NEWSLETTER
LO FUNDS – CONVERTIBLE BOND ASIA
October is notorious for high market volatility but global markets
were uncharacteristically stable this past month. More global
easing efforts in September were the most likely supportive factor.
Another unusual aspect of the current climate is the busy timetable
of political transition until year end. The first battle was between
Mr Obama and Mr Romney in the US. It is followed by an equally
important event in China: the Communist Party Congress (CPC),
is officially endorsing the next ruling team of China. Lastly, in
December, an election will take place in South Korea to determine its
next leader. Awaiting these important changes, Asian markets have
been lacking direction. The MSCI Asia ex-Japan index was down
0.27% for the month, however, in a clear exception, the Hong Kong
local index posted a decent gain of 3.9%. We will spend more time
on Hong Kong later in this newsletter.
The political transition in China should have far-reaching implication
across Asia and beyond we believe, especially since it has been the
subject of constant rumours and conspiracy theories. Nevertheless,
dust is expected to settle in the latter part of November. The 18th
CPC will determine core members of the new administration for the
next 10 years. Once all the 7 members of the new Politburo Standing
Committee are decided, we can assume that a political compromise
has been reached. Overall, the committee should not contain too
many surprises. At the very least, we think it is quite certain that Xi
Jinping and Li Keqiang will be appointed as President and Premier.
The names and factions to fill the other 5 slots are less clearly
defined. Recent press suggests that supporters of Jiang Zemin,
the previous President, will take a majority of the committee seats.
Despite that, we believe that political stability is very unlikely to be
challenged.
Turning to Hong Kong, its relatively strong market performance can
at least be partly explained by the hot money inflows that followed
the third round of US quantitative easing (QE3).
It is difficult for us to distinguish the egg from the chicken here:
since the announcement of QE3, the Hong Kong dollar (HKD) has
been pushed up to record highs. The Hong Kong Monetary Authority
(HKMA) had no choice but to absorb all the inflows and issue an
equivalent amount of the HKD. As a result, a surge of liquidity
entered the economy. Significantly, it was the first such action by
the HKMA in the past 5 years. Many commentators immediately
drew a correlation between hot money inflow and stronger market
performance. We think it is too early to reach such a conclusion.
In the past, there have been 4 instances of the Hong Kong dollar
being bided up to its stronger levels. The Hong-Kong stock market
reacted positively twice, but peaked out and rolled over in the
other 2 instances. Key to this is to gauge whether the inflows
are sustainable. We do not think it suggests an outright case for
portfolios to take higher market risk.
Another twist regarding the “hot money” inflow is that it has further
escalated anxiety among the local population about property prices.
On average, Hong Kong property prices have risen 18% this year,
pushing them towards all-time highs. It is widely believed that the
inflows will drive the already high property prices even higher.
Affordability is already out of reach for the young generation,
leading to discontent within society. In response, additional property
cooling measures were introduced by the government in October. A
controversial measure is the implementation of a 15% buyer stamp
duty (BSD) for non-Hong Kong residents. In our view, it is good that
the new administration has taken some stronger measures to control
the heating property market, but we are doubtful that these policies
are enough to reverse price expectations. Without complimentary
supply policy, controlling measures on the demand side will only
provide short-term relief we think.
In October, both the JACI (JP Morgan Asia Credit Index) investment
grade corporate and the non-investment grade corporate spreads
contracted a further 17 bps and 36 bps respectively.
The Fund (LO Funds II – Convertible Bond Asia, IA, USD) was up
0.7%, above the UBS Asia ex Japan (0.6%), which brings our YTD
performance to 9.4% vs. 8.9% for the benchmark.
This month, the major sources of outperformance vs. the benchmark
were the Industrial sector (thanks to our overweight position in SM
Investments in the Philippines), Utilities (thanks to our overweight
position in Jaiprakash Power in India) and Financials (thanks to our
position in Hong Kong Stock Exchange, absent from the benchmark).
IMPORTANT INFORMATION: Data as of 31 October 2012. Monthly publication of Lombard Odier Investment Managers. Please see important information at the end of this document. For use of recipient only, do not forward.
