CASTING A WIDER NET –
HIGH INCOME BONDS
Mark Vaselkiv
May 2015
T. Rowe Price Investment Capabilities:
Experienced Global Resources
1 The combined assets under management of the T. Rowe Price group of companies in Euros. The T. Rowe Price group of companies includes T. Rowe Price
Associates, Inc., T. Rowe Price International Ltd, T. Rowe Price Hong Kong Limited, T. Rowe Price Singapore Private Ltd., and T. Rowe Price (Canada), Inc. Assets under management are calculated in U.S. dollars and converted to Euros using an exchange rate determined by an independent third party.
As of 31 March 2015, figures Shown in GBP
T. ROWE PRICE: A STRONG FIRM WITH DEEP RESOURCES
FIXED INCOME INVESTMENT PROFESSIONALS
Portfolio Managers
25
Portfolio Managers/Analysts
6
Associate Portfolio Managers
5
Credit Analysts
46
Quantitative Analysts
27
Economists
1
Traders
24
Trading Analysts
13
Portfolio Specialists
7
Management
5
Solutions
3
Total Fixed Income Professionals
162
Assets under management: GBP 520.5
1
of
which more than GBP 100 billion in Fixed
Income Assets
Over 75 years of dedicated investment
management and related services within an
independent, highly stable organisation and a
culture that puts client interests first
5,905 employees and 463 investment
professionals in 15 offices across the globe
An experienced team of portfolio managers
with an average firm tenure of 16 years
Firm led by a 7 person Management
Committee with an average tenure of
30 years
3
5 High Yield and
Bank Loan Traders
13 High Yield
Analysts
4 Senior Portfolio
Managers
About the Manager
Mark J. Vaselkiv
Head of High Yield Investing
Portfolio Manager,
High Yield Strategy
31 years of investment experience
27 years with T. Rowe Price
High Yield Expertise
TOTAL FIRM ASSETS
1₤520.5 billion
FIXED INCOME ASSETS OVER ₤100 billion
HIGH YIELD ASSETS MORE THAN ₤16 billion
US High Yield
Bank Loans
European High Yield Global High Yield
1 The combined assets under management of the T. Rowe Price group of companies in GBP as of 31 March 2015. The T. Rowe Price group of companies includes
T. Rowe Price Associates, Inc., T. Rowe Price International Ltd, T. Rowe Price Hong Kong Limited, T. Rowe Price Singapore Private Ltd., and T. Rowe Price (Canada), Inc. Assets under management are calculated in U.S. dollars and converted to Euros using an exchange rate determined by an independent third party.
Today’s U.S. High Yield Market Environment
Permits Less Compensation For Risk
Source: Barclays
0
5
10
15
20
25
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
P
er
ce
n
t
(%
)
Years
BARCLAYS U.S. HIGH YIELD INDEX
Coupon
Yield to Worst
5
Central Bank Actions are Limiting Supply
in Global Markets
Source: Citi Research, Haver
Note: Federal Reserve, BoJ, ECB interventions included; Assumes €320bn of LTRO repayment in 1Q15 with 100bn re-borrowing, €750bn of QE in 2015, and extension of the BoJ QE at current rate; US & Japan net issuance data based on annualized quarterly data
-$3 tn
-$2 tn
-$1 tn
$0 tn
$1 tn
$2 tn
$3 tn
$4 tn
$5 tn
05
06
07
08
09
10
11
12
13
14
15
Years
CB interventions
Shares
Corp
Gov't
Net
As of 31 March 2015 with estimations through the end of the yearExpanding Global Opportunity Set From
What Had Traditionally Been A U.S. Market
Sources: BIS and Credit Suisse. Emerging Market Corporate data as of 31 March 2015
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD
2015
Billion
s
($)
MARKET GROWTH—1996 THROUGH MARCH 2015
US High Yield
European High Yield
Emerging Market Corporate Debt
US Leveraged Loans
7
90
100
110
120
130
140
150
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
G
ro
w
th
o
f
€100
GROWTH OF €100
U.S. High Yield
European High Yield
Emerging Markets Corporate
Different Regions Produce Divergent Results
As of 31 March 2015
Source: BofA/ML and T. Rowe Price.
