Kames

Kames Absolute Return Bond Fund

December 2011Colin Finlayson – Investment Manager Fixed incomeColin Finlayson Investment Manager, Fixed incomeStephen Snowden – Investment Manager, Fixed Income

Key personnely p

• Our fixed income range of funds are all rated by OBSR:

Stephen SnowdenDavid Roberts Euan McNeil Iain BuckleMelanie MitchellPhilip Milburn Colin Finlayson

Ou ed co e a ge o u ds a e a ated by O S– Investment Grade Bond Fund – AA – Investment Grade Global Bond Fund – A – High Yield Bond Fund – AA

– Sterling Corporate Bond Fund – AA – Strategic Bond Fund – AA – Strategic Global Bond Fund – A

– High Yield Global Bond Fund – AA • Awards include:

– Investment Week Fund Manager of the Year Awards 2011, Sterling High Yield Bond category

– Ethical Corporate Bond Fund – A

– UK Lipper Fund Awards 2011, Best High Yield Bond Fund (GBP)– Kames High Yield Bond Fund, highly commended at the Portfolio Adviser Awards 2011– Citywire Team All Stars, Asset Group Winner (Bonds) 2007 and 2008

Citywire Team All Stars 2007 Sector Winner (UK Corporate Bonds)– Citywire Team All Stars 2007, Sector Winner (UK Corporate Bonds)

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Market outlook

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• Fund aims to generate capital returns whilst limiting downside volatility and preserving capital

– Performance target: 3 month GBP LIBOR + 2%-3% net of fees

No alpha derived from currency risk– No alpha derived from currency risk

– Offers investors low risk NOT no risk

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Three key components

Carry module

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Credit Rates d lmodule module

Kames Absolute

Return Bond

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Three key components – Carry module

• Minimum weighting of +20% within the overall fund• Diversified range of investment grade quality bonds

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• Bonds of maximum 2 years maturity only

• Examples of positions– RBS (Senior) 5.25% 15/05/2013 – yield = 5.3%¹– MM02 7.625% 25/01/2012 = 3.8%²– Gazprom 6.58% 31/10/2013 = 5.5%³

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¹Yield on purchase date of 30 September 2011. ²Yield on purchase date of 7 November 2011. ³Yield on purchase date of 30 September 2011.

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Three key components – Credit module

• Primary alpha focus on credit neutral relative value positions• Exposure limited to +/-50% within the overall fund

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• Examples of positions:– ANZ 6.54% 2012/49 – 8.0% Yield-to-call in June 2012¹– Sprint 8.375% 15/03/2012 = 8.2%²– Cable & Wireless 8.75% 06/08/2012 = 6.5%³

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¹Yield on purchase date of 30 September 2011. ²Yield on purchase date of 4 October 2011. ³Yield on purchase date of 1 November 2011.

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Three key components – Rates module

• Primary alpha focus is on duration neutral relative value positions• Duration range: -2.5 to +2.5 years – neutral position of 0 years duration

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• Examples of positions– Long UK Government 2041 Bonds Short 30yr US bond futures– Long New Zealand Government 2015 Bonds Short 3yr Australian bond futures– Long Canadian Government 2021 Bonds Short 10yr German bond futures

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For illustrative purposes only

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Know what fund you are not buying

• What Kames Absolute Return is…– Fund offering returns in line with risk budget

T ti iti t t l t f i t

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• And what it is not…– Offering unrealistic returns given the risk limits

G t i i t f i t– Targeting a positive total return for investors – Making use of six sources of alpha– Sticking to what we know and are good at

– Guaranteeing a given return for investors– Focusing on a single asset class– Taking currency risk to generate performance

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Absolute Return Bond Fund vs. Strategic Bond Fund

Absolute Return Bond Strategic Bond

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Performance Source Alpha + Beta Beta + Alpha

Management Focus Absolute returns Total returns

Return Measurement Actual return Peer group relative

Default Duration Zero Positive

Credit Risk Limited Unlimited

High Yield Limit Max 20% Up to 100%

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Why invest in Kames Absolute Return Bond?

