For Professional Investors and Advisers Only

Convertibles and the
Great Rotation
OCTOBER 2013
RWC
Convertible Bond – asymmetric return profile

Junk – distressed credits with high likelihood of a company default.
Bon...
RWC
Why invest in Convertible Bonds? – Ideal for Multi-Asset Portfolios

Annualised Return & Volatility of
Global Equities...
RWC
Performance Comparison
Global Convertible Bonds vs. Global Equities
280
260
240
220
200
180
160
140
120
100
80
60
40
2...
RWC
Performance Comparison
RWC Asia Convertibles vs. MSCI Asia Ex-Japan Equity Index
110
105
100
95
90
85
80
75
70
65
60
J...
RWC
Convertible Bonds – Correlation Analysis

Correlation with
Convertibles Bonds

Annualised Volatility

Global Convertib...
RWC
Convertible Bonds Through Monetary Cycles

Performance Through Monetary Cycles

Performance in Different Interest
Rate...
RWC
Convertible Bonds Through Business Cycles

Performance Through Business Cycles

Performance in Expansionary and
Recess...
RWC
Convertible Bond Volatility
Equity Volatility Developments

70

25

60

20

Performance in Different Volatility
Enviro...
RWC
RWC Global Convertibles Fund – Philosophy & Approach
Objective:

To provide long term capital appreciation through a w...
RWC
RWC Global Convertibles – Delta Breakdown
End of September 2013

Delta Contribution by Sector
Util.

Delta Exposure vs...
RWC
UBS Global Focus –Delta Breakdown
End of September 2013

Delta Exposure vs. Sector vs. Sector Weight

Delta Contributi...
RWC
Example: Equinix Convertible Bonds (Aug 2010 – Dec 2011 )
135

125

1. EQIX shares fall by 33% after the company's low...
For Professional Investors and Advisers Only

Global Convertibles Fund
OCTOBER 2013
RWC
Introduction to RWC

RWC is an active investment manager

Focus on longevity and stability

•

•

Independent and owne...
RWC
RWC Global Convertibles Fund – Philosophy & Approach
Objective:

To provide long term capital appreciation through a w...
RWC
Cheapness to Fair Value
Europe Cheapness to Fair Value

Japan Cheapness to Fair Value
10

4
2

5

0

0

-2
-4

-5

-6
...
RWC
RWC Global Convertibles – Investment Team
Davide Basile
• Former Lead Manager of Morgan Stanley Global
Convertible bon...
RWC
Investment Process – Disciplined, Proven Approach
Macroeconomic and Thematic Insights
•
•
•
•
•

Decide macroeconomic ...
RWC
Investment Process - Methodology
New Positions
• Create Company Model / Fundamental assessment / Valuation

• Balance ...
RWC
RWC Global Convertibles – Delta Breakdown
End of September 2013

Delta Contribution by Sector
Util.

Delta Exposure vs...
RWC
UBS Global Focus –Delta Breakdown
End of September 2013

Delta Exposure vs. Sector vs. Sector Weight

Delta Contributi...
RWC
RWC Global Convertible Bond Holdings – Delta Evolution
60
55
50
45

Delta (%)

40
35
30
25
20
15
10
Dec 01

Dec 02

De...
RWC
RWC Global Convertibles – Credit Breakdown
End of September 2013

Ranked Credit Rating Attribution

Credit Categories ...
RWC
RWC Global Convertibles – Interest Rate Sensitivity & Volatility Breakdown
End of September 2013

Interest Rate Sensit...
RWC
RWC Global Convertibles – Portfolio Characteristics
End of September 2013

Key Details

Credit Rating (formal rating)
...
RWC
RWC Global Convertibles – Top 10 Holdings
End of September 2013

By Weight
#
1
2

By Delta

Name

Weight

#

Name

Wei...
Global Convertibles Fund
APPENDICES
RWC
Repeat of 2008 Unlikely
Europe CB Market -

Chart 1: September 2008

2%

Changing balance between long-only and hedge ...
RWC
Why invest in Convertible Bonds? – Ideal for Multi-Asset Portfolios

