employees' retirement system of the state of rhode...
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Employees' Retirement System of the State of Rhode Island
October 28, 2015
Frances L. Coombes Timothy J. Settel
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Global Breadth and Local DepthSeptember 30, 2015
Assets under management in USD (billions)*Splits time between Hong Kong and Singapore offices
Total Firm AUM: $446.1 billionTotal Corporate Credit AUM: $126.7 billionTotal Staff: 827
Singapore$3.3Investment Professionals: 5Total Staff: 22
New York$163.4Investment Professionals: 23Total Staff: 89
London$39.6Investment Professionals: 17Total Staff: 66 Tokyo
$9.0Investment Professionals: 4Total Staff: 25
Melbourne$15.2Investment Professionals: 5Total Staff: 17
São Paulo$8.9Investment Professionals: 18Total Staff: 67
Pasadena$206.7Investment Professionals: 55Total Staff: 540
DubaiTotal Staff: 1 Hong Kong
Total Staff: 1*
Global Fixed-Income Focus
2
0
2
4
6
8
10
0 2 4 6 8 10
Yield
(%)
Interest Rate Risk (yrs)Source: Barclays, J.P. Morgan, S&P/LSTA. As of 30 Sep 15
Interest Rate Sensitivity
Barclays U.S. Credit Index
Barclays U.S. Aggregate Index
Barclays U.S. High-Yield Index
Merrill Lynch 1-3 Years BB-B High-Yield Index
Credit Suisse Leverage Loan Index
ERS of the State of Rhode Island
Barclays U.S. Credit
Barclays U.S. Aggregate
Barclays U.S. High-Yield 2%
US 3-Month LIBOR
S&P 500
Credit Suisse Leverage Loan
Merrill Lynch 1-3 Years BB-B High-Yield
Custom Index¹
0
2
4
6
8
10
12
14
16
0 2 4 6 8 10 12
Retur
n (%
)
Risk (% Standard Deviation)
Annualized 5-Year Risk/Return (%)
Source: Barclays, S&P, Merrill Lynch, Credit Suisse. As of 30 Sep 15
Relationship inception: March 2013
Benchmark 70% Credit Suisse Leverage Loan / 30% Merrill Lynch 1-3 Years BB-B High-Yield Index
Market Value $202 million (as of September 30, 2015)
Advantages Income generation Reduced volatility Low interest rate sensitivity
Current Mandate – Bank Loan / Short Dated High-Yield
¹70% Credit Suisse Leverage Loan / 30% Merrill Lynch 1-3 Years BB-B High-Yield Index
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Global environment
Timing of Fed interest rate lift-off remains an unknown; source of ongoing market uncertainty Emerging Markets continue to struggle contributing to global slowdown in growth Commodities have suffered significantly from China and emerging markets slowdown, most commodities trading
at historically low levels Oil remains main focus for credit investors given size of Energy sector within credit universe European QE gaining traction, better results and stability out of the region Earnings season unspectacular as earnings growth continues to moderate. Sales growth challenged, yet most
companies are beating low earnings estimates Global liquidity continues to worsen leading to additional volatility in markets
US-focused environment
US growth is steady yet muted. US appears to be the stabilizing force in the global market Dollar strength acts as headwind for corporate earnings Corporate balance sheets are strong and leverage is manageable Ability to service debt burdens remains at all-time high Cash on the balance sheet and access to liquidity plentiful for most borrowers Defaults rates should remain low for the foreseeable future
Market Themes
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-2.71
-0.46
1.63
-2.78
-0.68
1.33
-1.43
1.31
2.89
-4
-3
-2
-1
0
1
2
3
4
3Q15 Year to Date Since Inception31 Mar 13
Total
Retu
rn (%
)Employees' Retirement Systemof the State of Rhode Island (Gross)
Employees' Retirement Systemof the State of Rhode Island (Net)
CustomIndex¹
As of 30 Sep 15. Returns for periods greater than one year are annualized. Returns since inception are as of the indicated close of business day.¹70% Credit Suisse Leveraged Loan Index, 30% Merrill Lynch US High Yield Cash Pay BB-B Rated 1-3 Year Index
Investment ResultsPeriodic Returns
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Asset allocation had a neutral impact on relative performance
Overweight to the energy sector and other commodities negatively impacted performance
Lower quality biases detracted from performance
Issue selection detracted from performance due to an overweight to underperforming individual issuers
Primary market offerings provided attractive total return opportunities
Active trading and ongoing market dislocation allowed us to concentrate portfolio in better relative value sectors/issues
Performance Summary3rd Quarter 2015
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-20-10
