LLC FPA New Income, Inc. Advisors, Pacific Board oval and appr review . First Pacific Advisors, LLC

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  • FPA New Income, Inc. FPNIX

    Third Quarter 2015 Webcast Presentation

    Presented by: Thomas H. Atteberry, CFA, Portfolio Manager Abhijeet Patwardhan, Director of Research Joseph H. Choi, Research Analyst Prakash Gopinath, Research Analyst Julian Mann, Research Analyst/Trader Nazanin Pajoom, Data Analyst

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  • FPA New Income, Inc. – Fund highlights

    Investment objective ■ The Fund's primary investment objective is current income and long-term total return. Capital preservation is

    also a consideration.

    Highlights ■ Short-term: seeks positive absolute returns in a 12-month period

    ■ Long-term: seeks positive real returns (outperform inflation plus 100 basis points) over five-year period and competitive returns versus bond market universe

    ■ Benchmark indifferent

    Past performance is no guarantee of future returns

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  • FPA New Income, Inc. – Fund highlights

    Investment profile ■ Rigorous security and portfolio analysis seeks to mitigate risk:

    – Value-driven investing – Duration actively managed – Security and portfolio stress test

    ■ Investment restrictions as stated in the prospectus:

    – Minimum 75% must be rated “AA” or higher – Maximum 15% in aggregate in Interest Only, Principal Only, Z bonds, and Inverse Floaters – Maximum 25% in foreign U.S. dollar or non-dollar securities

    ■ Other restrictions:

    – Maximum 15% in restricted or illiquid securities – Options, futures, shorting, and leverage prohibited

    Past performance is no guarantee of future returns

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  • Significant risks in bond markets

    US Treasury yields and downside risk

    4

    0.63% 0.91% 1.36% 1.74% 2.04%

    2.85%

    -0.34% -1.03%

    -2.45% -3.80%

    -5.78%

    -14.96% 2 Years 3 Years 5 Years 7 Years 10 Years 30 Years

    Yield to Maturity Total Return*

    Yield to Maturity – Forecast annualized return if held to maturity

    Stress test – Forecast 12-month total return with 100 bps interest rate increase within 12 months

    As of September 30, 2015 *Simulated Treasury 12-month total return scenarios Source: Bloomberg Past performance is no guarantee of future results

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  • What would happen if interest rates rose 1% over 12 months?

    5

    As of September 30, 2015

    Duration YTW YTW/Duration Stress test

    FPA New Income 1.42 2.79 1.96 1.87

    Barclays U.S. Aggregate 1-3 Year Index 1.87 1.00 0.53 -0.37

    Barclays U.S. Aggregate Bond Index 5.60 2.31 0.41 -2.79

    Source: Barclays, FactSet. Past performance is no guarantee of future results and the index performance is not representative of the FPA New Income fund. Please refer to slide 25 for fund performance. As of September 30, 2015, the SEC yield was 2.77%. This calculation begins with the Fund’s dividend payments for the last 30 days, subtracts fund expenses and uses this number to estimate your returns for a year. The SEC yield is based on the price of the fund at the beginning of the month. The income yield stated here reflects prospective data and thus assumes payments collected by the fund may fluctuate.

    Stress test return: yield−to−worst + (1 + yield−to−worst)

    2 − duration

    ■ FPA New Income has more than 2.7x yield of the Barclays U.S. Aggregate 1-3 Year Index while taking on 27% less duration risk

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    Focus on downside protection

    Source: Morningstar Past performance is no guarantee of future results The index performance is not representative of the FPA New Income fund. Please refer to slide 25 for fund performance.