Annualised Return & Volatility of
Global Equities...
RWC
Convertible Bonds – Correlation Analysis

Correlation with
Convertibles Bonds

Annualised Volatility

Global Convertib...
RWC
New Issuance Trends
Annual Convertible Issuance 2000-2013

Monthly Convertible Issuance 2012-13
12

220
200

10

180
1...
RWC
Performance of RWC Global Convertibles Fund
RWC Global Convertibles Fund - Cumulative Return
50%
40%

Cumulative Retur...
RWC
Portfolio Construction and Limits – Fund Structure

Portfolio construction and limits
•
•
•
•
•

Diversified by securi...
RWC
Breakdown of Global Convertible Bond Universe

•
•
•
•
•

• Significant proportion of issues not rated. Implied rating...
RWC
Convertible Bonds – A Snapshot of 2008 & 2009 / 2 Extraordinary Years

Sharp Reduction in Equity markets and subsequen...
RWC
Davide Basile - Head of RWC Global Convertibles Team

“The unique selling points of convertible bonds do hold true thr...
RWC
RWC Convertible Bond Funds
As at end September 2013

RWC Global Convertibles Fund

RWC Asia Convertibles Fund

RWC Cor...
RWC
Contact

Please contact us if you have any general questions
or would like to discuss any of our strategies.

RWC
60 P...
RWC
Risk Warnings & Disclaimers

This document contains information relating to RWC Partners Limited, RWC Focus Asset Mana...
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13.10 convertibles and the great rotation

