400 likes | 406 Views
Learn about how PPM America utilizes a centralized credit and portfolio management function to navigate a challenging market and target investment opportunities. Explore their diversified portfolio and investment strategies.
E N D
Portfolio and Investment Strategy: Targeting the Opportunities a Tough Market Presents Leandra Knes President and Chief Executive OfficerChief Investment OfficerPPM America
The North American Investment Arm of Prudential Plc • Founded in 1990, headquartered in Chicago • Manages approximately $62.3 billion in assets • Jackson National • Prudential UK and Prudential Asia • Institutional Collateralized Bond Obligation clients • Other clients • 175 total employees in Chicago and New York City
Prudential plc $242 Billion ¹ PPM America, Inc $62.3 Billion ² . Portfolio Management/ Quantitative Analytics Credit Analysis Commercial Real Estate Operations and Finance Structured Finance and CDO Management Private Finance Special Investments Workouts Private Equity Public Equity Functional Organization Structure We Manage a Broad Array of Fixed Income and Equity Assets ¹ As of June 30, 2002 ² As of September 30, 2002; includes assets managed through PPM America’s affiliate, PPM Finance, Inc.
Overwhelming Majority of PPMA’s Clients are Internal Assets Under Management as of September 30, 2002 Billions Jackson National Life $ 42.8 Prudential 14.4 Collateralized Bond Obligations 4.1 Prudential Asia 0.7 Other 0.3 $ 62.3
Centralized Credit and Portfolio Management Functions • Background • Historically organized in “self sufficient” asset class silos, with little overlap • Reorganized September 2001 • Leverage analytical competitive advantage • Centralize systems • Checks and balances • Expandable
Moody’s Forecast of Default Rates Defaults Projected to Decline From Highs but Still Well Above Long-term Average Moody's Speculative Grade Trailing 12-Month Default Rates Actual Jan. 2000 to Aug. 2002 / Forecasted Sept. 2002 to Feb. 2003 12.0% 10.7% 11.0% 10.5% 10.5% 10.5% 10.3% 10.3% 10.3% 10.1% 10.0% 10.0% 10.0% 10.0% 9.8% 9.8% 9.3% 10.0% 9.6% 9.0% 8.8% 8.8% 9.0% 8.5% 7.9% 7.7% 7.7% 8.0% 7.1% 6.7% 7.0% 6.2% % 6.0% 5.0% 4.0% 3.77%* 3.0% 2.0% 1.0% 0.0% Jul-01 Jul-02 Jan-01 Jun-01 Oct-01 Jan-02 Jun-02 Oct-02 Jan-03 Feb-01 Mar-01 Feb-02 Mar-02 Feb-03 May-01 May-02 Apr-01 Apr-02 Sep-01 Nov-01 Dec-01 Sep-02 Nov-02 Dec-02 Aug-01 Aug-02 Months Note: *Long run annual default rate is 3.77%
Return Calculation Implied Total Return* 6.2% 2001 Interest Earned* $2,386.2m *Time period is 2001, JNL portfolios only
300 300 October 2000 Since Inception 225 *Basis Points Over Index 150 75 62 9-30-02 Year-to-Date 0 Performance Prudential Life Funds – U.S. Fixed Interest * Benchmark is Merrill USD Corporates Index • 80% IG (split 45% A/ 55% BBB) • 20% BIG (split 70% BB/ 30% B) • Benchmark caps issuer exposure to control concentration risk Note: These numbers are not externally audited
Portfolio Management Brion Johnson Executive Vice PresidentHead of Public Fixed IncomePPM America
Portfolio Management Structured to Deliver Superior Investment Performance • Manage multiple accounts using total return, “buy and manage” and other client specific strategies • Client Portfolio Managers manage relationships, articulate client objectives and optimize portfolios • Asset Portfolio Managers make sector and individual credit decisions for public fixed income securities • Quantitative specialists support these functions • Trading transmits market information and centralizes our interactions with Wall Street President, CEO & CIO Leandra Knes Portfolio Management Brion Johnson Client Asset Trading Portfolio Managers Portfolio Managers Quantitative Research
Investment Strategy Seeking Diversified Portfolio That Funds Liabilities Without Mismatch Risk • Increase the universe of investable asset categories • Greater diversification of risks • Higher option- and risk-adjusted spreads • Replacement of interest rate risk with diversifiable risks • Continue to migrate away from residential MBS investments • Less attractive from a return on capital perspective • Emphasis on “value-added” investments when relative values are attractive • Commercial mortgages • Investment grade private placements • ABS and CMBS