0102030
2000 2002 2004 2006 2008 2010 2012 2014
Perce
ntHigh-Yield LTM YoY Sales Growth
12131415161718
2000 2002 2004 2006 2008 2010 2012 2014
Perce
nt
High-Yield LTM EBITDA Margins
Corporate Credit Fundamentals Remain Solid
(remove net)
2.5
3.0
3.5
4.0
4.5
2000 2002 2004 2006 2008 2010 2012 2014
High-Yield Interest Coverage
02468
10121416
2000 2002 2004 2006 2008 2010 2012 2014
Perce
nt
High-Yield Cash/Debt
2.53.03.54.04.55.05.5
2000 2001 2002 2003 2005 2006 2007 2008 2010 2011 2012 2013 2015
High-Yield Leverage
HY Leverage
Source: Morgan Stanley Research, Bloomberg. As of 30 Jun 15 Source: Morgan Stanley Research, Bloomberg. As of 30 Jun 15
Source: Morgan Stanley Research, Bloomberg. As of 30 Jun 15 Source: Morgan Stanley Research, Bloomberg. As of 30 Jun 15
Source: Morgan Stanley Research, Bloomberg. As of 30 Jun 15
3.54.04.55.05.56.0
1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14
Bank Loan Leverage
BL Leverage
Source: S&P/LSTA, LCD. As of 31 Mar 15
7
1.304812162024
048
12162024
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Issuer-Weighted
Default Rate (%)
Spre
ad ov
er LI
BOR
(%)
US Bank Loan Default Rates vs. SpreadsMoody's Issuer-WeightedBank Loan Default Rate (right)
S&P/LSTA Performing Loan Index3-Year Discounted Spread (left)
Source: S&P/LSTA, Moody's. As of 30 Sep 15
2.30
5
10
15
20
0
5
10
15
20
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Default Rate (%)
Optio
n-Ad
justed
Spr
ead (
%)
US High-Yield Default Rates vs. SpreadsMoody's Default Rate¹ (right) Barclays U.S. High-Yield Index Spread (left)
Source: Moody's, Barclays, Western Asset. As of 30 Sep 15¹As of 31 Aug 15
Valuations and Default Rate CorrelationValuations are Compelling
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High Yield Energy – OAS+10.2%
U.S. Corporate High Yield ex Energy – OAS
+5.7%
0
2
4
6
8
10
12
14
16
18
20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Optio
n-Ad
justed
Spr
ead (
%)
Energy Bonds Spreads Have Widened
Source: Barclays. As of 30 Sep 15
Energy Credit Repricing on an Absolute and Relative Basis
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Global environment Timing of Fed interest rate lift-off remains an unknown and is a source of uncertainty in the market Emerging Markets continue to struggle which is contributing to a global slowdown in growth Commodities have suffered significantly from the slowdown in China and Emerging Markets, with most commodities trading at historically low levels Oil has been the main focus for credit investors given the size of the Energy sector within the credit universe European QE is showing signs of traction resulting in better results and stability out of the region Earnings season has been unspectacular as earnings growth continues to moderate. Sales growth has been difficult to achieve yet most companies
are beating low earnings estimates Global liquidity in investment trading markets continues to worsen leading to additional volatility
US-focused environment Dollar strength continues to be a headwind for corporate earnings US growth is steady yet muted. The US appears to be the stabilizing force in the global market Corporate balance sheets are strong and leverage is manageable Ability to service debt burdens remains at an all-time high Cash on the balance sheet and access to liquidity is plentiful for most borrowers Defaults rates should remain low for the foreseeable future
Strategies Maintain short-dated exposure / potential refinancing candidates Maintain overweight to single B and lower rated issuers given attractive risk-return dynamic Overweight transportation, consumer non-cyclicals (healthcare, consumer products) Remain overweight to energy companies based on strong asset base, attractive valuations and low default outlook Underweight technology and communications (broadcasters, wirelines) Issuer selection will continue to drive results Focus exposure in most attractive relative value opportunities
Portfolio Considerations4Q15
10
0.0
30.0
70.0
0.0
0.0
0.0
Investment-Grade Credit
High-Yield Credit
Bank Loan
Non-US
EM Corporate
Cash & Cash Equivalents
Sector ExposureSeptember 30, 2015
¹70% Credit Suisse Leveraged Loan Index, 30% Merrill Lynch US High Yield Cash Pay BB-B Rated 1-3 Year IndexNote: Sector exposure includes look-through to any underlying commingled vehicles if held. All weightings are a percentage of total market value. A negative cash position may be reported, which is primarily due to the portfolio’s unsettled trade activity. Data may not sum to 100% due to rounding.
