THE CORE CONUNDRUM - Guggenheim Partners
THE CORE CONUNDRUM - Guggenheim Partners THE CORE CONUNDRUM - Guggenheim Partners
Yield to Worst Discovering Yield in the Investment-Grade Universe New Issue, Esoteric ABS Provide Yield without Increased Credit and Rate Risk 8% 6% Barclays B Corporate Index (A S&P / A Fitch) Barclays BB Corporate Index 4% (A S&P / A Fitch) 2% BofA ML ABS Master BBB-AA Index Barclays U.S. Aggregate Bond Index (AA) Barclays AA Corporate Index Barclays BBB Corporate Index Barclays A Corporate Index 0% 2 3 4 5 6 7 8 Duration In the investment-grade complex, ABS is one sector offering leveraged credit-type yields without the commensurate credit risk. Additionally, the shorter duration of ABS securities relative to comparably rated corporate bonds offers greater protection against rising rates. Source: Bloomberg, Bank of America Merrill Lynch, Barclays. Data as of 12/31/2012. Willis Lease is a U.S. public company and a major lessor of spare aircraft engines. BCP is a leading commercial bank in Peru. We believe CLOs and ABS backed by aircraft leases are the two sectors currently offering the most attractive relative value. CLOs are benefitting from low bank loan default rates, healthier corporate balance sheets, and robust new loan issuance (nearly $300 billion in 2012). In the aircraft ABS space, the recent wave of restructurings and recapitalizations of U.S. airlines have resulted in improved profitability and lower fixed costs. Leasing rates have been supported through the increased demand from airlines that have chosen to lease rather than buy aircraft. In addition to our favorable view on the underlying collateral, aircraft ABS securities tend to be amortizing, have shorter durations, and offer yields in excess of 6 percent on senior BBB tranches – a premium of almost 300 basis points over corporate bonds. Due to the immense diversity and complexity of CLOs and ABS, however, ascertaining relative value requires in-depth analysis of both deal structure and the underlying collateral. Long-Duration Strategy For investors who need to maintain longer asset duration in order to match their liabilities, floatingrate CLOs or short-duration ABS can be combined with longer-duration, fixed-rate securities as part of a barbell strategy. (“Barbell” means to structure 12 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS
Barbell means to structure a portfolio with both short- and long-duration securities in order to achieve a desired duration target. With a barbell strategy, the negative impact of rising rates on the longer-duration, fixed-rate assets is partially offset by the positive benefit of higher interest coupons on floatingrate securities. a portfolio with both short- and long-duration securities in order to achieve a desired duration target.) Utilizing this approach provides investors with yield advantages while still meeting portfolio duration objectives. With a barbell strategy, the negative impact of rising rates on the longerduration, fixed-rate assets is partially offset by the positive benefit of higher interest coupons on floating-rate CLOs. In the case of ABS, shorter maturities and principal amortizations allow investors to reinvest proceeds at higher yields if rates were to rise over an extended period. To complement the short duration of ABS in the barbell strategy, we prefer select, longer-dated, taxable municipal bonds that offer yield premium to Treasuries and agency debt. The political uncertainty over the past several years, namely the debt ceiling debate and the Fiscal Cliff, has created attractive valuations in the municipal market. As investors begin focusing on the real economy and not the political economy, we believe municipals are primed to benefit. According to the Rockefeller Institute, state tax revenues have grown for 10 consecutive quarters as employment at the state and local government level has stabilized. California, once the poster child for fiscal ineptitude, is projecting an $850 million budget surplus for full year 2014. A longer-term tailwind for municipal credit fundamentals will be the continued momentum of the housing sector. Home price appreciation will eventually translate into higher property tax assessments realized by local governments over the next several years. Aside from these improving fundamental factors, the municipal sector may also benefit from technical catalysts. Building upon the record $50 billion in mutual fund inflows in 2012, continued demand for municipals will likely be aided by the expected growth of the U.S. economy throughout 2013. Increased Federal revenues may lead to a decline in Treasury bond issuance, forcing investors into other government-related alternatives such as municipals and military housing. Our focus remains on A-rated revenue bonds maturing within 20 years that finance essential services, public universities and transportation. Active Management in Practice With nominal coupons across the fixed-income universe near historical lows, the opportunity cost from employing a benchmark-driven, passively managed strategy has increased dramatically. An actively managed strategy provides the opportunity to generate returns through targeted weightings to attractively valued sectors. The volatility of sector performance over the past few years, quantified in the following table, underscores the importance of active management. 13 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS
- Page 1 and 2: PORTFOLIO STRATEGY RESEARCH | FEBRU
- Page 3 and 4: SECTION 1 The Core Conundrum In an
- Page 5 and 6: Assessing the Relative Value of the
- Page 7 and 8: SECTION 2 Coping with New Market Re
- Page 9 and 10: Nominal Total Return Era of “Retu
- Page 11: through overcollateralization, exce
- Page 15 and 16: The Changing of the Guard The Futur
Yield to Worst<br />
Discovering Yield in the Investment-Grade Universe<br />
New Issue, Esoteric ABS Provide Yield without Increased Credit and Rate Risk<br />
8%<br />
6%<br />
Barclays B<br />
Corporate Index<br />
(A S&P / A Fitch)<br />
Barclays BB<br />
Corporate Index<br />
4%<br />
(A S&P / A Fitch)<br />
2%<br />
BofA ML ABS<br />
Master BBB-AA Index<br />
Barclays U.S. Aggregate<br />
Bond Index (AA)<br />
Barclays AA<br />
Corporate Index<br />
Barclays BBB<br />
Corporate Index<br />
Barclays A<br />
Corporate Index<br />
0%<br />
2 3 4 5 6 7 8<br />
Duration<br />
In the investment-grade complex, ABS is one sector offering leveraged credit-type yields without the<br />
commensurate credit risk. Additionally, the shorter duration of ABS securities relative to comparably<br />
rated corporate bonds offers greater protection against rising rates.<br />
Source: Bloomberg, Bank of America Merrill Lynch, Barclays. Data as of 12/31/2012. Willis Lease is a U.S. public company and a major lessor<br />
of spare aircraft engines. BCP is a leading commercial bank in Peru.<br />
We believe CLOs and ABS backed by aircraft leases<br />
are the two sectors currently offering the most<br />
attractive relative value. CLOs are benefitting from<br />
low bank loan default rates, healthier corporate<br />
balance sheets, and robust new loan issuance<br />
(nearly $300 billion in 2012). In the aircraft ABS<br />
space, the recent wave of restructurings and<br />
recapitalizations of U.S. airlines have resulted<br />
in improved profitability and lower fixed costs.<br />
Leasing rates have been supported through the<br />
increased demand from airlines that have chosen<br />
to lease rather than buy aircraft. In addition to<br />
our favorable view on the underlying collateral,<br />
aircraft ABS securities tend to be amortizing,<br />
have shorter durations, and offer yields in excess<br />
of 6 percent on senior BBB tranches – a premium<br />
of almost 300 basis points over corporate bonds.<br />
Due to the immense diversity and complexity<br />
of CLOs and ABS, however, ascertaining relative<br />
value requires in-depth analysis of both deal<br />
structure and the underlying collateral.<br />
Long-Duration Strategy<br />
For investors who need to maintain longer asset<br />
duration in order to match their liabilities, floatingrate<br />
CLOs or short-duration ABS can be combined<br />
with longer-duration, fixed-rate securities as part<br />
of a barbell strategy. (“Barbell” means to structure<br />
12 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS
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