convertible bonds in the ucits context zürich, … stanford.pdf · an independent swiss asset...

1 Alpha generation built to last

This document is provided for information purposes only and its contents (including any opinions) are subject to change without notice. This document has been prepared exclusively for the information of the person or persons for whom it is intended.

CONVERTIBLE BONDS IN THE UCITS CONTEXT

Zürich, September 19th 2011

2 Alpha generation built to lastARKOS CAPITAL

An independent Swiss asset management firm:

• Authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA as a manager of collective investments

• Applying a solid and consistent investment approach since 2002

• Managing a range of liquid and transparent absolute return funds, both off-shore and UCITS

• With a significant portion of employees’ liquid assets invested in the funds

• Employing a core team of seven long standing investment professionals with a passion for fundamental analysis supported by a risk manager and eleven further specialists

• Managing EUR 594m of AUM as of August 31, 2011

The Company

Our Mission is to provide excellent performance and service to our clients through low volatility, liquid and transparent absolute return investment products


Developed Europe

• World Invest Absolute Return, L/S equity UCITS fund, beta mandate between 0 and 0.5 (average 0.15) and max vol of 10%

Emerging Markets

• World Invest Absolute Emerging, L/S equity UCITS fund, beta between 0 and 0.5 and maxvol of 18%

Financials

• World Invest Absolute Financials, L/S equity UCITS fund, beta mandate between 0 and 0.5, max vol of 10%

Convertible Bonds

• World Invest Absolute Strategy, Convertible Bonds UCITS fund

Our UCITS Offering


Fixed Income Product

Convertible Bonds are first of all BONDS. Corporate Bonds. What do they offer:

•Fixed maturity redemption•Coupon cash flow•Bond Floor protection

Equity Characteristics

Convertible Bonds also offer equity characteristics:

•Fixed conversion ratio at the option of the holder•Dividend protection•M&A Protection•Optionality upside

Convertible Bond Essentials


CBs - Long-term Asset Class


CBs steadily outperform over the long-term

Fixed Income CharacteristicsCBs offer redemption at maturity. Corporate credit risk, not equity risk.

Bond FloorsBefore maturity, CB prices are sustained by the bond value. As new issuance gets rolled-out, bond floors are higher and higher.

Soft/Hard Call FeaturesMost CBs are callable. This forces a kind of “take profit” situation when in-the-money CBs get forced into conversion. New issuance also creates higher call levels.

Dividend and M&A protectionCoupons AND full dividend protection helps keep up with the equity market. M&A protection keeps premiums safe in corporate action.

Where does the outperformance come from?


New Investor Base

From Hedge Fund dominance to broader investment basePre-Lehman the CB market was dominated by leveraged Hedge Funds (CB Arb).“Non-traditional Investors” were attracted by excess yield and negative basis.Market now 60/40 between outright and HFs

Prospectus Changes

Full dividend protectionAfter the crisis, and indeed again today, dividend yields were historically high. In order to place new issuance, full dividend protection became “standard”.

Change of Control (CoC) protectionPremium protection through CoC ratchets has become common. Mostly linear ratchets.

Convertibles after 2008…


M&A Protection

Change of control “ratchet”:

100%

80%

Prezzo

Bond Floor

Increase in conversion ratio in

case of M&A “ratchet”

Or 100% Put + accrued?

?

Initial premium

protection


M&A Protection

In real money… Bulgari 5.375% 2014


Moments of distressed valuations!


Negative basis is back in the CB market!

Not only yield pick-up… but also free equity options!!

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SpreadYTMMaturityAskBidSecurity Name15.09.2011


Convertible Bond main strategies

There are/were two main lines in CB management:

Outright Investors

Long Only dedicated mutual funds – Traditional CB SICAVs, Units Trusts

Fixed Income Funds – Use CBs as a means to gain equity exposure

Pension Funds – Long term “buy and hold” investors

Private Banking – Wealth Management and retail banking

Arbitrage Investors

Hedge Funds / Bank Prop Books – Relative value, Gamma trading, M&A, Carry trades

Market Makers – Gamma trading, Carry trades


LiquidityIndependent custodian, administrator and manager

No strategy deviationEU Passport

Delivery channel to broad investor baseRecognised brand

Fundamental OutrightInvestment

UCITS AI

Arbitrage Opportunities

Under UCITS you can combine both

Regulated Environment


Lower average deltaCapital Protection

Delta upside opportunity miss is substituted by Alpha generating arbitrage trades