  1. 1. For Professional Investors and Advisers Only Convertibles and the Great Rotation OCTOBER 2013
  2. 2. RWC Convertible Bond – asymmetric return profile Junk – distressed credits with high likelihood of a company default. Bond proxy – parity value significantly below bond floor and therefore insensitive to movements in the underlying equity. Delta range between 0% and 20%. Balanced convertibles – most attractive risk/return profile. Rate of change in sensitivity to equity price accelerates as equity rises and decelerates as equity falls. Delta range between 20% and 70%. Equity proxy – virtual equity with delta 70% - 100%. Importantly bond floor significantly below the convertible price and therefore provides little support as equity falls. RWC | 1
  3. 3. RWC Why invest in Convertible Bonds? – Ideal for Multi-Asset Portfolios Annualised Return & Volatility of Global Equities, Convertibles & Bonds (1996 – June 2013) Why buy convertibles: • Upside potential of equities and downside protection of bonds • Provides an asymmetric risk/return profile • Strong risk adjusted returns • Low duration asset class • Lower duration exposure within a fixed income portfolio • Low correlation with other fixed income instruments • Increases diversification within a multi-asset portfolio • Improves efficient frontier • Provides exposure to volatility through embedded call options • Long-only investors can benefit from volatility exposure • Equity exposure without taking all the downside risk if equities fall • Puts, resets and takeover ratchets (which can be particularly attractive in this market environment) 20% 0.45 18% 0.40 16% 0.35 14% 0.30 12% 0.25 10% 0.20 8% 0.15 6% 0.10 4% 0.05 2% 0% Convertible Bonds Annualised Return (LHS) Equities Annualised Std. Dev. (LHS) Government Bonds 0.00 Sharpe Ratio (RHS) Source: Bloomberg, UBS, RWC RWC | 2
  4. 4. RWC Performance Comparison Global Convertible Bonds vs. Global Equities 280 260 240 220 200 180 160 140 120 100 80 60 40 20 0 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 UBS Global Focus Convertible Index MSCI World Equity Index Source: UBS, Citi, RWC, September 2013 RWC | 3
  5. 5. RWC Performance Comparison RWC Asia Convertibles vs. MSCI Asia Ex-Japan Equity Index 110 105 100 95 90 85 80 75 70 65 60 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 MSCI Asia Ex-Japan Equity Index Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 RWC Asia Convertibles Source: UBS, Citi, RWC, September 2013 RWC | 4
  6. 6. RWC Convertible Bonds – Correlation Analysis Correlation with Convertibles Bonds Annualised Volatility Global Convertible Bonds 1.00 8.89 Global 7-10yr Corporate Bonds 0.13 5.52 Global 3-5yr Corporate Bonds 0.08 4.99 Global 7-10yr Sovereign Bonds -0.06 11.58 Global 3-5yr Sovereign Bonds -0.04 10.65 US Treasuries/Agencies 7-10yr -0.22 6.25 US Treasuries/Agencies 3-5yr -0.23 3.32 US 3month T-Bills -0.08 0.34 Asset Class Source: Bloomberg, MSCI, BoA-ML, RWC. Data as at end of 1996 to end of 2012. Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. RWC | 5
  7. 7. RWC Convertible Bonds Through Monetary Cycles Performance Through Monetary Cycles Performance in Different Interest Rate Environments 5 300 4.5 Equities Convertible Bonds Corporate Bonds -13.7% -2.4% 28.7% -51.2% -28.4% -4.7% 1.5 January 1997 - August 1999 57.2% 36.1% 13.6% 1 250 96.7% 46.5% 29.7% August 1999 - February 2001 2.7% 13.2% 4.2% August 2004 - September 2007 73.3% 34.3% 15.3% 4 3.5 FALLING INTEREST RATES 3 200 February 2001 - August 2004 2.5 September 2007 - March 2009 150 2 100 50 FLAT INTEREST RATES March 2009 - December 2012 0.5 RISING INTEREST RATES 0 1997 2000 2003 2006 2009 2012 UBS Global Focus Convertible Bond Index 0 MSCI World Total Return Equity Index BoA-ML 1-3yr Global Investment Grade Corporate Bond Index G3 Base Rates Sources: Chart: Bloomberg, MSCI, UBS, BoA-ML, RWC. December 2012. Table: Bloomberg, MSCI, UBS, BoA-ML, RWC. December 2012. RWC | 6
