Kames Strategic Global Bond Fund

September 2013Colin Finlayson – Investment Manager Fixed IncomeColin Finlayson Investment Manager, Fixed Income

The Great Rotation?

2

Then and now – is history repeating itself? y p g

20

1994 Total return20

Is history repeating?

5

10

15

5

10

15

10

-5

0

-10

-5

0

-20

-15

-10

-25

-20

-15

bt ty 00 ts Ts ps Y 00-25

EM

$ d

ebt

EM

Equ

ity

FTS

E10

0

Gilt

s

US

Ts

US

Cor

ps

US

HY

S&

P 50

0

EM

$ d

eb

EM

Equ

it

FTS

E10 Gilt

US

T

US

Cor

p

US

H

S&

P 50

1994 returns to end August 2013 returns to end August

Source: BoA Merrill Lynch, Morgan Stanley, FTSE, S&P, Bloomberg, Kames Capital as at 31 August 2013

E E U 1994 returns to end August 2013 returns to end August

3

Bond market in forward looking shockerg

3

The US yield curve is very steep

2

1Yie

ld %

0

-1

983

984

985

986

987

988

989

990

991

992

993

994

995

996

997

998

999

000

001

002

003

004

005

006

007

008

009

010

011

012

013

Source: Bloomberg, Kames Capital as at 30 August 2013

19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 2 20 20

4

Kames Strategic Global Bond Fund – Flexibilitiesg

Government bonds

Investment grade corporate bonds

What we own and will own

g p

High yield bonds

Emerging market bonds

Index-linked bonds

Asset backed securities

Cash

Foreign Exchange

What we haven’t owned and won’t ownOrdinary Equity

Private Placement Debt

5

Convertible Bonds

2013 – Volatility and divergent returnsy g

Asset type Total return %

Drawdown %

US Corporates -3.2 -5.01%

3%

US Treasuries -3.3 -6.4

Emerging Market Debt -9.3 -11.3-3%

-1%

1%

urn

%

US TIPS -8.7 -10.7

Kames Strategic Global Bond 0.2 -3.9%

-7%

-5%

Tota

l ret

u

-11%

-9%

Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13

Kames Strategic Global Bond US TreasuriesEmerging Market Debt US TIPSUS C t

Source: Bloomberg, Kames Capital and BoA Merrill Lynch as at 31 July 2013

6

US Corporates

Kames Strategic Global Bond Fund performance

70

Cumulative 5 year medians

g p

40

50

60 58.3%

10

20

30

% g

row

th 28.9%

-10

0

10

-20

Aug

08

Oct

08

Dec

08

Feb

09A

pr 0

9Ju

n 09

Au g

09

Oct

09

Dec

09

Feb

10A

pr 1

0Ju

n 10

Au g

10

Oct

10

Dec

10

Feb

11A

pr 1

1Ju

n 11

Aug

11

Oct

11

Dec

11

Feb

12A

pr 1

2Ju

n 12

Aug

12

Oct

12

Dec

12

Feb

13A

pr 1

3Ju

n 13

Aug

13

7

Kames Strategic Global Bond B Inc USD Lipper Global - Bond Global median

Source: Lipper as at 30 August 2013. NAV to NAV, income re-invested. Total return, local currency, B Inc USD class. Launch date 8 November 2007. Past performance is not a guide to the future.

Strong risk adjusted performanceg j p

Key

Return Return volatility Sharpe ratio

15 14 2 0Kames FundMedian Fund

3 ye

ars

12.4

5.25

10

15 13.3

6.568

101214

0 3

1.8

0.90.51.01.52.0

Sector range

Quartile range

3 2.4

-2.9-5

0 4.0

1.50246 0.3

-0.6

-1.0-0.50.0

ears 14.7

10

15

20

15.615

20

1.5

1.0

1.5

2.0

5 ye

3.6

-0.2

7.9

-5

0

5

10

6.7

2.2

9.9

0

5

100.4

-0.3

0.8

-0 5

0.0

0.5

1.0

8

Source: Lipper Hindsight, Kames Capital as at 28 June 2013. Kames Strategic Global Bond Fund B (Inc) USD, returns, volatility and sharpe ratio are calculated on a monthly basis (annualised). Volatility is standard deviation.