U.S. High Yield represented by the BofA ML U.S. High Yield Index hedged to EUR, European High Yield represented by the BofA ML European Currency High Yield ex. Sub. Fin. 2% Constrained Index hedged to EUR and Emerging Markets Corporate represented by the JP Morgan CEMBI Broad Diversified Index hedged to EUR
Repair
Recovery
Expansion
Downturn
Macro Environment
Still-challenging and uncertain outlook
Moderate but improving Growth is back but plateauing
Weak and deteriorating
Credit Availability
Borrowing (and lending) is weak
Accelerating credit growth, but still below historical trend
Renewed confidence drives private sector debt growth
Credit growth and availability stalls as confidence shaken
Corp. Aggression
Companies shore up balance sheets; focus on survival
Leverage and appetite for risk-taking still low, but rising
Optimism and credit encourages large-scale M&A and capex
Companies cut back due to high borrowings, and weakening cash flow
Global Credit Cycles are Increasingly
Unsynchronized
Source: T. Rowe Price
India
Indonesia
Euro Zone
Mexico
United Kingdom
United States
Australia
Russia
China
Brazil
9
Valuations Appear Compelling Within An
Historical Context
Source: Citi Research, NBER and Barclays
1All periods of Treasury market sell-offs are month beginnings
200 bp
250 bp
300 bp
350 bp
400 bp
450 bp
500 bp
550 bp
Feb-98
Feb-06
Mar-15
HIGH YIELD SPREADS 70% THROUGH
THE RECOVERY PERIOD
-400 bp
-300 bp
-200 bp
-100 bp
0 bp
100 bp
200 bp
A
ug
'8
9 - Ma
y
'9
0
O
c
t'93
- D
ec
'9
4
F
eb
'96 - S
ep
'9
6
O
c
t'98
- Fe
b'00
No
v
'01
A
p
r'
0
2
J
un
'0
3 - J
un
'0
4
J
ul
'0
5 - J
ul
'06
J
an
'0
9 - J
an
'1
0
S
ep
'1
0 - A
pr'
11
M
a
y
'1
3
- J
a
n
'1
4
HIGH YIELD SPREADS TIGHTEN WHEN
THE TREASURY MARKET SELLS OFF
1While Energy Weakness Was Notable,
Individual
Credit
Selection
Creates
Opportunity
Source: Citi Research
Note: As of month ends; based on index constituents of respective observed months
300 bp
350 bp
400 bp
450 bp
500 bp
550 bp
Jun '14
Dec '14
Mar '15
Basics
Energy
B or Lower
Other
Basics
Energy
B or Lower
Other
THE DRIVERS OF SPREAD CHANGES IN HIGH YIELD, JUNE ’14 TO MARCH ’15
T. ROWE PRICE FUNDS SICAV
European High Yield Bond Fund
Global Emerging Markets
Corporate Bond Fund
Not All Parts of the Market Offer Value –
Favor Single Bs in European High Yield
Source: BofA ML European Currency High Yield Constrained Ex Subordinated Financials Index
The securities identified and described above are intended to illustrate the security evaluation process of T. Rowe Price investment professionals and do not represent all of the securities analysed or purchased or sold for the SICAV T. Rowe Price SICAV European High Yield Bond sub-fund. No assumptions should be made that the securities analysed, or other securities analysed, purchased or sold, were or will be profitable. To further illustrate our security selection process, a complete list of securities in the SICAV sub-fund that were purchased or sold during the past year is available on request, subject to applicable law.