  8. 8. RWC Convertible Bonds Through Business Cycles Performance Through Business Cycles Performance in Expansionary and Recessionary Periods 300 Equities 250 Convertible Corporate Bonds Bonds EXPANSIONARY PERIOD 200 January 1997 - November 2000 15.7% 74.7% 37.8% 42.1% March 2009 - December 2012 80.0% 43.0% 26.9% November 2000 - August 2001 -19.6% -4.6% 5.0% August 2007 - March 2009 100 49.2% August 2001 - August 2007 150 65.8% -44.8% -24.4% -0.8% RECESSIONARY PERIOD 50 0 1997 2000 2003 2006 2009 2012 NBER Recession Dates UBS Global Focus Convertible Bond Index MSCI World Total Return Equity Index BoA-ML 1-3yr Global Investment Grade Corporate Bond Index Sources: Chart: Bloomberg, MSCI, UBS, BoA-ML, NBER, RWC. December 2012. Table: Bloomberg, MSCI, UBS, BoA-ML, RWC. December 2012. RWC | 7
  9. 9. RWC Convertible Bond Volatility Equity Volatility Developments 70 25 60 20 Performance in Different Volatility Environments 50 40 15 30 10 VIX Average Equities Convertible Bonds January 1997 - January 2004 24.0 45.1% 55.0% January 2004 - June 2005 14.7 12.2% 1.2% June 2005 - July 2007 12.7 50.1% 29.3% July 2007 - August 2008 23.0 -15.7% -10.4% August 2008 - December 2009 36.4 -9.5% 3.5% December 2009 - December 2012 21.4 24.1% 16.2% 20 5 10 0 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 VIX (3-Month Moving Average) (LHS) Annual Volatility of VIX (3-Month Moving Average) (RHS) 70 Equity Volatility and Convertible Bond Volatility 60 50 40 0 30 20 10 0 Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 VIX (3-month Moving Average) Annual Volatility of UBS Global Focus Convertible Bond Index (3month Moving Average) Source: Bloomberg, MSCI, UBS, CBOE, RWC. December 2012 Table: Bloomberg, MSCI, UBS, CBOE, RWC. December 2012 RWC | 8
  10. 10. RWC RWC Global Convertibles Fund – Philosophy & Approach Objective: To provide long term capital appreciation through a well balanced portfolio of global convertible bonds, focusing on stock selection and disciplined management to give the optimal profile throughout the market cycle. Delta / Equity Sensitivity (disciplined portfolio construction) • Balanced delta exposure of between 30 – 50%, focused on high convexity names (Gamma) • Provide upside equity exposure with bond floor protection Global portfolio - diversified by region and sector • Avoid regional delta and sectorial concentrations • New issue calendar Optimum approach is index unconstrained • Convertibles are issued opportunistically & fashionable sectors enjoy heavy issuance (TMT bubble, property in 2007) • Equity sensitivity usually highest at equity markets peaks, and vice versa / indices can be misrepresentative Focus on high credit quality and use of internal ratings where bonds are non-rated • Typically a minimum of 50% in formally rated investment grade securities • High emphasis on valuing non rated securities (typically 40% of the convertible universe) Volatility • Focus on cheap implied volatility within convertible bonds & low volatility of returns within fund • Volatility provides diversification within a multi-asset class portfolio Little or no use of “Synthetic” structures • Implied volatility compression / liquidity and transparency / potentially high concentration of credit risk to financial counterparties RWC | 9
  11. 11. RWC RWC Global Convertibles – Delta Breakdown End of September 2013 Delta Contribution by Sector Util. Delta Exposure vs. Sector vs. Sector Weight Energy 80% 4.1 Mat. 70% 3.2 Cons. Stap. Health Care 50% 6.7 1.4 10.0 Indust. 30% 6.1 Finan. 20% 7.1 Cons. Disc. 4.0 6.0 8.0 10.0 70% 13.0 30% North America 24.7 20% 10% 1.4 5.0 10.0 15.0 20.0 Weighted Av erage Delta 51.6% South America 64.8% North America 59.4% 5% 8.4% Japan 56.3% 25.0 30.0 Weighted Av erage Delta 51.6% 7.6% 2.7% 3.2% 1.8% 10 20 30 40 50 60 70 80 90 100 Delta Contribution Range 12 10.7 9.7 10 Europe 52.4% 13.1% 10.3% 10% 0% 40% 5.3 0.0 Cons. Stap. 39% Finan. 40% 50% Japan 12.5% Energy 46% 60% Europe 16.5% 15% 80% 0.7 South America Telec. Sv c. 49% Delta Exposure vs. Region vs. Region Weight 0.2 Africa 19.6% 20% Util. 59% 0% SUM = 51.6 6.4 Australia Indust. 57% Mat. 59% 12.0 Delta Contribution by Region Asia IT 60% 10% 9.6 2.0 Cons. Disc. 59% 40% IT 0.0 Health Care 70% 60% 1.9 Telec. Svc. 25% 90% SUM = 51.6 1.5 Delta Distribution Range 8.2 7.4 8 Australia 44.8% 6.4 6 Af rica 45.5% 4 Asia 40.2% 2 - 2.7 3.0 3.0 0.1 10 0.4 20 30 40 50 60 70 80 90 100 0% Source: RWC / Nomura RWC | 10