5 0 0.5

Kames Strategic Global Bond Fund positioningg p g

Asset allocation Dec 2007 – Jul 2013100

Active asset allocation

Min (%) Max (%)

Cash -3.90 17.60

60708090

sets

Government 0.00 48.00

Index-Linked 0.00 1.91

Investment Grade 35.40 85.0030405060

% o

f ass

High Yield 4.20 32.50

US RMBS 0.00 5.5701020

07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13

Emerging Markets 0.00 3.39

Nov

0Fe

b 0

May

0A

ug 0

Nov

0Fe

b 0

May

0A

ug 0

Nov

0Fe

b 1

May

1A

ug 1

Nov

1Fe

b 1

May

1A

ug 1

Nov

1Fe

b 1

May

1A

ug 1

Nov

1Fe

b 1

May

1

Cash Govt Index Linked IG HY US RMBS Emerging Markets

Source: Kames Capital as at 31 July 2013.

9

Kames Strategic Global Bond Fund duration allocationg

8

Duration by currency bloc excluding high yield

4

6

mi a

nnua

l)

0

2

dur

atio

n (s

em

4

-2

0

Mod

ified

-4

Nov

07

Jan

08M

ar 0

8M

a y 0

8Ju

l 08

Se p

08

Nov

08

Jan

09M

ar 0

9M

a y 0

9Ju

l 09

Se p

09

Nov

09

Jan

10M

ar 1

0M

a y 1

0Ju

l 10

Se p

10

Nov

10

Jan

11M

ar 1

1M

a y 1

1Ju

l 11

Sep

11

Nov

11

Jan

12M

ar 1

2M

a y 1

2Ju

l 12

Sep

12

Nov

12

Jan

13M

ar 1

3M

a y 1

3Ju

l 13

AUD CAD EURO GBP NZD SEK CHF USD YEN Grand Total

Source: Kames Capital as at 31 July 2013

10

Asset class flexibility is keyy y

Asset class Current environment Strategy

Government • Monetary cycle turned in the US Remain underweight interest rateGovernment bonds • Rest of the world not immune

• A large part of the move already in the price

Remain underweight interest rate risk, but temper position

Investment • Valuations still attractive on a long term basis Core part of strategic bond funds. Investmentgrade

• Valuations still attractive on a long-term basis• Avoid re-leveraging event risk Capture spread and manage

duration risk

Hi h i ld• Total return prospects attractive

P f f US Hi h Yi ld E Hi h Sti k t hi h lit hi h i ldHigh yield • Preference for US High Yield over European High Yield

Stick to higher quality high yield

Emerging markets

• Sell-off brings some realism back to markets• Fund outflows mean it is too early to catch the falling Selected exposure to stock specific

corporates too earl to bmarkets y gknife corporates, too early to buy

RMBS• US housing market strong even with increasing

mortgage rates• Supportive technicals

Non Agency RMBS (Option ARM sub-segment ) offers value and diversification

11

• Supportive technicals diversification

Ignore technicals at your peril

• FOMC: “exceptionally low levels… at least through late 2014”

g y p

1600

Quantifying quantitative easing

• ECB: “we will do all that it takes (to save the Euro)”

SNB no o n more than 10% of1200

1400

• SNB: now own more than 10% of the entire stock of Bunds*

• BoE: QE program at £375billion and 800

1000

$ bi

llions

forward guidance

• BoJ: ¥140 trillion of planned asset purchases over two year period

400

600

purchases over two year period

0

200

Fed BoE ECB SNB BoJ

Source: Central Bank websites as at 31 March 2013. *SNB assumes 50% of CHF 400bn+ balance sheet. Ignores ECB covered bonds €70bn, US MBS $1.5trn

12

Investment grade strategyg gy

800

900

600

700

read

(sa)

