Hit northern retreat sep 12

SEPTEMBER 2012

HIGH YIELD BONDS & L&G HIGH INCOME TRUST

CITYWIRE NORTHERN RETREAT

Martin Reeves Head of High Yield

Brigid Jackson Product Specialist

SEPTEMBER 2012 BATH INCOME DINNER 2

The L&G High Income Trust

• Looks globally for the best opportunities

• Lower risk high yield fund – does not buy CCCs or financials

• Dedicated high yield team with 15 years average experience

Source: BoA/ML BB-B index by currency and domicile, as at 31 December 2011

GBP£15bn

51 issuers

EUR£85bn

129 issuers

North America£412bn

691 issuers

EM£118bn

265 issuers

Global high yield market cap


The importance of behavioural finance to our investment process

• Individuals overestimate their investment acumen Apply two minds to every problem

• Emotion can drive behaviour Always follow the process

• Markets overshoot ‘fair value’ Address through effective risk management


A three-step investment processLeverages LGIM’s top-down and bottom-up research

Translate our macro forecasts into

investable themes


investable themes

Establish the risk profile of the portfolio

– the ‘barbell’



Identify profitable opportunities

– security selection




Performance of the L&G High Income Trust

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

FundBenchmark

Fund 2.86% -25.30% 43.42% 16.15% -2.32% 9.60%

Benchmark 3.17% -23.26% 39.60% 12.10% 4.21% 8.70%

2007 2008 2009 2010 2011 YTD 2012

Source: LGIM. HIT benchmark is 95% Global High Yield BB- B Rated 2% Constrained Ex-Financial (GBP Hedged) 5% British Pound LIBID Overnight, lagged one day . HIT returns are shown for the ‘G’ share class and are gross of fees. Past performance is no guide to the future. YTD returns to 31 Jul 2012.

Difference -0.31% -2.04% +3.82% +4.05% -6.53% +0.90%


High Income Trust – summary

Permitted assets and instruments

• Typically holds sub-investment grade bonds, cash, OTC derivatives (I/R swaps, currency forwards, CDS) for efficient portfolio management. Convertibles, preference shares and hybrids also permitted.

• Maximum 10% cash, maximum 20% CCC*, maximum 70% single B, maximum 100% BB or better

• Overseas exposures permitted - hedged to GBP

Key Points

Fund size:

Fund Inception:

Benchmark:

Target:

Portfolio Manager:

£1.4 billion (Jun 2012)

November 2000

IMA Sterling High Yield peer group and composite of 95% Merrill Lynch Global High Yield BB-B Rated 2% Constrained Ex-Financial (local currency) Index and 5% Merrill Lynch GBP LIBID Overnight index

1% pa over benchmark over rolling 3 years (before fees)

Martin Reeves

* We do not buy CCC rated bonds but the 20% bucket can be utilised to protect the fund from being a forced seller if the holding is downgraded to CCC.


CCCs are the killer in high yieldBBs rarely default, Bs more so

Historic default rates (%)

0%

2%

4%

6%

8%

10%

12%

14%

16%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

e20

13e

BB B

Historic default rates (%)

0%

10%

20%

30%

40%

50%

60%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

e20

13e

CCC

AVERAGE 4.4%

AVERAGE 1.0%

AVERAGE 20%

Source: LGIM (forecasts) and Moody’s (historic default rates)


BBs have always overcompensated investors for default risk

310 310

449 465518

271210

253 228

520

973

446 424

0

200

400

600

800

1,000

1,200

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Cred

it sp

read

(bps

)

0%

2%

4%

6%

8%

10%

12%

Def

ault

rate

Liquidity premium

Spread to compensate for default

5yr forward default rate (RHS)

Source: Moody’s default rates 1999-2008, LGIM estimates 2009-11 and BOA/ML (spreads)


Bs have generally overcompensated investors for default risk

603638

1,453

707

334343331443

754719

871

525568

0

200

400

600

800

1,000

1,200

1,400

1,600

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Cred

it sp

read

(bps

)

0%

5%

10%

15%

20%

25%

30%

35%

40%

Def

ault

rate

Liquidity premium

Spread to compensate for default

5yr forward default rate (RHS)



But CCCs only sometimes compensate investors for default risk

9961,071

2,690

1,211

624790769

999

2,0132,248

2,429

1,5241,410

0

500

1,000

1,500

2,000

2,500

3,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Cred

it sp

read

(bps

)

0%

15%

30%

45%

60%

75%

90%

Def

ault

rate

Liquidity premiumSpread to compensate for default5yr forward default rate (RHS)



This has implication for performance relative to peer group

Performance of global high yield by credit quality

90

95

100

105

110

115

120

125

Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12

Inde

x =

100

@ 3

0 Se

p 11

CCC BB/B

• In a ‘risk on’ environment, HY funds with CCCs should outperform

Source: Bloomberg, ML/BOA indices.

