China Bond Strategies - (CNY Bond and China Total Return Bond) - Manulife Investment Management
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Second Quarter 2021 China Bond Strategies (CNY Bond and China Total Return Bond) Quarterly Market & Strategy Review For a discussion of the risks associated with this strategy, please see the Investment Considerations page at the end of the presentation. MSTR.540338
CNY Bond Strategy For Institutional/Investment Professional Use Only. Not for distribution to the public. 2 MSTR. 540338
CNY Bond Strategy The Strategy Returned +3.01% in 2Q Quarter’s Overview – CNY Bond Strategy Market Highlights • China’s 1Q21 GDP growth was marginally below expectations at 18.3% yoy, due to the favorable base effect, following 6.5% yoy growth in 4Q20. The Caixin manufacturing Purchasing Managers’ index (PMI) remained stable and above 50 for the quarter, showing expansionary activity, but slipped marginally to 51.3 in June from 52 in May. • Monetary policy remained stable over the quarter with the PBOC leaving policy rates unchanged. The State Council met in early July and issued a statement emphasising stable and effective monetary policy implementation and mentioned the possible use of “RRR (Reserve Requirement Ratio) cuts when appropriate”. There has been a subsequent RRR cut of 0.50bps in early July which took the market by surprise but is not a signal for broader monetary easing at this stage. • The PBOC announced during the quarter an increase in the FX reserve requirement ratio for financial institutions from 5% to 7% against the trend of the appreciating CNY since April. A PBOC statement reiterated their policy target of maintaining CNY stability around a reasonable equilibrium under market forces. • China bond yields declined marginally over the period with the 10-year CGB yield closing at 3.09% from 3.19% at the beginning of the quarter. Chinese yuan (CNY) appreciated +1.48% to 6.46 against the USD over the quarter as UST yields declined and the yield premium for China bond yields was maintained. CNY Bond Portfolio • Maintained o/w duration positioning as we believe yields are attractive for carry while the PBOC has turned slightly more dovish. • Maintained 30% o/w to corporate bonds for carry opportunities. Added exposure to high quality, Tier 1 property developers. Performance • The Strategy returned +3.01% in 2Q (USD, gross of fees) versus +2.83% for its benchmark. • Main relative contributor for the quarter was from overweight duration positioning as onshore CNY yields declined. • Main relative detractor was security selection with exposure to a long-dated policy bank among the key detractors. Performance is shown in USD, gross of fees. As of 30 June 2021. Past performance is not indicative of future results. For Institutional/Investment Professional Use Only. Not for distribution to the public. MSTR.540338 3
China Onshore Bond Market CNY bond yields maintained their yield advantage against UST yields China Onshore Bond Market Review China Onshore Rates Credit Renminbi • Onshore bond yields declined over the quarter to 3.09% • Onshore SOE and higher quality corporate • CNY gained +1.48% to 6.4571 bonds benefitted from positive carry while • UST yields declined to 1.47% and the selective names also saw positive returns against the USD but declined against premium for CNY rates increased from from spread narrowing the CHF over 1.4% to 1.6% 3.0% 3.5 2.47% 3.0 2.5% 2.30% 2.5 2.01% 2.0% 2.0 1.5 1.42% 1.5% 1.34% 1.28% 1.0 1.0% 0.5 0.0 0.5% 0.0% CGBs Policy Banks Corporates China 10Y CGB Yield 2Q21 return YTD return US 10Y UST Yield Source: Bloomberg, Index performance data shown in CNY terms. As of 30 June 2021. For Institutional/Investment Professional Use Only. Not for distribution to the public. MSTR.496778 4
