 21 spol 9% 01/11/17 1.50
Lowell Group 10.75% 01/04/19 1.31
Cerba European Lab 7% 01/02/20 1.29
Disclosure 32
Jupiter Unit Trust Managers Limited (‘JUTM’) and Jupiter Asset Management Limited (‘JAM’) are both registered in England and Wales (nos. 2009040 and 2036243). The registered office of both is 1 Grosvenor Place, London SW1X 7JJ. JUTM and JAM are authorised and regulated by the Financial Services Authority whose address is 25 The North Colonnade, Canary Wharf, London E14 5HS.
This presentation is intended for investment professionals and not for the benefit of private retail investors. However any one attending the presentation or who has the opportunity to view the accompanying slides should bear in mind that the value of an investment and the income from it can go down as well as up. It may be affected by exchange rate variations and you may not get back the amount invested. Quoted yields are not guaranteed. Past performance should not be seen as a guide to future performance.
Jupiter Strategic Bond: The manager has the power to invest a significant proportion of the portfolio in high yield bonds (a type of bond with a low rating from a credit rating agency). While such bonds may offer a higher income the interest paid on them and their capital value is at greater risk, particularly during periods of changing market conditions. Due to the overall structure of the portfolio, the level of quarterly income payments will not be constant and will fluctuate. This Fund can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Key Investor Information Document (KIID), Supplementary Information Document (SID) and Scheme Particulars are available from Jupiter on request.
For your security we may record or randomly monitor all telephone calls. If you are unsure of the suitability of an investment please contact your financial advisor. Any data or views given should not be construed as investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.