HIT Percentile

Oct 11 95

Nov 11 5

Dec 11 95

Jan 12 95

Feb 12 87

Mar 12 50

Apr 12 4

May 12 18

Jun 12 38

Jul 12 90


A three-step investment processLeverages LGIM’s top-down and bottom-up research


investable themes


investable themes










JULY 2012 SCORECARD INPUTS UK Europe US

Macro fundamentals -1 -1 -1

Sovereign credit risk -1 -2 -1

Corporate strength (non-fins) 0 -1 0

Liquidity/sentiment (non fins) 0 0 0

Supply/demand (non-fins) +1 +1 +1

Overall -1 -3 0

1. How much risk do we take?Leverage the insights of LGIM’s team of economists and asset class specialists

Source: LGIM, for illustrative purposes only

Translate macro forecasts into risk on/risk off view

Translate macro forecasts into risk on/risk off view

• Era of deleveraging and austerity to drag on global growth

- Recession in Europe (excl. Germany)

- US slowdown/fiscal cliff

- Higher nominal growth in EM

• Investors need yield

• Constrained market liquidity

STRATEGIC THEMES

‘Roadmap’

• Market volatility to persist

+

TACTICAL POSITIONING & RISK AWARENESS

‘Scorecard’


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

UK Germany Switz. France Spain China Poland Ukraine Russia S. Africa Brazil Mexico

Sep-11 Jun-12

Risk positioning has evolved Allocation by country/region

1. US exposure increasing

2. Peripheral Europe decreasing in favour of ‘core’

Source: LGIM. Shows allocation of L&G High Income Trust.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

US


STABLE CREDIT ENVIRONMENT

Low spreadnames

High spreadnames

STABLE CREDIT ENVIRONMENT

Low spreadnames

High spreadnames

'RISK ON' ENVIRONMENT

Low spreadnames

High spreadnames

'RISK ON' ENVIRONMENT

Low spreadnames

High spreadnames

'RISK OFF' CREDIT ENVIRONMENT

Low spreadnames

High spreadnames

'RISK OFF' CREDIT ENVIRONMENT

Low spreadnames

High spreadnames

2. Where do we take risk?Establishing the risk profile of the portfolio

• Risk positioning evolves over the economic cycle

- Increase overweight to lower risk sectors/names in a ‘risk off’ environment

- Increase overweight to higher beta/riskier sectors and names in stable and ‘risk on’ environments

OVERWEIGHT

UNDERWEIGHT

OVERWEIGHT

UNDERWEIGHT

OVERWEIGHT

UNDERWEIGHT

Establish the risk profile of the fund

– allocate to ‘risk buckets’

Establish the risk profile of the fund

– allocate to ‘risk buckets’


3. How do we select securities?The responsibilities of our credit analysts

Translating a fundamental view to a valuation perspective in an

objective manner

Identify profitable opportunities –

security selection

Identify profitable opportunities –

security selection

Fundamental analysis on specific bonds with range of outcomes

Default probability of specific bonds with range of outcomes

Industry view – Range of outcomes for company/issuer


3.1 Our process gives us an independent view of credit quality

Base UpsideDownside

0 bps

200 bps

400 bps

600 bps

800 bps

1,000 bps

1,200 bps

1,400 bps

1,600 bps

1,800 bps

2,000 bps

Move out of ‘expensive’ names to ‘cheap’ names

with upside potential


Our proprietary research shows higher quality holdings

0%

10%

20%

30%

40%

50%

60%

BBB BB B CCC % sr secured bonds

LGIM's view of credit qualityCurrent credit rating

Source: LGIM, Bloomberg and ML/BoA as at 11 June 2012

Our positions also have superior security

protection than the benchmark


Risk profile of emerging markets

• Our EM holdings are biased to issues from investment grade countries

• Minimal exposure to EM bonds with country ratings below BB compared to the index