CNY Bond Strategy Maintaining long duration positioning as liquidity expected to remain ample Key Portfolio Changes Interest Rates Credit Currencies • Maintained overweight duration • Added exposure to Tier 1 investment • CNY to remain stable in current range for positioning as yields are range-bound and now with risk of USD appreciating grade Chinese property short-end rates remain stable towards year-end. • Nominal/Real interest rate advantage over • Credit spreads remain very stable for high • CNY to remain supported by positive quality issuers in our investable universe US rates persists inflows to onshore assets. Duration (Years) Sector Breakdown (%) Currency Positioning (%) 6.6 6.5 100% 100% 6.4 13.3 13.1 13.2 12.9 6.4 6.4 6.3 80% 80% 6.2 60% 56.5 56.4 56.3 56.5 60% 6.0 5.8 5.8 100 100 100 100 5.8 5.7 5.7 40% 40% 5.6 20% 20% 5.4 30.3 30.3 30.3 30.3 5.2 0% 0% Mar-21 Apr-21 May-21 Jun-21 Mar-21 Apr-21 May-21 Jun-21 Mar-21 Apr-21 May-21 Jun-21 Portfolio Cash Government CNY/CNH Markit iBoxx ALBI China Onshore Bond Index Government-Related Corporate As of 30 June 2021. For Institutional/Investment Professional Use Only. Not for distribution to the public. MSTR.496778 5
CNY Bond Strategy RRR cuts signal a more dovish tone Risk Market Factors Investment Theme Positioning ▪ Potential for more dovish monetary policy after recent More dovish tone but 50bps RRR cut. official rate cuts are Interest not expected. ▪ Maintained long duration Rates ▪ Expect China government bond 2021 supply expected positioning against benchmark. yields (nominal and real) to to be lower with less remain attractive relative to other special bond issuance. markets. ▪ Overall defaults within SOE sector ▪ Yield pick-up from corporate remain low. bonds. Maintain 30% o/w exposure to corporate bonds. ▪ Deleveraging theme can result in a Continue to favour more cautious environment overall sectors and issuers ▪ Added exposure to high quality Credit and may impact idiosyncratic that have high Tier 1 IG-rated property names. names. strategic importance. ▪ Will look to increase exposure to ▪ Expect crowding out effect with ESG-related bonds as the market stronger companies gaining develops further. market share over weaker rivals. Foreign inflows ▪ CNY gained +1.48% against the expected to be USD over the quarter. ▪ The CNY remains range-bound maintained after Currency with potential risk of a stronger ▪ Foreign inflows expected to be confirmation of CGB USD in 2H21. above CNY1 trillion in 2021. inclusion in WGBI index. Source: Manulife Investment Management as of 30 June 2021 For Institutional/Investment Professional Use Only. Not for distribution to the public. MSTR.540338 6
CNY Bond Strategy The Strategy Returned +3.01% in 2Q 2021 Performance (%) 2Q CNY Bond Composite +3.01 Markit iBoxx ALBI China Onshore Index +2.83 Excess return (Gross) +0.17 Performance Attribution vs. Benchmark (2Q) Main Relative Contributors Main Relative Detractors 20 ▪ Overweight duration against the ▪ Overweight exposure to benchmark was the biggest corporate bonds was a positive contributor over the quarter as contributor but this was offset 15 onshore CNY yields declined. by security selection which detracted from performance. Basis Points 10 18 ▪ Exposure to a long-dated policy 18 bank was the biggest detractor. 5 0 2 -2 -5 Excess Interest Credit Currencies Return Rates Source: Manulife Investment Management, Bloomberg PORT risk system, as of 30 June 2021. Performance is shown in USD, gross of fee Returns greater than one year are annualized. Past performance is not indicative of future results. Performance shown of the strategy is gross of fees and does not include advisory fees and other expenses an investor may incur, which when deducted will reduce returns. Changes in exchange rates may have an adverse effect. For Institutional/Investment Professional Use Only. Not for distribution to the public. MSTR.540338 7
CNY Bond Composite Investment Results as of 30 June 2021 Annualized Gross Returns (%) Cumulative Gross Returns^ 14 170 12.56 12.07 12 160 10 150 Rebased to 100 8 140 6 5.62 130 4.87 4.69 4.56 4.49 4.35 4.27 4.10 3.71 3.71 120 4 3.28 3.40 3.012.83 2 110 0 100 Nov 10 Aug 11 May 12 Nov 13 Aug 14 May 15 Nov 16 Aug 17 May 18 Nov 19 Aug 20 May 21 Feb 13 Feb 16 Feb 19 3 Mths YTD 1 Year 3 Years 5 Years 7 Years 10 Years Since (p.a.) (p.a.) (p.a.) (p.a.) Inception (p.a., 1 Dec Portfolio Benchmark* 2010) Portfolio Benchmark* Returns greater than one year are annualized. Past performance is not indicative of future results. Performance shown of the strategy is gross of fees and does not include advisory fees and other expenses an investor may incur, which when deducted will reduce returns. Changes in exchange rates may have an adverse effect. As of 30 June 2021. Performance is shown in USD, gross of fees. * Benchmark: Markit iBoxx ALBI China Onshore Bond Index. ^ Cumulative gross return presented since inception 1 December 2010. For Institutional/Investment Professional Use Only. Not for distribution to the public. 8 MSTR. 524495