Custom Index¹ (%)Yield to Worst: 6.17
Employees' Retirement System of the State of Rhode Island (%)Yield to Worst: 7.06
0.7
29.0
67.2
0.4
0.7
2.0
Investment-Grade Credit
High-Yield Credit
Bank Loan
Non-US
EM Corporate
Cash & Cash Equivalents
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-3.3
2.8
-5.4
-4.0
5.5
4.9
-6.0
6.2
-3.8
0.6
0.6
2.0
-0.1
Basic Industry
Capital Goods
Communications
Consumer Cyclical
Consumer Non-Cyclical
Energy
Finance
Industrial Other
Technology
Transportation
Utility
Cash & Cash Equivalents
Swap
-3.3
-22.3
16.5
9.5
-1.1
0.0
0.5
-1.9
2.0
BBB
BB
B
CCC
CC
C
D
NR
Cash & Cash Equivalents
Subsector and Quality Exposure Overweights/UnderweightsEmployees' Retirement System of the State of Rhode Island vs. Custom Index¹September 30, 2015
¹70% Credit Suisse Leveraged Loan Index, 30% Merrill Lynch US High Yield Cash Pay BB-B Rated 1-3 Year IndexNote: Sector exposure includes look-through to any underlying commingled vehicles if held. All weightings are a percentage of total market value. A negative cash position may be apparent, which is primarily due to the portfolio’s unsettled trade activity. Data may not sum to 100% due to rounding.
Quality Exposure Overweights/Underweights (%)Subsector Exposure Overweights/Underweights (%)
Portfolio Quality: BB-Index Quality: BB
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Appendix
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FRANCES L. COOMBES17 Years Experience
– Western Asset Management Company – Client Serv ice Executive, 1998–– Columbia University, School of International and Public Affairs, M.P.P.– University of California, Berkeley, B.A.
Biographies
Note: Western Asset experience reflects current position title and hire date.
TIMOTHY J. SETTEL22 Years Experience
– Western Asset Management Company – Portfolio Manager, 2001–– Lazard Freres & Co. – Portfolio Manager, 1995 – 2001– Bear Stearns – Mortgage Analyst, 1993 – 1995– New York University, M.B.A.– Lehigh University, B.S.
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Global Credit Team
As of 31 Aug 15*Dual responsibilities, shared with investment-gradeand municipals team
Portfolio Managers
Research
Trading
Portfolio Analysts
Product Specialists
MunicipalsRobert Amodeo, CFA (28 yrs) – USCharles Bardes (30 yrs) – USDavid T. Fare, CFA (28 yrs) – USBarbara Ferguson (30 yrs) – US John C. Mooney, CFA (28 yrs) – US
Judy Ewald (32 yrs) – USHealth Care, Higher Education, Housing, Pre-Refunded, Tax Exempt StructuredMichael Linko (23 yrs) – USAirports, Bridges and Tunnels, Mass TransitToll RoadsBud Littman (22 yrs) – USMisc High-Yield, Public Facilities, Power, Special Assessment DistrictsKathryn L. Montgomery* (8 yrs) – USAirport Revenue, Financial Institutions Higher Education, PortsThea Okin (33 yrs) – USAssisted Living, Charter Schools, Nursing Homes, Power, Water & SewerFrederick Poon (15 yrs) – USHealth Care, Industrial Revenue, Solid Waste, Tobacco
David Curry (8 yrs) – USAmish Dalal (9 yrs) – USJoseph Genco (22 yrs) – USMindy Tran, CFA (13 yrs) – USMaria Pacifico (8 yrs) – US
Osvaldo Acosta (16 yrs) – AustraliaDan Alexander, CFA (11 yrs) – USOberto Alvarez (22 yrs) – USKurt D. Halvorson, CFA (14 yrs) – USChetna Mistry (18 yrs) – UK
High-Yield Credit/Bank LoansMichael C. Buchanan, CFA (25 yrs) – USIan R. Edmonds (25 yrs) – UKChristopher N. Jacobs, CFA (27 yrs) – USWalter E. Kilcullen (18 yrs) – USChristopher Kilpatrick (18 yrs) – USTimothy J. Settel (22 yrs) – USDamon Shinnick, CFA (16 yrs) – Australia