    ■ Five largest drawdown periods for Barclays U.S. Aggregate Bond Index during the past ten years

    0.00 -0.37 -0.09

    -0.85

    0.00 -0.28

    -0.63 -0.31 -0.32 -0.15

    -1.81

    -3.83

    -1.65

    -3.67

    -2.15

    -0.48

    -11.00

    -0.22

    -2.62

    -0.60

    -12.0

    -10.0

    -8.0

    -6.0

    -4.0

    -2.0

    0.0

    September 2005- October 2005

    April 2008- October 2008

    November 2010- December 2010

    May 2013- August 2013

    February 2015- June 2015

    M ax

    im um

    d ra

    w do

    w n

    (% )

    FPA New Income

    Barclays US Aggregate 1-3 Yr

    Barclays US Agg Bond

    Nontraditional Bond Funds

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  • Standard deviation

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    ■ One year periods ending 9/30

    Source: Morningstar Past performance is no guarantee of future results The index performance is not representative of the FPA New Income fund. Please refer to slide 25 for fund performance. Standard Deviation is applied to the annual rate of return of an investment to measure the investment's volatility.

    0.51 0.38

    0.84

    0.59 0.62 0.80

    0.48 0.47 0.46

    0.74

    2.96

    2.12

    3.02

    2.58

    3.06

    2.18 2.20

    2.43

    1.12

    1.98

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    3.0

    3.5

    4.0

    2011 2012 2013 2014 2015

    St an

    da rd

    d ev

    ia tio

    n (%

    )

    FPA New Income

    Barclays US Aggregate 1-3 Yr

    Barclays US Agg Bond

    Nontraditional Bond Funds

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  • Focus on risk and reward

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    10/1/2005-9/30/2015 Source: Morningstar, Barclays Past performance is no guarantee of future results The index performance is not representative of the FPA New Income fund. Please refer to slide 25 for fund performance.

    FPA New Income

    Barclays US Agg Bond

    Barclays US Aggregate

    1-3 Yr

    1-Yr Trsy Constant Maturity

    30-Day Tbill

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    3.0

    3.5

    4.0

    4.5

    5.0

    0.0 1.0 2.0 3.0 4.0 5.0

    10 -Y

    ea r R

    et ur

    n (%

    )

    10-Year Standard Deviation

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  • 9

    Unintended consequences: correlated volatility

    9/30/15

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  • Unintended consequences: correlated volatility

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    Source: Morningstar. Bond fund categories as defined by Morningstar.

    FPA New Income Correlation

    1/1997-12/2007 1/2008-9/2015

    Nontraditional Bond Funds 0.25 0.06

    Intermediate-Term Bond Funds 0.32 0.51

    Long-Term Bond Funds 0.30 0.43

    World Bond Funds 0.21 0.43

    High Yield Bond Funds 0.30 0.08

    Bank Loan Funds 0.21 -0.06

    Emerging Markets Bond Funds 0.14 0.33

    Intermediate Bond Funds Correlation

    1/1997-12/2007 1/2008-9/2015

    FPA New Income 0.32 0.51

    Nontraditional Bond Funds 0.41 0.70

    Long-Term Bond Funds 0.97 0.93

    World Bond Funds 0.67 0.81

    High Yield Bond Funds 0.22 0.69

    Bank Loan Funds -0.02 0.48

    Emerging Markets Bond Funds 0.19 0.77

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  • Portfolio – fixed income allocation alternative

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    Low volatility strategies with goal of positive return in

    rising interest rates, such as Short Duration

    High Yield

    Bank Loans

    Emerging Markets

    Non- traditional

    Non-Dollar Developed

    Core Fixed Income

    ■ Trying to find ideas that reduce the risk of Core

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  • Proposed Securities & Exchange Commission liquidity guidelines

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    Source: Securities and Exchange Commission

    …or what macro-prudential looks like

    Liquidity risk management programs

    ■ Classification of the liquidity of fund portfolio assets

    ■ Assessment, periodic review and management of a fund’s liquidity risk

    ■ Establishment of a three-day liquid asset minimum

    ■ Board approval and review

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  • Proposal of how we will comply with the rules

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    …or how we have thought about liquidity for over 30 years

    Primary liquidity ■ Tier 1

    − Stated maturity of one to two years

    − Normal settlement of T+0 or T+1

    − Classified as a U.S. Treasury obligation or U.S. agency senior obligation

    ■ Tier 2

    − One year or less expected average life or maturity

    − Normal settlement of T+3

    − The lowest credit rating is AA-/AA3 at a minimum

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