Why Manulife IM CNY Bond Strategy? Why China Why This Why Manulife IM? Bonds? Strategy? • Fast growing asset • Exposure to high • One of the world’s class, potential quality onshore largest Asia Fixed diversification China government Income houses* benefits and credit bonds and established track record • Opening of China’s • Active approach onshore bond targeting consistent • Established market to foreign risk-adjusted excess Onshore China investors (currently returns Bond Strategy’s
China Total Return Bond Strategy For Institutional/Investment Professional Use Only. Not for distribution to the public. 10 MSTR. 540338
China Total Return Bond Strategy The Strategy Returned +1.31% in 2Q Quarter’s Overview – China Total Return Bond Strategy Market Highlights • China’s 1Q21 GDP growth was marginally below expectations at 18.3% yoy, due to the favorable base effect, following 6.5% yoy growth in 4Q20. The Caixin manufacturing Purchasing Managers’ index (PMI) remained stable and above 50 for the quarter, showing expansionary activity, but slipped marginally to 51.3 in June from 52 in May. • Monetary policy remained stable over the quarter with the PBOC leaving policy rates unchanged. The State Council met in early July and issued a statement emphasising stable and effective monetary policy implementation and mentioned the possible use of “RRR (Reserve Requirement Ratio) cuts when appropriate”. There has been a subsequent RRR cut of 0.50bps in early July which took the market by surprise but is not a signal for broader monetary easing at this stage. • China USD credit returns have been mixed with China USD credit underperforming on weaker sentiment and investor concerns around specific names in the Asset Management Company (AMC) and Property sectors. Weaker sentiment led to China underperforming other regions within Asian credit. • Chinese yuan (CNY) appreciated +1.48% to 6.46 against the USD over the quarter as UST yields declined and the yield premium for China bond yields was maintained. China Total Return Bond Portfolio • Interest rates: maintain duration around 4 years. UST yields expected to be range-bound for now. • Credit: reduced exposure to China USD HY to 36%. Returns primarily driven by carry. • Currency: lifted exposure to CNY onshore bonds to 13% due to relatively stable CNY outlook. Performance • The Strategy returned +1.31% in 2Q (USD, gross of fees). The reference benchmark* returned 2.75% over the same period. • Main contributors to absolute performance was from duration positioning as US yields declined. Income from credit exposure was a positive contributor while the portfolio also benefitted from its exposure to CNY which gained against the USD. • No detractors to absolute performance over the quarter. Performance is shown in USD, gross of fees. As of 30 June 2021. * Reference benchmark: FTSE Chinese (Onshore CNY) Broad Bond Index. This benchmark is used as a reference of the onshore China bond universe only Past performance is not indicative of future results. For Institutional/Investment Professional Use Only. Not for distribution to the public. MSTR.540338 11
China USD Bond Market Deterioration in sentiment results in IG outperforming HY China USD Bonds • China IG credit outperformed China HY credit in 2Q21 due to deteriorating sentiment among credit investors that has been driven by specific events related to China Asset Management Companies (AMCs) within the SOE sector; and tighter regulatory pressure applied to the Chinese property sector. • Consequently, there has been some flight to quality with IG names preferred over HY and stronger companies preferred and China USD credit underperforming Asia ex-China over the quarter. China USD Credit – Returns China USD Credit - Spreads 400 0.4% 380 0.18% 0.2% 360 Spread (basis points) 0.0% 340 320 -0.2% 300 -0.4% -0.32% 280 260 -0.6% 240 -0.8% 220 -0.87% -0.83% 200 Jun-20 Jul-20 Jan-21 Jun-21 Mar-21 Nov-20 Dec-20 Feb-21 Aug-20 Sep-20 Oct-20 Apr-21 May-21 -1.0% China IG China HY 1Q21 return 2Q21 return China Credit Spread Asia Credit Spread Source: Bloomberg, JP Morgan Asia Credit Index. Index performance data shown in US Dollars, as of 30 June 2021. For Institutional/Investment Professional Use Only. Not for distribution to the public. MSTR.496778 12