  12. 12. RWC UBS Global Focus –Delta Breakdown End of September 2013 Delta Exposure vs. Sector vs. Sector Weight Delta Contribution by Sector Util. 80% SUM = 49.2 2.0 Energy 70% 3.9 Mat. 3.0 Cons. Stap. 60% 1.5 50% Health Care 5.8 Telec. Svc. IT 10.9 Indust. 7.3 Cons. Disc. 2.0 4.0 6.0 8.0 10.0 6.1 Africa 0.7 2.9 30% North America 19.0 South America 5.0 20% 10% 2.4 0.0 10.0 15.0 5.7% 3.6% 4% 2% 10 20 20.0 Weighted Av erage Delta 49.2% 30 40 50 60 70 80 90 100 Delta Contribution Range 10 9.4 8.7 9 8 Europe 49.8% 40% 11.1% 9.8% 6% South America North 68% America 57% Japan 55.1% 10.7% 10.4% 9.1% 8% 0% 50% 18.0 Japan Energy 36% Weighted Av erage Delta 49.2% 60% Europe 10.3% Delta Exposure vs. Region vs. Region Weight 80% 70% Asia 12% 10% Cons. Stap. 42% Finan. 41% Util. 46% 12.0 SUM = 49.2 0.1 30% Mat. 42% Telec. Sv c. 39% 0% Delta Contribution by Region Australia Indust. 57% 13.4% 14% 10% 6.9 0.0 Cons. Disc. 51% 15.8% 16% Health Care 57% 20% 6.7 Finan. IT 63% 40% 1.3 Delta Distribution Range 18% 7.1 7 6.0 6 Af rica 43.6% Asia 31% 7.2 5 3.7 4 3 2 Australia 25.2% 3.5 2.3 0.4 1 - 0.9 10 20 30 40 50 60 70 80 90 100 0% Source: RWC / UBS RWC | 11
  13. 13. RWC Example: Equinix Convertible Bonds (Aug 2010 – Dec 2011 ) 135 125 1. EQIX shares fall by 33% after the company's lowered revenue guidance for Q3'10 and FY'10 by 2% and 1%, respectively. Our analysis led us to believe that the share price reaction was far overdone, and that our fundamental thesis remained intact. In response to the 33% decline in share price, the more conservative EQIX 2.5% convertible bonds lose only 8% of their value. The higher-delta 3% 2014 convertible bonds lose 16% of their value. 3. As the EQIX share price stages a recovery, the 3% 2014 convertible bond is able to participate to a greater degree than the 2.5% 2012 bond. Over this period, the stock delivers investors a total return of 33.3% with a vol of 31.3%. The 2012 2.5% convertible bonds a total return of 11.1% with a vol of 6.9%. The 2014 3.0% convertible bonds deliver a total return of 24.9% with a vol of 14.2%. 115 105 95 2. Due to the drop in the share price, the profiles of the two convertibles undergo a significant transformation. The 2.5% 2012 convertibles move from a delta of 33% with a gamma of 1.5 to a delta of only 12% with a gamma of 0.9. At this point, the 2.5% 2012 convertible bonds offer very little equity participation, but they do retain some convexity. Meanwhile, the 3% 2014 convertible bonds move from a 70% delta to a 37% delta, whilst gamma increases from 0.4 to 1.6. Given the dramatic change in the profiles of the two convertible bonds, as well as our fundamental view on the company, switching from the 2012 bonds to the 2014 bonds becomes a very attractive trade. It is in these situations that active management of a convertible bond fund becomes especially important. 85 75 Aug-10 Oct-10 Dec-10 Feb-11 EQIX 2.5% 2012 CBs Apr-11 Jun-11 EQIX 3% 2014 CBs Aug-11 Oct-11 Dec-11 EQIX Stock Source: Nomura, Bloomberg, RWC, 2012 RWC | 12
  14. 14. For Professional Investors and Advisers Only Global Convertibles Fund OCTOBER 2013