EURO HIGH YIELD MARKET –
YIELD TO MATURITY (%) PER RATING
As of 31 March 2015, figures Shown in Euros
Average
Rating to Maturity (%) Yield of the Market (%) Proportion
BB 3.2% 61.4% B 6.0% 31.3% CCC and Lower 13.6% 6.7% Index 4.7% 100% Media 14.1% Automotive 13.9% Services 13.8% Basic Industry 12.1% Healthcare 7.4% Retail 7.0% Consumer Goods 6.7% Telecom-munications 5.3% Capital Goods 4.5% Leisure 4.4% Utility 2.5% Financial Services 2.4% Transportation 2.3% Technology 1.4% Others 2.0%
EURO HIGH YIELD SINGLE B –
SECTOR BREAKDOWN
13
Not All Parts of the Market Offer Value –
Double Bs in Emerging Markets Corporates
Source: JP Morgan CEMBI Broad Diversified Index
The securities identified and described above are intended to illustrate the security evaluation process of T. Rowe Price investment professionals and do not represent all of the securities analysed or purchased or sold for the T. Rowe Price SICAV Global Emerging Markets Corporate Bond sub-fund. No assumptions should be made that the securities analysed, or other securities analysed, purchased or sold, were or will be profitable. To further illustrate our security selection process, a complete list of securities in the SICAV sub-fund that were purchased or sold during the past year is available on request, subject to applicable law.
EMERGING MARKET CORPORATES MARKET–
YIELD TO MATURITY (%) PER HIGH YIELD RATING
As of 31 March 2015
Average
Rating to Maturity (%) Yield of the Market (%) Proportion
BB 7.0% 16.3%
B 8.6% 9.1%
CCC and Lower 14.2% 2.8%
Index 5.4% 100%
EMERGING MARKET CORPORATE DEBT
DOUBLE B – SECTOR BREAKDOWN
Financial 29.7%
TMT 18.2% Oil & Gas
13.7% Consumer 12.1% Metals & Mining 10.9% Industrial 5.6% Utilities 3.3% Real Estate 3.0%
Pulp & Paper 2.7% Others
Year
SICAV Global
High Yield Bond Fund
J.P. Morgan 12
Month Default Rate
1995
%
2.82%
1996
1.64
1997
1.45
1998
1.73
1999
4.10
2000
5.03
2001
0.00
9.13
2002
0.00
7.98
2003
0.00
3.32
2004
0.68
1.11
2005
0.25
2.80
2006
0.00
0.87
2007
0.00
0.38
2008
0.34
2.25
2009
0.51
10.27
2010
0.00
0.80
2011
0.00
1.73
2012
0.03
1.26
2013
0.16
0.68
2014
0.60
2.96
2015 (through 31/03/15)
0.17
3.00
1Average
0.18%
3.88%
2Avoiding Bankruptcies Protects Our High
Yield Investors
HIGH YIELD ANNUAL DEFAULT RATES –
BASED ON PAR AMOUNT
As of 31 March 2015
15
A Tenured High Yield Investment Team
Delivers Durable Performance
Annualised In USD YTD* 1 Year 3 Year 5 Year 10
Year
T. Rowe Price SICAV Global High Yield
Bond Fund (I-class)
2.97
1.73
7.26
8.00
7.36
JP Morgan Global High Yield Index
2.45
1.16
7.09
8.60
8.20
Morningstar US OE High Yield Bond Category
2.25
0.75
6.35
7.45
6.74
Morningstar EAA
1OE Global High Yield
Bond Category
0.79
-2.49
5.29
6.27
6.26
Source for performance: T. Rowe Price. Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of the investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges (up to a maximum of 5% for the A Class), taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures.
Please note that no management fees are charged to the Z, S and J share classes. No administration agent fees are charged to the J Class. No expenses or any other fees are charged to the Z class. Fee arrangements for the Z, S and J share classes are made directly with the investment manager. Please see the prospectus for further information.
Where the base currency of the fund differs from the share class currency, exchange rate movements may affect returns.
Hedged share classes (denoted by ‘h’) utilize investment techniques to mitigate currency risk between the underlying investment currency(ies) of the fund and the currency of the hedged share class. The costs of doing so will be borne by the share class and there is no guarantee that such hedging will be effective.
