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A new world order AROUND – implications THE for bond WORLD investors IN 80 MINUTES BNY Mellon Asset Management For professional advisers only Your starting point is all important… A perspective on investment returns Returns The ‘great moderation’ is over … Time Returns … a more volatile world Time For illustrative purposes only 1 Your starting point is all important… A perspective on investment returns 2 (cont’d) Then and now… it’s a different world United States 1982 2011¹ Fed funds rate 10-year bond yield Monetary base Budget deficit as % of GDP Household debt to GDP ratio Inflation rate, % yoy Savings rate Unemployment rate Profit margins (national accounts)² S&P 500 P/E ratio (1 year trailing) S&P 500 cycle adjusted PE³ S&P 500 dividend yield Demographics – average age of babyboomer 12% 14% $149 billion -2.2% 47.1% 8.9% 11.9% 8.5% 9.6% 8.0x 7.8x 5.7% Median age is 27 0.25% 2% $2.6 trillion -10.1% 88.3% 3.8% 4.5% 9.1% 17.5% 14.0x 20.3x 2.3% Median age is 56 Investment solutions in a lower return/volatile world • • • • Active, flexible approaches Emphasis on income Strategies that protect capital and aim for asymmetry of return ‘Return based’ objectives ¹ September 2011. ² Calculated by the Bureau of Economic Analysis in the US in calculating the national accounts ³ Used 10 years of earnings to remove the effect of the economic cycle from the PE calculation Source: Census, Bloomberg, Datastream, Newton A perspective on investment returns Or put it another way…let’s pretend it’s a household budget: The US financial position: ($) ($) US tax revenue Federal budget spending New debt National debt Recent budget cuts Source: Newton, October 2011 3 2,170,000,000,000 Annual family income 21,700 Annual outgoings 38,200 New credit card debt 16,500 3,820,000,000,000 1,650,000,000,000 14,271,000,000,000 38,500,000,000 Outstanding balance on credit card Budget cuts 142,710 385 A perspective on investment returns Peak debt year Peak debt in USD bn Peak debt proportion of domestic GDP Peak debt proportion of global GDP Greece Russia Argentina S. Korea/Thailand Eurozone* 1982 1997 2002 1997 2011 40 347 489 1,836 36,157 80% 86% 181% 248% 297% 0.4% 1.2% 1.5% 6.1% 57.4% * Precrisis debt peak except for Eurozone figures, which are as at February 2011 Note: Bubbles are not to scale and for illustrative purposes only ** GDP stands for Gross Domestic Product, and is the monetary value of goods and services produced within a country’s borders in a specific time period. It is usually calculated on an annual basis and gives an indication of a country’s economic health and standard of living. Source: IMF, Bloomberg Global thematic framework 5 Theme(s) Five important transitions to a world with: Less debt More ‘balanced’ economic variables Higher energy costs More older people Unprecedented connectedness The post-bubble landscape 6 Key economic factors: Debt, growth, competitiveness Primary trend: Extended period of deleverage Secondary trend Loose Monetary Policy, State intervention Major fault lines: Eurozone economic collapse US growth and budget arithmetic China growth uncertainty Diverse outcomes: Printing of Money, Rate Cutting and Default Market distortions remain Managing money against a bond index is fraught with danger 7 Index* weightings AAA CLUB UK Australia Canada Germany Sweden Denmark % 6.74 0.95 1.82 5.96 0.41 0.57 MONEY PRINTERS USA 33.70 Japan 32.42 CREDIT RISK France 6.09 Holland 1.63 Belgium 1.63 Italy 5.36 Spain 2.71 % 16.45 66.12 17.42 100.00 *Source: JPMorgan Global Bond, as at 31 Dec 2011 REST OF THE WORLD Brazil China Czech Republic Indonesia Malaysia Mexico New Zealand Norway Poland South Africa South Korea Singapore Switzerland Government debt held abroad 8 Govt debt held abroad as % GDP vs. 5yr CDS spreads Source: Datastream as of 31 October 2011 As economic growth slips the reliance on foreign support becomes more important. Wage growth and the problem with Europe Source: Bloomberg, OECD January 2012 Source: Bloomberg, OECD January 2012 9 Global Dynamic Bond strategy Conceptual representation Source: Newton, February 2012 Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations. 10 • Emphasis on traditional fixed income asset classes • A return seeking core with particular security characteristics • Risk offsetting positions for dampened volatility and downside protection The fixed income asset classes rankings change depending on the economic cycle EM Emerging-market govt bonds 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Govt 1st EM 6.80 HY 14.87 HY 59.71 Govt 11.66 Govt 6.38 HY 10.22 EM 13.73 EM 15.07 HY 30.57 EM 15.18 IG 9.95 EM 13.19 EM 21.65 Govt 13.03 Govt bonds IG Investment-grade corporate bonds 2nd Govt 6.32 EM 12.04 EM 27.51 IG -3.38 EM 5.89 EM 9.68 Govt 6.50 HY 14.69 EM 29.01 Govt 10.73 Govt 7.31 Govt 10.22 HY 3.06 IG 10.75 Source: Newton, Merrill Lynch Indices Hedged into Sterling, 31 December 2011 Past performance is not a guide to future performance. 3rd IG 5.14 IG 7.46 IG 16.09 EM -10.23 IG 3.76 IG 3.32 IG 5.20 IG 8.66 IG 8.73 IG 10.72 HY 4.76 IG 8.49 IG 1.74 HY 5.01 HY 11 High-yield corporate bonds 4th HY 2.92 Govt 3.89 Govt 1.18 HY -27.01 HY 2.53 Govt 2.82 HY 4.91 Govt 8.02 Govt 4.39 HY 1.61 EM 1.52 HY -6.15 Govt 1.33 EM -12.83 Global Dynamic Bond Fund Newton Global Dynamic Bond Fund 12 The performance aim of the Fund is to deliver cash (1 month GBP Libor) + 2% p.a. over 3 to 5 years before fees are deducted. There is no guarantee that this return will be achieved or that your capital will be maintained. Risk parameters Risk control (portfolio guidelines) Target volatility 6% – 8%** Portfolio diversification Max 5% in any corporate issuer at purchase Portfolio concentration Max 50% in any sector. Quantitative risk assessment Risk monitoring How much risk? – (bond weights, correlation, volatility) What kind of risk? – (currency, credit, interest rate) Is risk consistent? – (strategic views, economic cycle) *The higher the target return the greater the potential for the returns to be significantly higher or lower than expected* **Based on long term volatility statistics Newton Global Dynamic Bond Fund Positioning as at 29 February 2012 High Yield 19.58% 13 Government Bonds 23.95% Investment Grade 32.00 % EM Sovereign 19.61 % Source: Newton, 29 February 2012 Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations. Newton Global Dynamic Bond Fund performance versus IMA 14 Sectors Source: Lipper as at 14 Feb 2012. Please note that sector returns are likely to vary, depending on the timing of data extraction from Lipper Fund performance calculated as total return including income net of UK tax, net annual charges, no initial charge, in GBP. The impact of the initial charge, which may be up to 4%, can be material on the performance of your investment. Performance figures including the initial charge are available upon request. Past performance is not a guide to future performance. The performance aim of the Fund is to deliver cash (1 month GBP LIBOR) + 2% p.a. over 3 to 5 years before fees are deducted. There is no guarantee that this return will be achieved or that capital will be maintained. Why Newton Global Dynamic Bond Fund? The present • Government bond yields at new lows • Investors looking to work their bonds harder – looking to invest in a wider bond universe • Defaults on a declining path. Corporate credit still attractive. • Plenty of individual credit stories – they don’t all move together • Emerging market debt a serious alternative – credit story improving The future • NEWTON GLOBAL DYNAMIC BOND FUND invests wherever there are fixed income opportunities • Investing in a diversified universe of generally high yielding securities: Going forward a dynamic fixed income asset allocation is required – Government bonds – Emerging market sovereigns – Corporates – high yield and investment grade • • Currency overlay Derivatives – principally to manage duration A higher yielding addition to global government bonds 15 Important information 16 This is a financial promotion and is not intended as investment advice. The information provided within is for use by professional clients and should not be relied upon by retail clients. All information relating to Newton Investment Management Limited (Newton) and Newton Global Dynamic Bond Fund has been prepared by Newton for presentation by BNY Mellon Asset Management International Limited (BNYMAMI). Any views and opinions contained in this document are those of Newton at the time of going to print and are not intended to be construed as investment advice. BNYMAMI and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested. The Prospectus and/or Simplified Prospectus should be read before an investment is made. This document can be obtained from www.bnymellonam.co.uk or by calling 0500 66 00 00. To help us continually improve our service and in the interest of security, we may monitor and/or record your telephone calls with us. Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations. Tax treatment will depend on the individual circumstances of clients and may be subject to change in the future. Newton Investment Management Limited are authorised and regulated by the Financial Services Authority. Newton Investment Management Limited, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1371973 Newton Global Dynamic Bond Fund (NGDBF) is a sub-fund of BNY Mellon Investment Funds, an investment company with variable capital (ICVC) incorporated in England and Wales under registered number IC27 and authorised by the Financial Services Authority. BNY Mellon Fund Managers Limited (BNY MFM) is the Authorised Corporate Director. BNY Mellon Fund Managers Limited, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1998251. Authorised and regulated by the Financial Services Authority. The investment adviser of the Newton sub-funds is Newton Investment Management Limited. ICVC investments should not be regarded as short-term and should normally be held for at least five years. There is no guarantee that either the target or positive returns will be achieved and no form of capital protection will apply. The higher the target return the greater the potential for the returns to be significantly higher or lower than expected. Changes in the rates of exchange may affect the value of investments. The Fund can invest in overseas securities which may also generate profits overseas and pay dividends in foreign currencies, which means the fund is exposed to changes in currency rates. The Fund may invest in emerging markets. It should be noted that these markets have additional risks associated with local custody and registration practices that may be less developed than more mature markets. The Fund takes its charges from the capital of the fund. Investors should be aware that there is potential for future capital erosion if insufficient capital growth is achieved by the Fund to cover the charges. Capital erosion may result in the amount of income that can be drawn declining over time. The Fund may hold sub-investment grade bonds that typically have a low credit rating and carry a high degree of default risk, which can affect the capital value of your investment. The Fund may hold fixed interest securities, which are particularly affected by trends in interest rates and inflation. This may affect the capital value of your investment. The Fund may invest in illiquid securities, which means that there is a possibility that they cannot be readily converted into cash when required. The value of these securities is subject to greater fluctuation if they are not regularly traded. The Fund may use derivatives for efficient portfolio management (EPM) purposes. EPM restricts the use of derivatives for the reduction of risk, the reduction of cost and the generation of additional capital or income with no or an acceptable low level of risk. EPM transactions must be economically appropriate and the exposure fully covered. In addition to EPM, the Fund uses derivatives in pursuit of its investment objectives. All of these factors may affect the performance of the Fund. This document is issued in the UK by BNY Mellon Asset Management International Limited. BNY Mellon Asset Management International Limited, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Services Authority. BNY Mellon Asset Management International Limited, BNY MFM and Newton and any other BNY Mellon entity mentioned are all ultimately owned by The Bank of New York Mellon Corporation. BNY MFM and Newton are members of the IMA. CP8112-15-03-2012(3m)