  15. 15. RWC Introduction to RWC RWC is an active investment manager Focus on longevity and stability • • Independent and owner managed since its foundation in 2000 and centered around skill-based, active fund management. • Experienced and trusted portfolio managers accomplish the best results when they are free from artificial restrictions. Our portfolio Employee ownership generates a level of stability and professionalism essential to the ongoing strength of a fund management business. • Strong focus on performance and a solid risk management culture managers take full accountability for investment decisions, having no house investment style. • lies at the heart of our business which is built around highly-talented portfolio managers. Our clients – we invest on behalf of both intermediaries and • An unconstrained approach to investing means that our portfolio institutions that look to us to grow the real value of their assets without managers can express their views without hindrance or artificial exposing them to undue risks. restrictions. We offer fund management expertise with a strong focus on liquidity. • Matching fund capacity with the investment approach ensures longterm success of our investment processes. RWC | 14
  16. 16. RWC RWC Global Convertibles Fund – Philosophy & Approach Objective: To provide long term capital appreciation through a well balanced portfolio of global convertible bonds, focusing on stock selection and disciplined management to give the optimal profile throughout the market cycle. Delta / Equity Sensitivity (disciplined portfolio construction) • Balanced delta exposure of between 30 – 50%, focused on high convexity names (Gamma) • Provide upside equity exposure with bond floor protection Global portfolio - diversified by region and sector • Avoid regional delta and sectorial concentrations • New issue calendar Optimum approach is index unconstrained • Convertibles are issued opportunistically & fashionable sectors enjoy heavy issuance (TMT bubble, property in 2007) • Equity sensitivity usually highest at equity markets peaks, and vice versa / indices can be misrepresentative Focus on high credit quality and use of internal ratings where bonds are non-rated • Credit quality of the overall portfolio is typically investment grade equivalent, no securities rated below B• High emphasis on valuing non rated securities (c. 50% of the convertible universe) Volatility • Focus on cheap implied volatility within convertible bonds & low volatility of returns within fund • Volatility provides diversification within a multi-asset class portfolio No use of “Synthetic” structures • Implied volatility compression / liquidity and transparency / potentially high concentration of credit risk to financial counterparties RWC | 15
  17. 17. RWC Cheapness to Fair Value Europe Cheapness to Fair Value Japan Cheapness to Fair Value 10 4 2 5 0 0 -2 -4 -5 -6 -8 -10 -10 -15 -12 -14 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 -20 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-10 Nov-11 Nov-12 US Cheapness to Fair Value Asia ex Japan Cheapness to Fair Value 5 5 0 0 -5 -5 -10 -10 -15 -15 -20 -20 -25 -25 -30 Nov-03 -30 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 -35 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Source: Nomura, March 2013 RWC | 16
  18. 18. RWC RWC Global Convertibles – Investment Team Davide Basile • Former Lead Manager of Morgan Stanley Global Convertible bond fund • Extensive long – only portfolio management expertise and track record Lakshman Harendran • Credit research & company modelling • Former Credit Analyst for Morgan Stanley Global Convertible Fund Michelle Shi Esther Watt, CFA • Quantitative expertise • Former member of equity fund management team focusing on Asian equities • Broad macro/fixed income experience • Previously Global Fixed Income Product Specialist at Fortis Investments RWC Infrastructure & Support Operations • Operational support • Corporate actions / cash management • Reconciliations • Portfolio Analytics support Trading Support • Leverages internal trading capabilities • System for automated convertible exchange being considered Client Reporting • Client support • Reporting literature & updating Other Inv. Teams • Bi-weekly analyst meetings • Informal and free flowing information exchange • Leveraging of internal expertise RWC | 17