• We take idiosyncratic (company-specific) risk – not sovereign risk

Exposures by country of risk credit rating

0%

2%

4%

6%

8%

10%

12%

14%

16%

AAA AA A BBB BB B CCC NR

% of Fund % of index


Market outlook

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

US BB US B Euro BB Euro B EM BB EM B

Spre

ad (b

ps)

Forecast spread range

Base case

Current spread

Source: LGIM, BOAML. Forecasts as at 30 August 2012


Summary

• A higher quality high yield fund

• Searching for opportunities around the globe

• Managed by an experienced team

SEPTEMBER 2012

HIGH YIELD BONDS & L&G HIGH INCOME TRUST

CITYWIRE NORTHERN RETREAT

150

811_

AF

I_C

C

APPENDICES


Biographies

Martin Reeves – Head of High Yield

Martin joined LGIM in September 2011 from AllianceBernstein, where he worked for thirteen years. At his previous employer he ran the global credit research team and was part of the group that set the credit strategy. He also at various times ran the European fixed income business and sat on the European board. Martin was also a founding director of the European High Yield Association and sits on the AFME buy-side issues committee. Martin gained a MA from Saint Catharine’s College Cambridge University, where he read economics. He also qualified as a chartered accountant with Ernst & Young.

Brigid Jackson – Product Specialist

Brigid joined LGIM as a Fixed Income and Multi-Asset Product Specialist in 2011 from Henderson Global Investors where she was Investment Director, Fixed Income focusing on high alpha credit strategies. Prior to this, Brigid spent 10 years at Barclays Global Investors/Blackrock as a Client Relationship Manager and latterly, a Fixed Income Strategist. She began her career with J.P. Morgan Investment Management in 1996. Brigid holds a BA in Economics from University of Otago, New Zealand.


LGIM’s active fixed income teamA combination of top down and bottom up insights

As at 31 August 2012

UK Investment Grade

R. Barnard-SmithColin Reedie

Ian Hutchinson

UK Investment Grade (Retail)

Michel CanoyBen Bugg

Pan-European Credit Research

Georg GrodzkiDavid Carton Dan Lustig

Sophia Johnston Neil NewberyGavin Kendrick Jeremy Tisdall

Robert Kendrick

Global Credit

Anton EserTony Fan

Julien HoudainJean Lee

Tomislav Pavlic

High Alpha Fixed Income

Richard HodgesBen Bugg

European Investment Grade

Patrick VogelMatthew Rees

Lan Wu

Credit Strategy

Ben BennettGabriela Budeanu

Head of Money Markets

Jennifer Gillespie

Head ofAsset

Allocation

David North

Head of Global Rates

Nicholas Griffiths

Head of Global High Yield

Martin Reeves

Head of Portfolio

Mgmt. Group

Kevin Chessum

Head of USFixed Income

John Bender

Fund Management

Tim BacikJeff Coil

Jeff KochDavid NirtautJoe Tomczak

Credit Research

A.Hooper-GreenhillFrederic JourdrenStanley MartinezMichael Rolnick

John Ryan

Fund management

Peter Schuld

FundManagement

Anuradha GoyalJohn Wherton

US CreditResearch

Brian BeargieJose Almonte

Garland BuchananDavid Knutson

InvestmentStrategy

James CarrickBrian CoultonTim Drayson Hetal Mehta

Asset allocation

Ben GillMichael Jouravlev

Thomas Nevill

Fund Management

Simon BellDan King

Fund Management

Rajib AlamJulia Burnell

Sophia HendersonKim Hill

Sarah Renshaw

Head of Fixed Income

Roger Bartley


8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0%

Standard deviation (ann.)

Retu

rn (a

nn.)

Our funds are managed against a conservative high yield indexHY indices – risk/returns over last 10 years

ML Global HY BB-B

ML Global HY

Our HY index

Global HY ex fins

Euro HY

US HY

HIT benchmark (inc 5% cash)

Euro HY BB-B

BarCap Global HY

US HY BB-B

Source: Bloomberg, ML/BOA, Barclays Capital. HIT benchmark is 95% Global High Yield BB- B Rated 2% Constrained Ex-Financial (GBP Hedged) 5% British Pound LIBID Overnight, lagged one day .