China Total Return Bond Strategy Reduced high yield exposure on more volatile environment Key Portfolio Changes Interest Rates and Currency Credit • Maintained overall duration around 4 • Slight defensive bias on China USD credit given weaker sentiment. years. • Reduced exposure to China USD high yield from 41% to 36%. • Further increased exposure in CNY for diversification and stability; currency split • Switched into new issue opportunities with good pricing. Look to selectively add in the China is 87% USD and 13% in CNY. property space if valuations improve. Duration (Years) Rating Breakdown (%) Sector Positioning (%) 5 100% 1.4 0.2 2.5 2.8 4.0 4.1 4.1 4.1 100% 5.0 4.9 5.8 5.5 9.2 9.2 9.0 4 11.7 5.5 4.2 5.1 3 80% 5.9 2 80% 33.0 35.9 36.2 33.0 1 60% 47.4 48.9 45.2 0 43.8 Mar-21 Apr-21 May-21 Jun-21 60% Currency (%) 40% 100% 6.6 8.9 11.1 12.5 40% 80% 20% 36.5 37.5 38.2 35.7 59.1 58.8 61.2 61.5 60% 93.4 91.0 88.8 87.1 20% 40% 0% Mar-21 Apr-21 May-21 Jun-21 20% Government-Related Industrials 0% 0% Mar-21 Apr-21 May-21 Jun-21 Mar-21 Apr-21 May-21 Jun-21 Utilities Financial Institutions USD CNY IG HY NR Cash and Others As of 30 June 2021. For Institutional/Investment Professional Use Only. Not for distribution to the public. MSTR.496778 13
China Total Return Bond Strategy Investors more cautious but China USD credit can be attractive for income Risk Market Factors Investment Theme Positioning ▪ Maintain stable outlook for UST yields for now. Stable US rates Interest ▪ Potential for more dovish ▪ Maintain USD duration ~4 years in supportive for China Rates monetary policy for China onshore portfolio. USD credit bonds after recent 50bps RRR cut. ▪ Returns to be primarily driven by ▪ Deleveraging theme can result in a carry. Seeing better value in HY more cautious environment overall Positive on China USD names vs IG. and may impact idiosyncratic credit for income names. ▪ 36% exposure to high yield within Credit China USD exposure at end of Continue to be ▪ Expect crowding out effect with selective in credit 2Q21. stronger companies gaining selection market share over weaker rivals. ▪ Will look to increase HY exposure at more attractive entry points. ▪ Increased exposure to CNY from ▪ CNY gained +1.48% against the Stable onshore rates 7% to 13% over the second USD over the quarter. and CNY outlook quarter. Currency makes exposure to ▪ Foreign inflows expected to be onshore securities ▪ Invested in policy banks and liquid above CNY1 trillion in 2021 attractive commercial bank bonds for onshore exposure. Source: Manulife Investment Management as of 30 June 2021 For Institutional/Investment Professional Use Only. Not for distribution to the public. MSTR.540338 14
China Total Return Bond Strategy The Strategy Returned +1.31% In 2Q 2021 Performance (%) 2Q China Total Return Bond Strategy (Gross) +1.31 FTSE Chinese (Onshore CNY) Broad Bond Index +2.75 (Reference Benchmark*) Excess Return (Gross) -1.45 Contribution to Return (2Q) Main Contributors Main Detractors ▪ Duration positioning was the ▪ There were no significant 140 biggest contributor as UST yields detractors. declined over the period. 120 ▪ Exposure to corporate bonds contributed to returns with returns 100 from income offsetting wider credit spreads. Basis Points 80 ▪ Exposure to CNY also contributed positively as CNY 131 gained against the USD over the 60 period. 40 72 20 45 14 0 Total Interest Rates Credit Currencies Return Source: Manulife Investment Management, Bloomberg PORT risk system, as of 30 June 2021. Performance is shown in USD, gross of fees. * Reference benchmark: FTSE Chinese (Onshore CNY) Broad Bond Index. This benchmark is used as a reference of the onshore China bond universe only. Returns greater than one year are annualized. Past performance is not indicative of future results. Performance shown of the strategy is gross of fees and does not include advisory fees and other expenses an investor may incur, which when deducted will reduce returns. Changes in exchange rates may have an adverse effect. For Institutional/Investment Professional Use Only. Not for distribution to the public. MSTR.496778 15