  19. 19. RWC Investment Process – Disciplined, Proven Approach Macroeconomic and Thematic Insights • • • • • Decide macroeconomic landscape and top down risk levels Assess market liquidity Determine exposure levels • Delta / Omega / Rho / Vega Determine convertible trends New issuance Fundamental Analysis Equity • Screening model to filter universe • Emphasis on value and cash flow factors • Rigorous fundamental assessment • Global perspective – identification of anomalies & themes Credit • Research focused on ascertaining strength of bond floor • Trends in credit ratios seen as important as actual level of ratio • Equity market often provides lead indication of deterioration in credit fundamentals Risk Disaggregation • • • • Continual monitoring process to assess appropriate “Greek” adjusted exposures • Delta adjusted see – through analysis • Portfolio credit attribution and delta adjusted breakdown • Modified duration exposure portfolio analysis • Implied volatility curve monitoring Gamma focused portfolio adjustment Strong emphasis on Call and Put monitoring Liquidity Portfolio Construction • • • • • Portfolio built bottom-up, focused on absolute (not relative) returns Seek diversification across industry, country and sector (on delta basis) Maintain balanced delta profile Scrutinise portfolio for unintended risks Execution an integral part of process due to nature of market RWC | 18
  20. 20. RWC Investment Process - Methodology New Positions • Create Company Model / Fundamental assessment / Valuation • Balance sheet and Cash flow analysis • Fundamental in understanding effect on company based on developing market trends • Capacity New Issues • New issues tend to come to market in a rapid book build method • Focus is on cheapness of the deal based on: • Structure of bond (coupon / maturity / Puts & Calls) • credit assumptions to determine bond floor in conjunction with structure • Equity structure component (strike on call option / convertibility of bond / equity volatility • Implied volatility of new issues • What is the adequate weight for the new holding based on credit worthiness • Issue size in relation to portfolio size • Portfolio interaction • Vital to understand how new position interacts with overall portfolio • New delta adjusted sectoral, regional exposure and credit exposure • Constructive exclusion • Does new position come at expense of existing position within the fund • Basis for re-evaluating current portfolio holdings • Scenario analysis of variable terms • Once a convertible bond is determined as cheap additional factors considered: Existing Positions • Constantly update company model • As new information becomes available company models must be updated • Integrating new results releases and re-evaluating original rational for inclusion • Positive target levels • Each position within the fund has a target level the convertible team believes the equity/credit or convert can achieve • Once target levels are reached the position is re-evaluated for exclusion from portfolio or re-evaluation of target levels based on updated information • Negative target levels • Each position has a lower level which acts as a catalyst if position does not perform as expected • Upon breach of the lower level, understanding rational (credit worsening / liquidity driven selloff/company specific forecast misses / general market movement) may lead to selling position or resetting targets • Capacity • Based on performance of position and fund flows weightings must be constantly reconsidered • • • Issue size • Expected investor involvement (long-only / Hedge Fund) • Underwriter • Grey Market • Rarity value Once participation in a new issue has occurred we re evaluate the holding as a new position and determine whether to hold or consider the trade a short term holding Participating in the new issue market may often be a short term trade that can generate significant alpha given the tendency of new issues to be brought to market at a slight discount to fair value Portfolio • Overall portfolio managed as a single unit • Optimised for gamma exposure • Delta / Omega / Rho exposure viewed in aggregate RWC | 19