2
Conversely the Fund underperformed in the Tech and Energy sectors.
The Fund is in our view cautiously positioned with an average
weighted delta of 29%, a premium of 46% and a bond floor of 92%.
Equities (Telekom Malaysia/Axiata/SJM Holdings, all the fruit of
conversions) represent 3% of the portfolio, equity-linked names 4%
(average equity sensitivity of 72%), balanced names 24% (average
equity sensitivity of 49%) bond-linked names 23% (average equity
sensitivity of 25%, average YTM of 1.1%), credit names 34%
(average equity sensitivity of 3%, average YTM of 4.7%) and fixed
income instruments 7% of portfolio (average YTM of 4.3%). The
cash level is maintained around 5%.
During the month, we continued to seek the best risk-adjusted profiles.
In Australia, we switched out of Western Areas 2014 into the more
asymmetrical Western Areas 2015 (Nickel producer, BB+, YTM
5.2%). We also added to Shangri-La 2016 (Hotel operator based
in Hong Kong, BBB, YTM 3.8%) and New World Development 2014
(Property in China and Hong Kong, BBB-, YTM 3.4%).
Regarding the straight bonds, we initiated some small positions in
Indian Rail 2017 (Railways’ financing in India, BBB-, YTM 3.2%),
Yuzhou 2017 (Property in China, B, YTM 11.1%), Longfor Prop 2019
(Property in China, BB, YTM 6.6%).
Finally, we opened a position in the straight debt of Agile Property
2017 (Real estate operator in China, BB, YTM 7.6%), complementing
our existing position in the company’s convertible bond.
Oct-12
Apr-12
Oct-11
May-11
Nov-10
May-10
Nov-09
Jun-09
Dec-08
90
100
110
120
130
140
150
LO FUNDS II - CB
ASIA (I USD)
UBS
CONVERTIBLES ASIA
EX - JAPAN (USD)
MSCI
ASIA EX - JAPAN
(USD)
LO FUNDS - CB
ASIA (P EUR)
LO FUNDS - CB
ASIA (P CHF)
PERFORMANCE*
2012 YTD
9.4%
8.9%
15.5%
8.3%
7.9%
2011
-8.5%
-7.3%
-17.3%
-9.6%
-10.7%
2010
15.5%
15.6%
19.6%
14.8%
13.1%
2009
23.2%**
38.6%
72.1%
22.6%
21.2%
Duration
2.72
2.55
2.72
2.72
Average maturity (best)
5.5
2.1
5.5
5.5
Yield-to-best
1.5%
2.1%
1.5%
1.5%
Average maturity
2.9
2.7
2.9
2.9
Yield-to-maturity
1.2%
1.6%
1.2%
1.2%
Current yield
2.0%
1.3%
2.0%
2.0%
Modified yield ****
1.9%
2.1%
1.9%
1.9%
Premium
46%
75%
46%
46%
Bond floor
92%
97%
92%
92%
Delta
29%
23%
29%
29%
Gamma
0.7
0.7
0.7
0.7
Volatility***
5.8%
6.2%
21.8%
5.7%
5.7%
Number of issues
63
63
63
63
* Net of fees (110 bp). ** Class P USD.*** Annualised since inception, based on daily performances.
**** Modified yield is the delta-adjusted average yield (using YTM and current yield).
LO Funds–Converttible Bond Asia (USD) P RA
PERFORMANCE*
IMPORTANT INFORMATION: Data as of 31 October 2012. Monthly publication of Lombard Odier Investment Managers. Please see important information at the end of this document. For use of recipient only, do not forward.