• Award winning fixed income team• Proven fixed income investment process

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• Three module investment approach• A core investment, targeting cash plus returns

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Launch date 30 September 2011

Fund manager Stephen Snowden and Colin Finlayson

Fund structure Irish domiciled VCIC under UCITS III

Investment policies Invest in diversified portfolio of fixed interest investments

Performance target Performance target 3 month GBP LIBOR + 2%-3% net of fees

Expected volatility < 5% VaR – (99% 1 month VaR)

Asset allocation ranges

Government Investment Grade CreditHigh Yield Credit

-75%-95%-50%-95%-20%-20%g g

Emerging Market CreditCash

-20%-20%>5%

F nd Restrictions

Carry Module:Credit Module:

> 20%; Minimum BBB- & <2yrs maturity+/-50%; HY+EM = +/-20%Fund Restrictions Rates Module:

Cash:

;+/-75%; Duration range -2.5 to +2.5yrs > 5%

Base Currency UK Sterling

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Hedged share classes Sterling, Euro, USD

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Appendicespp

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Investment philosophy

• Our fixed income specialists are guided in their research and fund-management duties by a three-pronged philosophy

M k t i ffi i t W l it thi th h b t h d ti t

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– Markets are inefficient. We exploit this through robust research and active management– It is vital to identify, analyse and manage risk– Investment strategies should be transparent and easily communicated

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Strategy process – top down into bottom upgy p p p

Analysis, challenge and decision

Team focus Portfolio

Duration, yield curve and asset allocation Macro positioning

blen

d Top down strategy group

Credit rating and sector preferences Top down credit strategy

o M

ICR

O

Whole team

Issuer and issue selection Bottom up credit strategyMA

CR

O to

Credit specialists p gyM

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Kames Capital fixed income idea cyclep y

Quadrant analysis

SpecialistRecommendation

Specialist, followingpeer review

MonitorFund manager and specialist Duration

AssetAllocation

Ratings selection

Sector selection

CurvePERFORMANCE

DRIVERS

ChallengeImplementationFund manager

selectionselection

Stockselection

Team debateStrategic decision

Team leaders and specialist

Fund manager and specialist

and specialist

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Kames Capital quadrant analysis approachp q y pp

• Common research framework applied to:

I t t t d dit k tF d t l V l ti – Interest rate and credit markets– Credit sectors and companies

• Quadrant analysisFundamentals

Fundamentals Valuations

– Fundamentals– Valuations– Technicals– Sentiment

Sentiment TechnicalsSentiment

• Each scored from -2 to +2 to give overall score

• Template approach ensure p ppconsistency, ease of use and record keeping

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Use of derivatives – EPM and Risk Control

• Credit risk management – CDS indices used to manage credit beta

Si l CDS d t i di id l dit– Single name CDS used to manage individual credit exposures• Currency risk management

– Currency forwards used to manage exposure; 100% hedged is default positionHead of Portfolio Derivatives responsible for derivative usage oversight• Head of Portfolio Derivatives responsible for derivative usage oversight

– Derivative Operations responsible for day to day valuation and collateral management– Specific derivative trading authorisation required, within overall risk control framework

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Risk control framework – client protections

Philosophy• Identification, analysis and understanding of

Analytics• On desk resource to aid idea generation,

p

desk

risk is essential• Utilise multiple sources of alpha, none to dominate• Fund manager responsibility with independent

oversight

testing and sizing• UBS Delta quantitative risk analysis system• Independent Risk Management Team

monitors risks taken

On

d

• Review discipline • Daily VaR reporting

Controls Governance• Portfolio limits set in thinkFolio front office system• Trades require separate fund manager authorisation• Centralised independent dealing team• Independent Risk Control Team monitors positions

• Monthly meeting with CIO assessing performance and risks

• Regular off-desk fund reviews with peer challenge• Investment Management Portfolio Risk &

Of• Independent Risk Control Team monitors positions

takenInvestment Management Portfolio Risk & Control Committee

ff desk

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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. The information in this document is based on our understanding of the current and historical positions of the markets. The views expressed should not be interpreted as recommendations or advice. Past performance is not a

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guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed.While the investment objective of absolute return funds is to achieve a positive return in all market conditions, this is not guaranteed in any way.Kames Capital Investment Company (Ireland) plc, is an umbrella type open-ended investment company with variable capital registered in the Republic of Ireland (no: 442106), registered office at 25-28 North Wall Quay, International Financial ServicesCentre, Dublin 1. Board of Directors: Andrew Bell (UK), Brian McDermott (Ireland), Mike Kirby (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 (no: SC113505) and Kames Capital

( SC2121 9) S ff 3Management Ltd (no: SC212159). Both are registered in Scotland and have their registered office at 3 Lochside Avenue, Edinburgh Park, Edinburgh, EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Services Authority, (FSA reference no: 144267). Kames Capital plc is the Investment Manager and Marketing Agent for Kames Capital Investment Company (Ireland) plc. Kames Capital Management Ltd is an appointed representative of Scottish Equitable plc, an AEGON company, whose registered office is 1 Lochside Crescent Edinburgh Park Edinburgh EH12 9SE (FSA reference no: 165548)office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (FSA reference no: 165548).

AEGON Asset Management UK rebranded to Kames Capital on 1 September 2011.

FP ID: 2011/12811

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