300

400

500

ench

mar

k sp

r

0

100

200

Be

0

Jan

07

Apr

07

Jul 0

7

Oct

07

Jan

08

Apr

08

Jul 0

8

Oct

08

Jan

09

Apr

09

Jul 0

9

Oct

09

Jan

10

Apr

10

Jul 1

0

Oct

10

Jan

11

Apr

11

Jul 1

1

Oct

11

Jan

12

Apr

12

Jul 1

2

Oct

12

Jan

13

Apr

13

Jul 1

3

N G A t d BBB t d Fi i l

Source: Barclays as at 31 July 2013

Non-Gov A rated BBB rated Financials

13

High yield: cheap relative to any realistic default scenariog y p y

44.8%41 1%

50%

e

Implied default rates vs actual experiences2,00020%

High yield spreads and default rates

30.1% 29.5%

39.3%

23.0%

41.1%

25.0%30%

40%

ativ

e de

faul

t rat

e

1,50015%

bps

rate

%

14.2% 15.2%

5.8%1.9%

10.1%10%

20%

5 ye

ar c

umul

a

500

1,000

5%

10%

Spr

ead

Def

ault

r

0%

BB

B

BB B

Credit Rating

00%

Jan

85S

ep 8

6M

ay 8

8Ja

n 90

Sep

91

May

93

Jan

95S

ep 9

6M

ay 9

8Ja

n 00

Sep

01

May

03

Jan

05S

ep 0

6M

ay 0

8Ja

n 10

Sep

11

May

13

Implied 5yr cumulative default rate, 40% recovery rate EUR

Implied 5yr cumulative default rate, 40% recovery rate USD

Actual 5yr cumulative default rates (since 1970) worst

Actual 5yr cumulative default rates (since 1970) average

J S M J S M J S M J S M J S M J S M

Global Speculative DRAverage DRProjected Global Speculative DRHY SpreadsA S d

Source: Left hand chart - Moody’s Investors Service, Merrill Lynch and Kames Capital as at 31 July 2013. Right hand chart - Deutsche Bank, Kames Capital, data as at 30 June 2013, average recovery rates and default experiences since 1970

Average Spread

14

Emerging Markets – the perfect storm

• Growing list of problems:

– Over-owned asset class

g g p

2.0

1 5

0

100– Fed “Tapering”

– EM currency depreciation

– Slower Chinese GDP

1.5

1.0

0 5

100

200

300M Slower Chinese GDP

• Inevitable result:

0.5

0.0

-0.5

300

400

500

% A

U

bps

– Outflows and wider spreads...

– ….prompting more outflows?

0 5

-1.0

-1.5

500

600

700

-2.0 8002007 2008 2009 2010 2011 20132012

EMBI GI Spreads (rhs) 4wma flows to EXD funds (lhs)

Source: EPFR Global, Thomson Reuters Datastream, HSBC

15

EMBI GI Spreads (rhs) 4wma flows to EXD funds (lhs)

Non Agency RMBS – very attractive fixed income asset class

• US housing market is recovering

– Non Agency RMBS a great way of gaining exposure to this

g y y

– Specifically the sub-sector Option ARMs (Adjustable Rate Mortgages)

Desired attribute Benefit

High original mortgage balance c.$500k House still has some value, aids recovery

P f f j di i l t t i C lif iPreference for non-judicial states i.e. California over Florida Speeds up any repossession process

Selected original underwriters Relatively better quality of borrowers and assets

2006/07 vintages with fast amortisation Capital payback opportunity greatest

Super senior tranches only, with lots ranking below you Subordinated bonds absorb losses first

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Kames Strategic Global Bond Fund

• Strategic global bond portfolio

– Total return fixed income fund

g

– Managed fixed income solution; delegate your fixed income strategy

– €/$/£/¥/CHF/SGD – track your clients’ needs

1 year 2 years 3 years 4 years 5 years

Fund 3.37% 12.36% 16.23% 33.21% 58.29%

Median 0.01% 5.22% 7.11% 17.69% 28.88%

Quartile 1 1 1 1 1

Outperformance 3 36% 7 14% 9 12% 15 52% 29 41%

17

Source: Lipper as at 30 August 2013. NAV to NAV, income re-invested. Total return, local currency, B Inc USD class. Launch date 8 November 2007. Past performance is not a guide to the future.