4
TYPE
WEIGHT IN PORTFOLIO
SENSI RANGE
AVERAGE SENSI
AVERAGE PREMIUM
YTM
Equities
3.3%
Equity-linked CB
4.0%
60% < S < 100%
72%
-1%
-2.1%
Balanced CB
24.2%
35% < S < 60%
49%
9%
-2.5%
Bond-linked CB
23.0%
15% < S < 35%
25%
35%
1.1%
Credit CB
33.6%
S < 15%
3%
88%
4.7%
Fixed Income
6.7%
4.3%
Cash
5.2%
RATING
%
AAA
2.5%
AA
2.0%
A
17.7%
BBB
44.4%
BB
22.0%
B
6.2%
Cash (AAA)
5.2%
Average rating
BBB-MATURITY
%
<1 year
9.9%
1-3 years
53.7%
3-4 years
14.5%
4-5 years
17.8%
5-7 years
2.7%
7-10 years
0.5%
>10 years
0.9%
Average maturity to best
2.3 years
PORTFOLIO STRUCTURE
31.0%
Hong Kong
16.0% Singapore
16.3% China
8.6% India
5.2% Cash
1.6% Korea
7.3% Malaysia
4.3% Philippines
7.4% Taiwan
2.3% Australia
FUND
BENCHMARK
SENSI-WEIGHTED
POSITION
WEIGHT
SENSI
WEIGHT
SENSI
Basic Materials
2.9%
7%
3.4%
4%
0.1%
Communications
8.2%
52%
8.7%
34%
1.3%
Consumer Non-cyclical
6.9%
11%
8.4%
14%
-0.4%
Consumer Cyclical
8.8%
17%
10.6%
6%
0.8%
Energy
3.2%
3%
6.3%
3%
-0.1%
Financial
2.8%
12%
1.0%
23%
0.1%
Industrial
15.1%
34%
11.4%
37%
1.0%
Pharmaceutical
0.0%
0%
0.0%
0%
0.0%
Property
29.8%
22%
29.7%
16%
1.8%
Technology
7.4%
21%
15.4%
14%
-0.6%
Utilities
9.8%
48%
5.1%
37%
2.7%
Why Asia?
•
Even in economic turmoil periods, emerging Asia economies
have shown positive economic growth
•
Consumption in Asia will continue growing in the long term
•
Economy growth will be supported by fiscal measures
•
Inflation fears largely explain the poor recent equity performance
in Asia
•
… but the inflation trend now appears to have reversed
•
Medium-term, the inflation/growth trade-off is still attractive,
in our view
•
A Chinese hard-landing scenario seems extreme, we rather bet
on a soft-landing scenario
Why Asian Convertible bonds?
•
Cheap options
•
An exposure with reduced risk to Asian stock markets
•
Ideal solution in terms of return/risk ratio in volatile markets
THE ATTRACTION OF ASIAN CONVERTIBLE BONDS
VALUATION OF ASIAN CONVERTIBLE BONDS
Asia-Pacific
Worldwide
0%
10%
20%
30%
40%
50%
Greater than 10% cheap
5% to 10% cheap
1% to 5% cheap
1% rich to 1% cheap
1% to 5% rich
5% to 10% rich
This document is issued by Lombard Odier Asset Management (Europe) Limited, a private limited company incorporated in England and Wales with registered number 07099556, having its registered office at Queensberry House, 3 Old Burlington Street, London, United Kingdom, W1S 3AB, authorised and regulated by the Financial Services Authority (the “FSA”) and entered on the FSA register with registration number 515393. Lombard Odier Investment Managers (“LOIM”) is a trade name.
The LO Fund mentioned in this document (hereinafter the “Fund”) is a Luxembourg investment company with variable capital (SICAV). The Fund is authorised and regulated by the Luxembourg Supervisory Authority of the Financial Sector (CSSF) as a UCITS within the meaning of EU Directive 2009/65/EC, as amended. The management company of the Fund is Lombard Odier Funds (Europe) S.A. (hereinafter the “Management Company”), a Luxembourg based public limited company (SA), having its registered office at 5, Allée Scheffer, L-2520 Luxembourg, authorized and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended.
The LO Fund II is a Luxembourg investment company with variable capital (SICAV). The fund is authorised and regulated by the Luxembourg Supervisory Authority of the Financial Sector (CSSF) as an “other UCI” under Part 2 of the Luxembourg law of 17 December 2010 relating to undertakings for collective investments.