High yield has delivered attractive income …

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

4Q 2

001

1Q 2

002

2Q 2

002

3Q 2

002

4Q 2

002

1Q 2

003

2Q 2

003

3Q 2

003

4Q 2

003

1Q 2

004

2Q 2

004

3Q 2

004

4Q 2

004

1Q 2

005

2Q 2

005

3Q 2

005

4Q 2

005

1Q 2

006

2Q 2

006

3Q 2

006

4Q 2

006

1Q 2

007

2Q 2

007

3Q 2

007

4Q 2

007

1Q 2

008

2Q 2

008

3Q 2

008

4Q 2

008

1Q 2

009

2Q 2

009

3Q 2

009

4Q 2

009

1Q 2

010

2Q 2

010

3Q 2

010

4Q 2

010

1Q 2

011

2Q 2

011

3Q 2

011

4Q 2

011

1Q 2

012

Inco

me

dist

ribut

ed (%

of f

und

valu

e)

Income distribution - rolling 12 mo

Source: LGIM. Quarterly distributions from 30 Nov 2000 to 30 April 2012 for L&G High Income Trust ‘R’ share class, net of fees.

← Average 5.83% p.a.


… and returns compare favourably to equities and government bonds

145

206

192

40

60

80

100

120

140

160

180

200

220

Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11

30 N

ov 2

000

= 10

0

UK equitiesUK government bondsHigh Income Trust (net of fees)

Source: LGIM, Bloomberg, Thomson. Monthly returns from 30 Nov 2000 to 31 Jul 2012 for BOA/ML UK Gilts Index, FTSE All Share Index (with dividends reinvested) and L&G High Income Trust ‘R’ share class, net of fees.


High yield is a good diversifierCorrelations of BB/B rated non-financial corporate bonds to other asset classes

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Investment grade corporates Government bonds Equities

Corr

elati

on

Last 5 yearsLast 10 yearsLast 15 years

Source: LGIM, Bloomberg. Analysis uses daily returns to 18 May 2012 for BOA/ML US Non-Financial Corporates A Rated Index, BOA/ML 5Y US Treasury Index and S&P500 Index versus US High Yield BB & B Rated Non Financials Index.


Top 10 countries

Source: LGIM to 31 July 2012. HIT benchmark is ML/BoA Global High Yield BB- B Rated 2% Constrained Ex-Financial (GBP Hedged) with 5% in Cash

HIT BENCHMARK

Nation Holding Nation Holding

US 44% US 60%

UK 8% Germany 4%

Germany 7% Canada 3% (<1% in fund)

Russia 3% UK 3%

South Africa 3% (<1% in index) France 3% (<1% in fund)

Brazil 3% Italy 2% (<1% in fund)

China 3% China 2%

Switzerland 2% (<1% in index) Venezuela 2% (<1% in fund)

Mexico 2% Brazil 2%

Poland 2% (<1% in index) Netherlands 1%


Top 10 industries

Source: LGIM to 31 July 2012

HIT BENCHMARK

Industry Holding Industry Holding

Telcos 13% Energy/E&P 12%

Energy/E&P 9% Telcos 11%

Cable/Sat TV 9% Utilities 8%

Food/Drink 6% Homebuilders/materials 8%

Transportation 6% Healthcare 7%

Gaming 5% Automotive/parts 5%

Healthcare 5% Services 5%

Automotive/parts 5% Cable/Sat TV 4%

Homebuilders/materials 5% Paper/Forest/Packaging 3%

Utilities 4% Heavy Industrials 3%


Evolution of industry holdings – HIT


Sep-11 Dec-11 Mar-12 Jun-12

Issuer Holding Issuer Holding Issuer Holding Issuer Holding

Transportation 9% Cable / Sat TV 10% Telecommunications 12% Telecommunications 13%