Outperformance 3.36% 7.14% 9.12% 15.52% 29.41%

Kames Strategic Global Bond FundgLaunch date 8 November 2007

Fund manager David Roberts and Philip Milburn

Support manager Colin Finlayson

Investment policies Invests across fixed income universe, ranging from AAA government bonds through to high yield and emerging market corporate bonds in any currency.

P i f t t Second quartile over rolling 12 months and top quartile over a rolling 3 year periods in Primary performance target q g p q g y pthe Lipper global bond global sector.

Secondary performance target To outperform the Barclays Capital global aggregate index by +2% p.a. over rolling 3 year periods.

Investment grade corporate bonds 0 100%

Asset allocation ranges

Investment grade corporate bonds 0-100%

Government bonds 0-100%

High yield bonds 0-100%

Emerging market bonds 0-100%Emerging market bonds 0 100%

Unhedged currency 0-10%

Cash 0-20%

Base currency US DollarBase currency US Dollar

Hedged share classes Sterling, Euro, US Dollar, Yen, Swiss Franc, Singapore Dollar

18

Important informationThis document is not intended for retail distribution and is directed only at investment professionals. It should not be distributed to, or relied upon by, private investors.

p

All data in this presentation is sourced to Kames Capital unless otherwise stated.

The views expressed in this document represent our understanding of the current and historical positions of the market. They should not be interpreted as a recommendation or advice.

Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed.

This document is accurate at the time of writing but can be subject to change without notification Kames Capital Investment Company (Ireland)This document is accurate at the time of writing but can be subject to change without notification. Kames Capital Investment Company (Ireland) plc, is an umbrella type open-ended investment company with variable capital registered in the Republic of Ireland (Company Number 442106), registered office at 25-28 North Wall Quay, International Financial Services Centre, Dublin 1. Board of Directors: Andrew Bell (UK), Mike Kirby (Ireland) and Bronwyn Wright (Ireland). Kames Capital Investment Company (Ireland) plc is regulated by the Central Bank of Ireland. Kames Capital is an Aegon Asset Management company and includes Kames Capital plc (Company Number SC113505) and Kames Capital Management Limited (Company Number SC212159). Both are registered in Scotland and have their registered office at Kames House, 3Lochside Crescent, Edinburgh, EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Conduct Authority, (FCA reference no: 144267). Kames Capital plc is the Investment Manager and Marketing Agent for Kames Capital Investment Company (Ireland) plc. Kames Capital Management Limited is an appointed representative of Scottish Equitable plc (Company Number SC144517), an Aegon company,whose registered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (PRA/FCA reference no: 165548).g , g , g , ( )

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Important informationThe Kames Strategic Global Bond Fund is registered in the UK, Channel Islands, Ireland, Netherlands, Switzerland, Luxembourg,Germany, Malta and Austria. Not all available shareclasses are registered in every country. Refer to the full prospectus for details.

p

For Investors in Switzerland - On March 26th 2009, the Swiss Financial Market Supervisory Authority FINMA authorised the distribution to the public of the shares of Kames Capital Investment Company (Ireland) plc (the “Company”) in or from Switzerland in conformity with article 120 of the Federal Law on Collective Investments of Capital dated June 23rd 2006. The Company was authorised as a Foreign Collective Investment Scheme. The articles of the Company, the Extract Prospectus for Switzerland, the Key Investor Information (Swiss edition), the annual and semi annual Report for Switzerland of the Company can be obtained free of charge on our website www.kamescapital.com or from the Representative in Switzerland, BGG Banque Genevoise De Gestion, 15, Rue Toepffer, 1206 Geneva, Switzerland, (Tel : + 41 22 3479040; Fax: + 41 22 3479327).

For Investors in Luxembourg - Kames Capital Investment Company (Ireland) plc is a UCITS collective investment scheme registered in Luxembourg by the Commission de Surveillance du Secteur Financier. The Prospectus, Supplement and Key Investor Information of Kames Capital Investment Company (Ireland) plc are available from CACEIS Bank Luxembourg 5, allée Scheffer, L-2520 Luxembourg.

FPID: 2013/16489

20