Equity fundamental analysisleads to outright investment

in Convertible Bonds

Equity upside + Bond Protection

Under UCITS you can combine both

Reduced delta portfolio

Arbitrage opportunities such as M&A ratchets, Carry,

and relative value

Zero delta alpha generation


Similar performance… less delta

You can manage a slight over performance with lower volatility (180d 5.8% vs. 6.15%)


Key Regulatory Limitations

Global ExposureVaR approach UCITS vs. commitment approach UCITS

OTC counterparty exposureMargins, synthetic shorts, credit exposure

Concentration Limits10/20/40% rules

Liquidity ObligationsMinimum bi-monthly NAV

…how does this affect our Convertible Bond management?



Global Exposure - VaR UCITS vs. commitment UCITS

Commitment UCITS VaR UCITS

Limited use of derivatives for hedging only

Total Commitment Max. 100% of NAV

Extensive use of derivatives for investment

purposes

Relative VaR2x benchmark VaR

Absolute VaRMax. 20% - 99% conf

Fits comfortably for our CB strategyOur average VaR has been 3-4% in 2010, while maintaining 140% gross exposure and fully invested – (Was close to 6-7% in Nov08)

Not ideal for CBsCould manage long-only, but would be limited in absolute return trades.



OTC Counterparty Exposure

Problem1. Limited ISDA agreements2. Lending source3. Margins and unrealised P&L

add up as exposure

As you cannot short stock physically, you end up with large OTC counterparty exposure. Max limit 10% with credit institution.

•Synthetic Shorts (CFD, Equity Swaps)•CDS•ETD & OTC derivatives•FX forwards

Fix1. Open multiple ISDA counterparties2. Lending via give-up3. Resetting of open P&L reduces

exposure



Liquidity Obligations - Coverage Rule

The fund must be able to meet delivery and payment obligations involving derivatives.1. Hold deliverable securities or enough liquidity to acquire assets needed2. Hold enough liquidity to allow required payments

Minimum NAV requirement is twice monthly

Liquidity is a MAJOR concern

We launched in January 2008 and have maintained daily NAV Careful liquidity management needed – No illiquid trades (ASWs or other lockups) Only classic long bond – short CFD – long CDS

Twice-monthly NAV is easily achievableNo ASWs with long make-whole provisions


Current Portfolio Structure

ARKOS CAPITAL

Delta Exposure

Conservative Delta: Average delta is 0.20

Convertible Arbitrage Trades:Over 10% of portfolio is delta neutral and represent relative value trades.

Long Only Trades:The outright trades are based on sound bottom-up fundamental research.

Interest Rate ExposureHedged duration: The gross duration is -2.00 (Rho)Over 50% of the risk is hedged via short interest rate futures cross currency and curves.

Net duration is -0.95 (Rho)

Credit and Liquidity

Credit Exposure: Despite issuers in the CB space are generally high-yield credits, we maintain a relatively conservative credit exposure. Average credit spread is +400bp (iTrax Xover +750bp)

Liquidity: Liquidity is monitored constantly via market-maker runs in order to ensure ample flexibility inline with our daily NAV requirements.


Performance – World Invest AbsoluteStrategy

World Invest Absolute Strategy DJ Euro Stoxx 600 DJ Euro Stoxx 50 iTrax Europe Main

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL2007 0.83% 0.27% 0.51% -0.10% -0.54% 0.97%2008 -0.55% -1.03% -1.44% 0.57% 1.03% -2.75% -1.10% 0.02% -7.25% -10.07% 3.19% 1.99% -16.57%2009 2.31% 0.98% 0.45% 3.06% 3.81% 0.78% 3.71% 3.20% 2.25% 0.02% 0.55% 1.78% 25.25%2010 -0.18% -0.19% 2.93% -0.71% -4.63% -0.45% 2.45% -0.27% 2.46% 1.52% -1.00% 1.83% 3.58%2011 1.53% 1.03% 0.80% 0.47% -0.25% -1.16% -1.90% -4.80% -4.34%