China Total Return Bond Composite Investment Results as of 30 June 2021 Annualized Gross Returns (%) Cumulative Gross Returns^ 14 125 12.33 12 120 10 8.35 115 8 7.11 110 6 5.22 105 4 3.42 2.75 2 1.31 100 0.64 0 95 3 Mths YTD 1 Year Since Inception (p.a., 1 Oct 2018) Portfolio Reference benchmark* Portfolio Reference Benchmark* Returns greater than one year are annualized. Past performance is not indicative of future results. Performance shown of the strategy is gross of fees and does not include advisory fees and other expenses an investor may incur, which when deducted will reduce returns. Changes in exchange rates may have an adverse effect. As of 30 June 2021. Performance is shown in USD, gross of fees. * Reference benchmark: FTSE Chinese (Onshore CNY) Broad Bond Index. This benchmark is used as a reference of the onshore China bond universe only. ^ Cumulative gross return presented since inception 1 October 2018. For Institutional/Investment Professional Use Only. Not for distribution to the public. 16 MSTR. 524495
Why Manulife IM China Total Return Bond Strategy? Why China Why This Why Manulife IM? Bonds? Strategy? ▪ Fast growing asset ▪ Flexible portfolio ▪ One of the world’s class, potential dynamically allocating largest Asia Fixed diversification benefits across the China Fixed Income houses* and Income universe established track ▪ Opening of China’s (onshore & offshore) to record onshore bond market maximize total returns to foreign investors and control risk ▪ Established Onshore (currently
Manulife Investment Management GIPS® Report CNY Bond Composite Creation Date: January 1, 2018 Inception Date: December 1, 2010 Reporting Currency: USD Schedule of Calendar Year Returns and Assets Number of Total Assets Firm Assets Gross of Fees Net of Fees Benchmark Composite 3-Yr Benchmark 3-Yr Portfolios End Composite End of Period End of Period Year End Return (%) Return (%) Return (%) Std. Dev. (%) Std. Dev. (%) of Period Dispersion (%) (Millions) (Millions) 2020 9.62 9.01 9.39 5.33 5.43
Manulife Investment Management GIPS® Report China Total Return Bond Composite Creation Date: October 1, 2018 Inception Date: October 1, 2018 Reporting Currency: USD Schedule of Calendar Year Returns and Assets Number of Total Assets Firm Assets Gross of Fees Net of Fees Benchmark Composite 3-Yr Benchmark 3-Yr Portfolios End Composite End of Period End of Period Year End Return (%) Return (%) Return (%) Std. Dev. (%) Std. Dev. (%) of Period Dispersion (%) (Millions) (Millions) 2020 7.96 7.31 9.65 N/A N/A
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Investment Considerations A widespread health crisis such as a global pandemic the ending dollar value would be $246,355. Unless interest in the referenced company. could cause substantial market volatility, exchange- otherwise noted, returns greater than 1 year are No investment strategy or risk management technique trading suspensions and closures, and affect portfolio annualized; calendar year returns for each one year can guarantee returns or eliminate risk in any market performance. For example, the novel coronavirus period end in December. Discrepancies may occur environment. disease (COVID-19) has resulted in significant due to rounding. Past performance does not disruptions to global business activity. The impact of a guarantee future results. 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Some investment strategies/solutions may not Any such impact could adversely affect the portfolio’s within their relevant regions, sectors or asset classes, be included in a GIPS compliant firm under certain performance, resulting in losses to your investment. and represent non-managed investment portfolios. circumstances, such as SMA/UMA business in Any performance information shown is the investment Canada, If derivatives are employed, note that investing in strategy composite gross of fees, including advisory derivative instruments involves risks different from, or Any characteristics, guidelines, constraints, or other and investment management fees and other expenses possibly greater than, the risks associated with information provided for this material was selected by an investor would incur, but net of transaction costs, investing directly in securities and other traditional the firm as representative of the investment strategy unless otherwise noted; deduction of such expenses investments and, in a down market, could become and is provided for illustrative purpose only, may would reduce returns. 