The Funds are only registered for public offering in certain jurisdictions. This document is not a recommendation to subscribe to and does not constitute an offer to sell or a solicitation or an offer to buy the Fund’s shares nor shall there be any sale of the Fund’s shares in any jurisdiction in which such offer, solicitation or sale would be unlawful. Consequently, the offering of the Fund’s shares may be restricted in certain jurisdictions. Prospective investors must inform themselves of, and observe, such restrictions, including legal, tax, foreign exchange or other restrictions in their relevant jurisdictions.
Neither this document nor any part of it shall form the basis of, or be relied on in connection with, any contract to purchase or subscription for the Fund’s shares. Any such acquisition may only be made on the basis of the official documents of the Fund each in their final form. The articles of association, the prospectus, the Key Investor Information Document, the subscription form and the most recent annual and semi-annual reports are the only official offering documents of the Fund’s shares (the “Offering Documents”). They are available on http://funds.lombardodier.com or can be requested free of charge at the registered office of the Fund or of the Management Company, from the distributors of the Fund or from the local representatives as mentioned below.
Austria. Supervisory Authority: Finanzmarktaufsicht (FMA), Representative: Erste Bank der österreichischen Sparkassen AG, Graben 21, A-1010 Wien - Belgium. Supervisory Authority: Autorité des services et marchés financiers (FSMA), Representative: Fastnet Belgium S.A.,Avenue du Port 86C, b320, 1000 Brussels - France. Supervisory Authority: Autorité des marchés financiers (AMF), Representative: CACEIS Bank, place Valhubert 1-3, F-75013 Paris - Germany. Supervisory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), Representative: DekaBank Deutsche Girozentrale, Mainzer Landstraße 16, D-60325 Frankfurt am Main - Italy. Supervisory Authority: Banca d’Italia (BOI), Paying Agents: Société Générale Securities Services S.p.A., Via Benigno Crespi, 19/A - MAC 2, 20159 Milano, State Street Bank S.p.A. Via Ferrante Aporti, 10, 20125 Milano, Banca Sella Holding S.p.A., Piazza Gaudenzio Sella, 1, 13900 Biella, Allfunds Bank S.A., filiale italianaVia Santa Margherita 7, 20121 Milano, - Liechtenstein. Supervisory Authority: Finanzmarktaufsicht Liechtenstein («FMA»), Representative: Verwaltungs- und Privat-Bank Aktiengesellschaft, Aeulestrasse 6, LI-9490 Vaduz - Netherlands. Supervisory Authority: Autoriteit Financiële Markten (AFM). Representative: Lombard Odier Darier Hentsch & Cie (Nederland) N.V., Weteringschans 109, 1017 SB Amsterdam (telephone: +31 20 522 0 522) - Spain. Supervisory Authority: Comisión Nacional del Mercado de Valores (CNMV). Representative: Allfunds Bank S.A. C/Nuria, 57 Madrid - Switzerland. Supervisory Authority: FINMA (Autorité fédérale de surveillance des marchés financiers), Representative: Lombard Odier Asset Management (Switzerland) SA, 6 av. des Morgines, 1213 Petit-Lancy; Paying agent: Lombard Odier Darier Hentsch & Cie, 11 rue de la Corraterie, CH-1204 Geneva. UK. Supervisory Authority: Financial Services Authority (FSA), Representative: Lombard Odier Asset Management (Europe) Limited, Queensberry House, 3 Old Burlington Street, London W1S3AB, which has approved this document for issuance in the UK to professional clients or eligible counterparties and is authorised and regulated by the FSA.
NOTICE TO RESIDENTS OF THE UNITED KINGDOM: The Fund is a Recognised Scheme in the United Kingdom under the Financial Services & Markets Act 2000. Potential investors in the United Kingdom are advised that none of the protections afforded by the United Kingdom regulatory system will apply to an investment in LO Funds and that compensation will not generally be available under the Financial Services Compensation Scheme. This document does not itself constitute an offer to provide discretionary or non-discretionary investment management or advisory services, otherwise than pursuant to an agreement in compliance with applicable laws, rules and regulations. Representative: Lombard Odier Asset Management (Europe) Limited, Queensberry House, 3 Old Burlington Street, London W1S3AB, which has approved this document for issuance in the UK to professional clients or eligible counterparties and is authorised and regulated by the Financial Services Authority.