Cable / Sat TV 8% Food / Drink 10% Cable / Sat TV 9% Energy/E&P 9%

Food/Drink 8% Telecommunications 8% Energy / E&P 9% Cable/Sat TV 9%

Healthcare 7% Transportation 7% Food / Drink 7% Food/Drink 6%

Telecommunications 7% Healthcare 7% Transportation 7% Transportation 6%

Gaming 6% Utilities 6% Automotive / parts 6% Gaming 5%

Utilities 6% Energy/E&P 5% Gaming 5% Healthcare 5%

Homebuilders / materials

5% Gaming 5% Healthcare 5% Automotive/parts 5%

Automotive/parts 5%Homebuilders /

materials5%

Homebuilders / materials

5% Homebuilders/materials 5%

Mining 5% Automotive / parts 4% Utilities 5% Utilities 4%


Evolution of country holdings – HIT


Sep-11 Dec-11 Mar-12 Jun-12

Issuer Holding Issuer Holding Issuer Holding Issuer Holding

US 39% US 40% US 41% US 44%

UK 7% UK 8% UK 8% UK 8%

Germany 5% Germany 5% Germany 7% Germany 7%

Poland 4% Poland 5% Switzerland 4% Russia 3%

China 4% China 4% Brazil 4% South Africa 3%

Spain 4% Brazil 3% Poland 3% Brazil 3%

Brazil 3% Russia 3% South Africa 3% China 3%

South Africa 2% South Africa 3% China 3% Switzerland 3%

France 2% France 2% Russia 3% Mexico 2%

Ukraine 2% Ukraine 2% Mexico 3% Poland 2%


Ratings breakdown – HIT


RatingFund Fund Fund Fund Fund Index

Sep-11 Dec-11 Mar-12 Jun-12 Jul-12 Jul-12

Cash 12% 11% 5% 10% 6% 5%

>BB 0% 5% 8% 8% 7% 0%

BB 41% 37% 42% 39% 47% 51%

B 47% 46% 44% 40% 38% 44%

<B 0% 0% 1% 3% 1% 0%

NR 0% 0% 0% 0% 0% 0%

TOTAL 100% 100% 100% 100% 100% 100%


Top 10 issuers


HIT BENCHMARK

Issuer Holding Issuer Holding

Unitymedia Gmbh 2.72% Nextel Communications 1.80%

Host Hotels & Resorts Lp 2.02% Petroleos De Venezuela 1.67%

Aes Corporation 1.94% Hca Inc 1.62%

Intelsat Jackson Hldg 1.93% Lafarge Sa 1.25%

Ziggo Bond Co 1.84% Century Tel Entp 1.04%

Inversiones Alsacia Sa 1.76% Dish Dbs Corp 0.96%

Virgin Media Finance Plc 1.74% El Paso Corp 0.86%

Marina District Finance 1.67% Mgm Mirage 0.86%

Wyndham Worldwide 1.67% Fiat Finance Na 0.84%

Cb Richard Ellis Service 1.63% Cco Holdings Llc 0.79%


Portfolio characteristics

HIT BENCHMARK

Yield to worst 6.13% 6.17%

Option adjusted spread 547 546

Duration 3.7 3.5

Average bond price 104.7 104.1

Average maturity (years) 7.0 6.7

Number of issuers 117 1,031

Number of issues 154 2,086

% with security 37% 0%



Important Information

This presentation, and any information it contains, has been produced for use by financial advisers only and should not be distributed without the permission of Legal & General (Unit Trust Managers) Limited.

The Legal & General is an authorised unit trust, managed by Legal & General (Unit Trust Managers) Limited, authorised and regulated by the Financial Services Authority.

The risks associated with the funds are set out in the Prospectus and these should be understood before making any investment decisions for clients. Additional information in relation to the Risk Management process is available on request. A copy of the Prospectus can be obtained from Legal & General (Unit Trust Managers) Limited.

Past performance is not a guide to future performance. The value of investments and any income taken can fall as well as rise and is not guaranteed. Investors may get back less than they invest. Exchange rate changes may cause the value of any overseas investments to rise or fall. Lines are open Monday to Friday, 9am to 5pm. Call charges will vary. We may record and monitor calls.

The views expressed within this document are those of Legal & General Investment Management Limited (LGIM), who may or may not have acted upon them. LGIM are the Investment Advisers to the fund.

Issued by Legal & General (Unit Trust Managers) Limited. This document should not be taken as an invitation to deal in Legal & General investments or the stated investment.

.

Disclaimer

Business

Hit northern retreat sep 12