Investment Strategy Seeking Value Added Investments Won’t Take “Bet the Company” Risks • Maintain tight restrictions on duration, convexity and liquidity • Refinement of the investment policy implies • A more precise articulation of risk and return • Quantification of out of index exposures • More active portfolio management • Better articulated sales criteria • Migrate high yield investments to more private high yield investments • Better historical default/recovery experience • Better covenants/monitoring ability • Maintain 8% exposure for non-investment grade investments
Invested Assets Mix – JNL vs. Industry Focus is on Diversifiable Credit Risk JNL (6/30/02)Industry (12/31/01) $38.7 Billion 30% Total 21% Total 12% 9% 3% 9% 4% 3% 9% 3% 13% 15% 9% 1% 5% 3% 4% 26% 1% 2% 37% 32% IG - Public (AAA-A) IG - Public (BBB) IG - Private/144A (AAA-A) IG - Private/144A (BBB) NIG - Public NIG - Private/144A Commercial Mortgages Common & Preferred Stock Sch. BA & real estate Cash & other assets
Fixed Income Securities Portfolio - Quality Distribution June 30, 2002 JNL’s Corporate Portfolio is Largely Investment Grade Securities $33.4 Billion $15.9 Rating Equivalents $14.8 47.7% Highest Quality AAA to A Aaa to A AAA to A 44.3% High Quality BBB Baa BBB 5.1% Medium Quality BB Ba BB 1.7% Low Quality B B B 1.0% Lower Quality CCC to C Caa to C CCC 0.3% In or near Default $2.7
Fixed Income Securities Portfolio - Sector Distribution JNL’s Corporate Portfolio is Diversified by Sector As of June 30, 2002 $33.4 Billion CMBS Private Corp. 5.0% 11.8% Public/144a ABS Private ABS 6.6% 1.9% Foreign government 0.1% MBS 21.5% Public/144a Corp. 53.1%
Public Corporate Investment Grade Fixed Income Portfolio (market value) JNL’s Fixed Income Portfolio is Broadly Diversified Industry Allocation vs. Index as of 6/30/02 $15.6 billion Notes: Includes commercial paper. Data is consolidated to include Jackson National of New York.
JNL’s Telecom Exposure as of 6/30/02 JNL JNL Consolidated Consolidated Unrealized DESCRIPTION BV as of 6/30/02 MV as of 6/30/02 Gain/(Loss) VERIZON GLOBAL FDG CORP 211 203 (8) QWEST COMMUNICATIONS 180 113 (67) AT&T CORP 144 125 (19) VODAFONE AIRTOUCH PLC 132 142 10 TELEFONICA EUROPE BV 110 113 3 CINGULAR WIRELESS LLC 105 98 (8) TELUS CORPORATION 103 88 (15) SPRINT CAPITAL CORP 112 96 (16) AT&T WIRELESS SVCS INC 98 80 (18) BRITISH TELECOM PLC 87 86 (1) Top 10 Telecom Exposure 1,282 1,144 (139) Other Telecom Exposure 573 439 (134) Total Telecom Exposure 1,856 1,582 (273)
Credit Analysis Jim Young Executive Vice PresidentChief Credit OfficerPPM America
Credit Analysis Credit Team Organized by Industry • Responsible for corporate credit analysis • Investment grade • High yield • Public and private credits • Specialized industry analysts • Covering all industry classifications • Across credit spectrum • Analysts, on average, follow 40 credits • Fewer if issuers in an industry are primarily high yield • Greater if primarily investment grade
Approval Process for New Deals Rigorous Approval Process Prior to Purchase • Full underwriting • Approval by Credit Committee • Credit Opinion: Buy Above, Buy At, Buy Below, Sell • Goal is to give Portfolio Managers information to guide purchase decision
Ongoing Portfolio Monitoring Analysts Expected to Know Credits on “Real Time” Basis • Expected to know credits “real time” • Semi-annual portfolio reviews • Constant communication with portfolio managers and traders
Names held Adelphia: sold out prior to bankruptcy at price well above prices today Global Crossing McLeod Williams Communications Names avoided (less than $5MM exposure) NTL Communications Enron Finova Pacific Gas and Electric XO Communications Southern California Edison PSINET Comdisco Exodus Communications KMart Metromedia Fiber Fifteen Largest Bankruptcies From 1/1/01 to 6/30/02 JNL has largely avoided many of the largest bankruptcies Notes: WorldCom filed in July, 2002
Competitor Information Evidence Would Suggest We are Doing as Well or Better Than Competition • Schedule D • Holdings in stressed names • Underweight power generation, airlines
2002 First Half Writedowns and Realized Losses (Gross) Writedowns and Losses Higher Than Expected Due to WorldCom Fraud Further Writedowns on High Yield Telecom $ 80MM ABS Writedowns 30MM Other 40MM Total $150MM WorldCom (Fraud) $120MM Adelphia (Fraud) 11MM Total Fraud-Related $131MM Total $281MM
Summary Credit Intensive Approach a Benefit in Today’s Market • Weak U.S. economy and bond market in 2002 • Many significant bankruptcies • JNL’s credit approach is paying dividends • Avoided 11 of 15 bankruptcies • Severe underweight in power generation sector • 2002 performance as good, or better, than competition • Holdings in stressed names in line with competition • Solid total return performance