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Actual fees may vary general approach of Manulife Investment information about the holdings, asset allocation, or depending on, among other things, the applicable fee Management to integrating sustainability risk sector diversification is historical and is not an schedule, portfolio size and/or investment considerations into our investment decision-making indication of future performance or any future portfolio management agreement. For example, if $100,000 processes. Further details on Manulife Investment composition, which will vary. Portfolio holdings are were invested and experienced a 10% annual return Management’s general approach to sustainability are representative of the strategy, are subject to change compounded monthly for 10 years, its ending value, available at at any time, are not a recommendation to buy or sell a without giving effect to the deduction of advisory or www.manulifeim.com/institutional/global/en/sustainabil security, and do not represent all of the securities investment management fees, would be $270,704 ity purchased, sold or recommended for the portfolio. It with an annualized compounded return of 10.47%. If The source for all information shown is Manulife should not be assumed that an investment in these an advisory or investment management fee of 0.95% Investment Management, unless otherwise noted. securities was or will be profitable. Top ten holdings of the average market value of the account were information combines share listings from the same deducted monthly for the 10-year period, the issuer, and related depositary receipts, into a singular annualized compounded return would be 9.43% and holding to accurately present aggregate economic For Institutional/Investment Professional Use Only. Not for distribution to the public. 21 MSTR. 540338
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Important Information (continued) The distribution of the information contained in this Futures Ordinance and the Securities and Futures this material is for information purpose only and does not presentation may be restricted by law and persons who (Professional Investor) Rules, in Hong Kong only. It is not constitute an offer, a solicitation or a recommendation to access it are required to comply with any such restrictions. intended for and should not be distributed to, or relied upon, contract a financial instrument or a financial service as The contents of this presentation are not intended for by members of the public or retail investors. defined under FinSA. This material does not constitute an distribution to, or use by, any person or entity in any implicit or explicit investment advice. 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Prospective implementing ordinance, at the exclusion of Professional investors resident in China are responsible for obtaining all Clients with an opting-out pursuant to Art. 5 (1) FinSA relevant approvals from the Chinese government authorities, ("Opting-Out Clients"), and/or Qualified Investors pursuant to including but not limited to the State Administration of the Federal Collective Investment Schemes Act ("CISA") and Foreign Exchange, before investing. its implementing ordinances, at the exclusion of Opting-Out Clients and Managed/Advisory Retail Clients pursuant to Art. Hong Kong: This material is provided to Professional 10 (3ter) CISA where relevant. The information provided in Investors, as defined in the Hong Kong Securities and For Institutional/Investment Professional Use Only. Not for distribution to the public. 23 MSTR. 540338
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