Source & Copyright: Citywire. The Fund manager is rated by Citywire based on the manager’s 3 year risk adjusted performance for the period ending 31 March 2015. 2015 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed: and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. As of 31 March 2015
Established Track Record in European
High Yield and Emerging Markets
Corporate Strategies
Annualised
In Euro YTD 1 Year 3 Year Since
Inception1
T. Rowe Price SICAV European High Yield
Bond Fund(I-class)
4.07
6.05
11.46
4.07
BofA ML European Currency High Yield Constrained
Ex Subordinated Financials Index (hedged to EUR)
3.02
5.03
9.67
12.28
Morningstar EAA OE Europe High Yield Bond Category
4.06
5.13
9.05
-
As of 31 March 2015
Annualised
In USD YTD 1 Year 3 Year Since
Inception2
T. Rowe Price SICAV Global Emerging Markets
Corporate Bond Fund (I-class)
1.36
2.67
4.99
4.67
JP Morgan Corporate Emerging Markets Bond Index Broad Diversified
2.36
4.52
5.37
5.12
Morningstar EAA OE Emerging Mkts Corporate Bond Category
0.85
0.08
3.80
-
Source for performance: T. Rowe Price. Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of the investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges (up to a maximum of 5% for the A Class), taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures.
Please note that no management fees are charged to the Z, S and J share classes. No administration agent fees are charged to the J Class. No expenses or any other fees are charged to the Z class. Fee arrangements for the Z, S and J share classes are made directly with the investment manager. Please see the prospectus for further information.
Where the base currency of the fund differs from the share class currency, exchange rate movements may affect returns.
Hedged share classes (denoted by ‘h’) utilize investment techniques to mitigate currency risk between the underlying investment currency(ies) of the fund and the currency of the hedged share class. The costs of doing so will be borne by the share class and there is no guarantee that such hedging will be effective.
Source & Copyright: Citywire. The Fund manager is rated by Citywire based on the manager’s 3 year risk adjusted performance for the period ending 31 March 2015. 2015 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed: and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
1T. Rowe Price SICAV European High Yield inception date 20 September 2011.
GLOBAL HIGH INCOME BOND
STRATEGY
Why Global High Income Bond?
Evolution of the High Yield Fixed Income Asset Class
Long-term sustainable demand for income oriented credit strategies
in a low interest rate world
Overvalued U.S. credit markets caused by an influx of new
investors and limited supply of quality issuers
Expanding international opportunity set from the maturation of
leveraged loan, European high yield and emerging markets
corporate asset classes
Meaningful potential to profit from dislocations and volatility driven
by economic and geopolitical uncertainties
19
Why T. Rowe Price? A Commitment to
Proprietary Research that Spans the Globe
162 Fixed Income Professionals
301 Equity Professionals
Count does not include Administration or Open positions As of 31 March 2015
334
Fixed Income and EquityProfessionals
UNITED STATES
84
Fixed Income and Equity Professionals UNITED KINGDOM
5
Equity Professionals SINGAPORE6
Equity Professionals JAPAN26
Fixed Income and EquityProfessionals HONG KONG
8
Equity Professionals AUSTRALIA Fixed Income Equity 76 94 130 204 2003 1Q15 27 57 25 9 2003 1Q15 21 5 7 6 2 5 2 8 2003 1Q15 2003 1Q15 2003 1Q15 2003 1Q15 0Global reach allows us to build critical
local knowledge and broaden capabilities
T. Rowe Price Global High Income Bond Process
Asset
Allocation
Portfolio
Construction
Sector
Allocation &
Themes
Credit Selection
10%
20%
20%
50%
Top
Down
Bottom
Up
Firm-wide global insights across equity and fixed
income asset classes including:
- Stocks v. Bonds - Global Equities v. Real Assets - Developed v. Emerging - High Yield v. Investment Grade
Sovereign and relative value quantitative and
qualitative inputs to establish:
- Country/Regional allocations - Interest rate/Duration themes
- Credit quality weights - Risk mgmt. tools/Performance attribution - Fixed Rate v. Floating Rate
Global research collaboration to develop
sector and industry weightings including:
- Media Telecommunications - Financials- Energy - Services
Detailed credit analysis to identify
improving credits by focusing on:
- Credit statistics and liquidity- Free cash flow generation - Quality of managements - Strategic value of companies - Security structure and priority
21
T. Rowe Price Global High Income Bond
Strategy Investment Philosophy
The views from:
We seek to generate higher total returns than U.S. based credit
strategies through:
3,000 metres
Superior credit selection driven by a world class fundamental
research platform of 200 fixed income and equity analysts
stationed across the globe
6,000 metres
Intense collaboration across investment strategies that have
identified and exploited major long-term industry themes
9,000 metres
Sophisticated portfolio construction processes led by highly
tenured and experienced management teams
12,000 metres
Consistent and relevant asset allocation insights developed
by T. Rowe Price’s successful asset allocation and sector
strategy committees
A diversified global high yield bond strategy that leverages
T
. Rowe Price’s strength in core high yield bond investing
A Strategy with a True Global Composition
United States/Canada
Europe
Emerging Market
Source: Bank of America/Merrill Lynch.