World Invest Absolute Strategy

ARKOS CAPITAL

As of End of Aug, 2011 World Invest Absolute Strategy

StrategyLong-biased Convertible Bonds with partially hedged risks (main strategy)

DescriptionPrimarily invests in Convertible Bonds, while partially hedging some of the consequent exposures. Geographic focus: Global Beta mandate between 0 and 0.5

Type of Fund / Domicile UCITS Sicav - Luxembourg

ISIN LU0333971942

Other Characteristics Diversified portfolio with over 50 positions

Inception January 2008

AUMs EUR 124.34 m

Liquidity Daily1.5% management fee,

10% performance fee, HWM

Minimum Investment EUR 5,000

Annualised Return 0.98%

Return Since Inception 3.62%

Max Target Volatility n.a.

Historical Volatility (s.i.) 7.09% p.a.

Fees


Arkos Capital SAVia Marconi 16900 LuganoSwitzerland

www.arkoscapital.com

Contact Information

ARKOS CAPITAL

Christina [email protected]

Tel. +4191 260 7805Fax +4191 260 7811

Marco [email protected]

Tel. +4191 260 7827Fax +4191 260 7811

SpeakerJonathan StanfordFund Manager – World Invest Absolute StrategyConvertible Bond UCITS

[email protected]

http://www.arkoscapital.com

mailto:[email protected]



http://www.arkoscapital.com


Disclaimer

This document is provided for information purposes only and its contents (including any opinions) are subject to change without notice. This document has been prepared exclusively for the information of the person or persons for whom it is intended and therefore may not be suitable for all investors. Nothing contained in this document constitutes or forms part of any offer to sell or buy an investment, or any solicitation of such an offer, by Arkos Capital, or any of its affiliates, in any jurisdiction where such activity is prohibited (including, without limitation, the United States of America) or to any person to whom it is unlawful to make any such offer or solicitation. Nothing contained in this document constitutes investment, legal, tax or other advice, nor is it to be relied upon when making investment or other decisions.

The information set out in this document in relation to the funds is for general guidance only and potential investors must obtain further information from the prospectus, offering circular or other offering document for the relevant fund. Any investment in the funds described in this document may involve significant financial risks. The price of investments and any income from them may fluctuate and may fall as well as rise. Past performance is not necessarily a guide to future results and there is a significant risk that investors will lose all of the money or other property invested. When an investment involves a foreign exchange transaction (i.e. an investment denominated in a currency other than the investor's base currency), it may be subject to fluctuations in currency values and the value of such investment and the income on them may go down as well as up. Units in a fund may not be readily realisable and there may be no recognised market in any such units in the event of an investor wishing to sell. There is no assurance that a fund's investment objectives will be achieved and investment results may vary substantially over time. Investment in any fund or in the funds generally is not intended to be a complete investment programme for any investor.

This document has been prepared, approved and issued by Arkos Capital. The information and opinions contained in this document have been compiled, or arrived at, in good faith and on the basis of publicly available information, internally developed data and sources believed to be reliable as at the date of publication. However, no representation or warranty, express or implied, is made by Arkos Capital or any other person as to their reliability, accuracy, completeness or correctness. Neither Arkos Capital nor any of its directors or other employees accepts any liability for any loss or damage of any kind, including any loss of profit, whether direct or indirect in respect of the use of this document or reliance on the information and opinions contained in it from time to time. However, Arkos Capital does not exclude or restrict any liability it may have under applicable laws and regulations.

All material copyright Arkos Capital 2011. All rights reserved. None of the contents of this document, either in whole or in part, may be reproduced, stored in a data retrieval system, or transmitted, in any form or by any means - electronic, mechanical, photocopying, recording or otherwise - without the prior written permission of Arkos Capital. However, reasonable extracts may be made for the purposes of comment or review, provided that the source is acknowledged.

ARKOS CAPITAL

convertible bonds in the ucits context zürich, … stanford.pdf · an independent swiss asset...

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