Commercial Mortgage Loans and Real Estate Securities David Zachar Executive Vice PresidentCommercial Real EstatePPM America
Real estate securities Commercial mortgage lending Real estate joint ventures Focus is on High quality real estate Well sponsored Well located Well diversified both in terms of property types and geography Commercial Mortgage Loans and Real Estate Securities PPM’s Commercial Real Estate Group Real Estate Joint Ventures Commercial Mortgage Loans CMBS and REIT Securities $60 million $2.6 billion $3.3 billion
Real Estate Securities • CMBS: - $1.6 billion - 4.26% of JNL’s Invested Assets • U.S. CMBS market is $500 billion in size • Value added to Corporate Bonds of similar ratings • Unlike MBS, excellent call protection via the individual loans and the sequential structure of CMBS • JNL portfolio consists primarily BBB+ to A- securities • REITs: - $732 million - 1.89% of JNL’s Invested Assets • Total public debt outstanding in REIT-debt market is $50 billion • Also value added to Corporate Bonds of similar ratings • All REIT-debt in JNL’s portfolio is public, investment grade securities
Commercial Mortgage Loans A Description of the Attributes of a Commercial Mortgage Loan • Compelling Attributes of a Commercial Mortgage: • Fixed Income Asset based on real estate assets • Yield Maintenance • Favorable capital treatment by regulators • JNL’s Commercial Mortgage Portfolio 9% of Invested Assets • Totals $3.2 billion with an average loan size of $8.7 million • Minimum loan size of $5 million, maximum loan size of $30 million • Excellent experience • Well-diversified in property types 40 West Office Building St. Louis, Missouri $22.5 million loan
Commercial Mortgage Lending Strategy PPM’s Origination Strategy and Preferred Property Types Strategy • Value Added Lending • Responsive • Creative • Mid Point documents • Process oriented • Borrower oriented • Sourced and serviced by correspondents • Local knowledge of borrowers and submarkets • Loans underwritten by PPM • PPM orders the appraisal and third party reviews JNL’s Commercial Mortgage Loan Portfolio
Commercial Mortgage Lending Strategy PPM’s Origination Strategy and Preferred Property Types Targeted Property Types • Office Buildings • Suburban, Class A • Loans at or below replacement cost • Not CBD • Retail Centers • Grocery or Discounter Anchored • Apartments • Class A- or B+ • Newer or an effective age of 5 years or less • Warehouse/Distribution • High bay • Masonry construction Wesley Park Apts. Atlanta, Georgia Giant Eagle Center Pittsburgh, PA
Private Placement Advantages • Private placement investments have several advantages over public investments • Better and more consistent information • Better structure • Better documents • Better covenants and control • Better pricing • JNL is willing to trade some liquidity for these advantages
Summary • Significant, multiple asset class investment capabilities • Historically difficult investing environment • Value added research capabilities • Management response to current environment • Monitor constantly • Reposition within constraints • Execute risk mitigation trades when practical • Transition with evolving investment policies • PPM is well-positioned to be proactive on the opportunities that a tough market can present
Appendix: A 2001 Return Calculations Assumptions/Methodology • Using the balance sheet we calculate the beginning and ending market value of JNL’s portfolio, which reflects both realized and unrealized losses. We adjust for capital movement; for commercial mortgage loans, where the performance is clearly excellent; and for policy loans, which PPMA does not manage. • We calculate net flows as sales minus surrenders and reflect the inflow from the reduction in the commercial mortgage loan portfolio. These numbers are from the GAAP statement of cash flows and from the balance sheet. • Treating this as a mid-period flow, 6.2% is the real time weighted rated of return that these numbers suggest is the total return for the portfolio. Comments 12/31/00 12/31/01 Total assets $36,067.9 $39,733.1 438.0 480.6 Accrued investment income $36,505.9 $40,213.7 Capital contribution-dividends (168.6) (32.8) $36,473.1 $40,045.1 Take out CMLs (4,660.2) (4,191.4) Take out Policy Lns (687.2) (700.4) PPM Assets ex CMLs $31,125.7 $35,153.3 Deposits $6,876.6 W'drawals (4,858.7) Decr (incr) in CMLs 468.8 Net transfer to sep accts (468.9) Net $2,017.8