The representative portfolio is an account in the composite we believe most closely reflects current portfolio management style for the strategy. Performance is not a consideration in the selection of the representative portfolio. Information regarding the representative portfolio and, where applicable, the other accounts in the composite is available upon request. Please see the GIPS® Disclosure page for additional information on the composite. Supplemental information.
As of 31 March 2015
GEOGRAPHICAL PROFILE
BofA Merrill Lynch Global High
Yield Hedged to USD Index
A collaborative effort across credit, sovereign, macro and equity research analysts
provides a holistic view of a company’s capital structure, taking into consideration
the market environment unique to each country and region where invested
Global High Income Bond
Representative Portfolio
23
Sector Allocations Based on Top-Down and
Bottom-up Inputs
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Manufacturing
Building Products
Automotives
Building & Real Estate
Healthcare
Container
Chemicals
Food & Tobacco
Service
Retail
Metals & Mining
Wireless Communications
Financial
Energy
Cable Operators
Global High Income Bond Representative Portfolio
BofA Merrill Lynch Global High Yield Hedged to USD Index
As of 31 March 2015
15 LARGEST INDUSTRIES IN THE GLOBAL HIGH INCOME BOND
REPRESENTATIVE PORTFOLIO
Source: Bank of America/Merrill Lynch.
The representative portfolio is an account in the composite we believe most closely reflects current portfolio management style for the strategy. Performance is not a consideration in the selection of the representative portfolio. Information regarding the representative portfolio and, where applicable, the other accounts in the composite is available upon request. Please see the GIPS® Disclosure page for additional information on the composite. Supplemental information.
Our global research and portfolio management teams identify improving issuers
with reliable management teams to exploit long-term industry themes
25
Total Return Performance
Global High Income Bond Hedged to USD Composite
Period Ended March 31, 2015 Figures Shown in U.S. dollar
GIPS
®
Disclosure
Global High Income Bond Hedged to USD Composite
Period Ended March 31, 2015 Figures Shown in U.S. dollar
27
Global High Income Fee Schedule
Global High Income Bond Hedged to USD Composite
As of Current Quarter-End Figures Shown in U.S. Dollars
Global High Yield Fee Schedule
(SICAV)
T. Rowe Price Funds SICAV — Global High Yield Bond Fund
29
European High Yield Fee Schedule
(SICAV)
T. Rowe Price Funds SICAV — European High Yield Bond Fund
Global Emerging Markets Corporate Bond
Fee Schedule (SICAV)
T. Rowe Price Funds SICAV - Global Emerging Markets Corporate Bond Fund
31
Additional Information
This marketing communication is directed at professional investors only. It is not intended for distribution to retail investors in any jurisdiction.
The Fund is a sub-fund of the T. Rowe Price Funds SICAV, a Luxembourg investment company with variable capital which qualifies as an undertaking for collective investment in transferable securities (“UCITS”). The Fund is offered on the basis of the Key Investor Information Document, the prospectus and the annual and semi-annual reports (together “Fund Documents”).
This document does not constitute investment advice - investors should ensure they understand the legal, regulatory and tax consequences of an investment in the Fund.
Issued and approved by T. Rowe Price International Ltd (“TRPIL”), 60 Queen Victoria Street, London, EC4N 4TZ. TRPIL is authorised and regulated by the Financial Conduct Authority.
T. ROWE PRICE, INVEST WITH CONFIDENCE and the Bighorn Sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc. in the United States, European Union, and other countries. This material is intended for use only in select countries.
2015-GL-1905 C16J4OF1S