An investment in the Fund is not suitable for all investors. Making an investment in a Fund is speculative. There can be no assurance that the Fund’s investment objective will be achieved or that there will be a return on capital. Past or estimated performance is not necessarily indicative of future results and not assurance can be made that profits will be achieved or that substantial losses will not be incurred.
This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before making an investment in the Fund, an investor should
read the entire Offering Documents, and in particular the risk factors pertaining to an investment in the Fund, consider carefully the suitability of such investment to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences.
This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful.
This document contains the opinions of LOIM, as at the date of issue. Investments in convertible bonds are primarily subject to interest rate risk, currency exchange rate risk, credit risk and to the underlying equity risk. These funds may use financial derivative instruments as a part of the investment process. This may increase the funds’ price volatility by amplifying market events. If the funds are denominated in a currency other than that in which the majority of the investors assets are held, the investor should be aware that changes in rates of exchange may affect the value of the funds underlying assets. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. Targets are subject to change and are current as of the date of this communication. Targets are objectives and do not provide any assurance as to future results. Holdings and/or allocations are subject to change. No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a financial promotion and has been approved by Lombard Odier Asset Management (Europe) Limited which is authorised and regulated by the Financial Services Authority. Past performance is not indicative of future returns, which may vary. The information and analysis contained herein are based on sources believed to be reliable. However, LOIM does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. The contents of this document are intended for persons who are sophisticated investment professionals and who are either authorised or regulated to operate in the financial markets or persons who have been vetted by LOIM as having the expertise, experience and knowledge of the investment matters set out in this document and in respect of whom LOIM has received an assurance that they are capable of making their own investment decisions and understanding the risks involved in making investments of the type included in this document or other persons that LOIM has expressly confirmed as being appropriate recipients of this document. If you are not a person falling within the above categories you are kindly asked to either return this document to LOIM or to destroy it and are expressly warned that you must not rely upon its contents or have regard to any of the matters set out in this document in relation to investment matters and must not transmit this document to any other person.
Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term “United States Person” shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Important information on performance: Past performance is not a guarantee of future results. Where the fund is denominated in a currency other than an investor’s base currency, changes in the rate of exchange may have an adverse effect on price and income. All performance figures reflect the reinvestment of interest and dividends and do not take account the commissions and costs incurred on the issue and redemption of shares/units; performance figures are estimated and unaudited. Net performance shows the performance net of fees and expenses for the relevant fund/share class over the reference period. Source of the figures: Unless otherwise stated, figures are prepared by LOIM. Important information on benchmarks: Any benchmarks/indices cited herein are provided for information purposes only. No benchmark/index is directly comparable to the investment objectives, strategy or universe of a fund. The performance of a benchmark shall not be indicative of past or future performance of any fund. It should not be assumed that the relevant fund will invest in any specific securities that comprise any index, nor should it be understood to mean that there is a correlation between such fund’s returns and any index returns. Important information on target performance/risk: Target performance/risk represents a portfolio construction goal. It does not represent past performance/risk and may not be representative of actual future performance/risk. Important information on portfolio composition: The portfolio information provided in this document is for illustrative purposes only and does not purport to be recommendation of an investment in, or a comprehensive statement of all of the factors or considerations which may be relevant to an investment in, the referenced securities. They illustrate the investment process undertaken by the manager in respect of a certain type of investment, but may not be representative of the Fund’s past or future portfolio of investments as a whole and it should be understood that they will not of themselves be sufficient to give a clear and balanced view of the investment process undertaken by the manager or of the composition of the investment portfolio of the Fund. As the case my be, further information regarding the calculation methodology and the contribution of each holding in the representative account to the overall account’s performance can be obtained by the Fund or the Management Company.
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