Emerging Markets CreditJean-Pierre Cote Gil (16 yrs) – BrazilSergio Evangelista (26 yrs) – BrazilChia-Liang Lian, CFA (22 yrs) – USSwee-Ching Lim (16 yrs) – Singapore Kevin Ritter, CFA (17 yrs) – US
Sebastian Angerer (6 yrs) – UKCredit AnalystNathalie Cuadrado, CFA (15 yrs) – UKIndustrialsIan Justice (17 yrs) – UKWhole Business SecuritizationRene Ledis (22 yrs) – USBasic Industries/Utilities/EnergyPaul S. Olsen* (32 yrs) – USFinancial InstitutionsDeAndre L. Parks, CFA (22 yrs) – USHealthcare/Consumer Products/RetailGerald R. Rawcliffe (32 yrs) – UKFinancial InstitutionsSean Rogan (26 yrs) – AustraliaCredit AnalystIvor Schucking (24 yrs) – USFinancial InstitutionsDavis Smith (26 yrs) – USCommunicationsAmelia Sugiarto (9 yrs) – UKCredit Analyst
J. Gibson Cooper, CFA (28 yrs) – USChemicals, Energy, Pipelines & Gas DistributionDouglas Dieter, Dr.P.H (16 yrs) – USHealthcare, TechnologyRuchi Gupta (17 yrs) – UKEuropean High-Yield Credit John C. Hwang (13 yrs) – USStructured CreditAraceli M. Sibley (23 yrs) – USConsumer Products, Entertainment, Restaurants, Consumer Services, TextilesSuzanne M. Trepp, CFA (25 yrs) – USAerospace/Defense, Transportation, Retail, Food & Beverage, TobaccoFlorent Vallespir (22 yrs) – UKEuropean High-Yield Credit
Sophala Chhoeng (9 yrs) – USBrandon C. Jacoby, CFA (12 yrs) – US
Quentin Lafosse (8 yrs) – UKBrendan A. Bowman, CFA (10 yrs) – US
Steven T. Saruwatari, CFA (21 yrs) – US
Steve A. Green (21 yrs) – AustraliaJean Lee, CFA (10 yrs) – UKEdward T. Ma, CFA (13 yrs) – USMolly Schwartz, CFA (11 yrs) – US
Thomas V. McMahon (36 yrs) – USInvestment-Grade Credit & High-Yield Credit/Leveraged Loans
Investment-Grade CreditRyan K. Brist, CFA (22 yrs) – USMatthew D. Jackson (13 yrs) – UKCraig Jendra, CFA (19 yrs) – AustraliaBlanton Keh, CFA (15 yrs) – USHiroyuki Kimura (28 yrs) - JapanAnthony Kirkham, CFA (25 yrs) – AustraliaPaul Shuttleworth (29 yrs) – UK
S. Kenneth Leech (38 yrs) – Chief Investment Officer Michael C. Buchanan, CFA (25 yrs) – Deputy Chief Investment Officer
Daniel Araujo (31 yrs) – BrazilBanking, Insurance, TelecomAdriano Casarotto (19 yrs) – BrazilCapital Goods, Chemicals, Energy, Metals & Mining, Paper & Forest, InfrastructureKevin Chang, CFA (15 yrs) – USEmerging Markets CreditMarcos Dal Collina (30 yrs) – BrazilEducation, Health Care, Specialized Consumer Services, High YieldMatthew Graves, CFA (10 yrs) – USEmerging Markets CreditMark A. Hughes, CFA (17 yrs) – USEmerging Markets CreditCaio Magano (14 yrs) – BrazilAuto Components, Transportation, UtilitiesWillian Murayama (11 yrs) – BrazilSecuritizationAlex Tanaka (15 yrs) – BrazilBuilding Products, Homebuilding, Real Estate Broker, Retailing
Wilfred Wong, CFA (14 yrs) – US
Jacob Greenberg (2 yrs) – US
Catherine L. Matthews (28 yrs) – UKGlobal Products
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Risk Disclosure
© Western Asset Management Company 2015. This presentation is the property of Western Asset Management Company and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This presentation is for informational purposes only and reflects the current opinions of Western Asset Management. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset Management may have a position in the securities mentioned. This presentation has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.