  21. 21. RWC RWC Global Convertibles – Delta Breakdown End of September 2013 Delta Contribution by Sector Util. Delta Exposure vs. Sector vs. Sector Weight Energy 80% 4.1 Mat. 70% 3.2 Cons. Stap. Health Care 50% 6.7 1.4 10.0 Indust. 30% 6.1 Finan. 20% 7.1 Cons. Disc. 4.0 6.0 8.0 10.0 70% 13.0 30% North America 24.7 20% 10% 1.4 5.0 10.0 15.0 20.0 Weighted Av erage Delta 51.6% South America 64.8% North America 59.4% 5% 8.4% Japan 56.3% 25.0 30.0 Weighted Av erage Delta 51.6% 7.6% 2.7% 3.2% 1.8% 10 20 30 40 50 60 70 80 90 100 Delta Contribution Range 12 10.7 9.7 10 Europe 52.4% 13.1% 10.3% 10% 0% 40% 5.3 0.0 Cons. Stap. 39% Finan. 40% 50% Japan 12.5% Energy 46% 60% Europe 16.5% 15% 80% 0.7 South America Telec. Sv c. 49% Delta Exposure vs. Region vs. Region Weight 0.2 Africa 19.6% 20% Util. 59% 0% SUM = 51.6 6.4 Australia Indust. 57% Mat. 59% 12.0 Delta Contribution by Region Asia IT 60% 10% 9.6 2.0 Cons. Disc. 59% 40% IT 0.0 Health Care 70% 60% 1.9 Telec. Svc. 25% 90% SUM = 51.6 1.5 Delta Distribution Range 8.2 7.4 8 Australia 44.8% 6.4 6 Af rica 45.5% 4 Asia 40.2% 2 - 2.7 3.0 3.0 0.1 10 0.4 20 30 40 50 60 70 80 90 100 0% Source: RWC / Nomura RWC | 20
  22. 22. RWC UBS Global Focus –Delta Breakdown End of September 2013 Delta Exposure vs. Sector vs. Sector Weight Delta Contribution by Sector Util. 80% SUM = 49.2 2.0 Energy 70% 3.9 Mat. 3.0 Cons. Stap. 60% 1.5 50% Health Care 5.8 Telec. Svc. IT 10.9 Indust. 7.3 Cons. Disc. 2.0 4.0 6.0 8.0 10.0 6.1 Africa 0.7 2.9 30% North America 19.0 South America 5.0 20% 10% 2.4 0.0 10.0 15.0 5.7% 3.6% 4% 2% 10 20 20.0 Weighted Av erage Delta 49.2% 30 40 50 60 70 80 90 100 Delta Contribution Range 10 9.4 8.7 9 8 Europe 49.8% 40% 11.1% 9.8% 6% South America North 68% America 57% Japan 55.1% 10.7% 10.4% 9.1% 8% 0% 50% 18.0 Japan Energy 36% Weighted Av erage Delta 49.2% 60% Europe 10.3% Delta Exposure vs. Region vs. Region Weight 80% 70% Asia 12% 10% Cons. Stap. 42% Finan. 41% Util. 46% 12.0 SUM = 49.2 0.1 30% Mat. 42% Telec. Sv c. 39% 0% Delta Contribution by Region Australia Indust. 57% 13.4% 14% 10% 6.9 0.0 Cons. Disc. 51% 15.8% 16% Health Care 57% 20% 6.7 Finan. IT 63% 40% 1.3 Delta Distribution Range 18% 7.1 7 6.0 6 Af rica 43.6% Asia 31% 7.2 5 3.7 4 3 2 Australia 25.2% 3.5 2.3 0.4 1 - 0.9 10 20 30 40 50 60 70 80 90 100 0% Source: RWC / UBS RWC | 21
  23. 23. RWC RWC Global Convertible Bond Holdings – Delta Evolution 60 55 50 45 Delta (%) 40 35 30 25 20 15 10 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 UBS Global Focus Index (EUR Hedged) Delta Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 RWC Global Convertibles Fund Delta Source: RWC/ UBS RWC | 22
  24. 24. RWC RWC Global Convertibles – Credit Breakdown End of September 2013 Ranked Credit Rating Attribution Credit Categories vs. Delta Exposure vs. Portfolio Weights A- 100 % 90% A BB- 70.1% B+ 66.4% BBB A- 53.3% BB 55.8% 40% Non Inv .Grade Delta Av erage 60.5% 10% 0% BBBB- B- 0.5 B BB- 4.7 13.2 BBB 10.7 BBB+ 0.00 0.20 0.40 0.60 11.0 4.1 5.5 2.9 AA1.6 0 7.6 BBB A 0.4 AAA BBB - A- 7.6 A B+ 3.5 BBB + 5.4 A- 5.1 BB+ BBB- BB 3.9 BB 8.1 BB+ 4.3 BB- 3.2 BB BBB 0.51 Av . Credit Rating Score 0.9 B+ 4.0 BB- 0.3 B 0.9 B+ BB+ -0.20 Credit Category Delta Contribution NR Distribution B- -0.40 AAA 31.9% 20% AA- B AA- 49.8% BBB- 51.2% BBB+ 50.8% 30% BBB+ A 41.9% - 50% B 50.5% Inv .Grade Delta Av erage 51% BBB 55.8% 70% BB+ 56.5% 60% B- 50.3% AAA 80% 2 1.6 AAA 4 6 8 10 12 14 0.9 0 2 4 6 8 10 12 Source: RWC/ UBS RWC | 23
  25. 25. RWC RWC Global Convertibles – Interest Rate Sensitivity & Volatility Breakdown End of September 2013 Interest Rate Sensitivity vs. Credit Rating vs. Portfolio Weight Interest Rate Contribution by Currency -0.5 B -0.89 BBB+ -1.1 BB -1.85 B+ -1.42 -1.5 - -2.0 BB+ -1.64 B- -1.94 JPY OTHE R -0.6 -0.8 -3.0 Non Inv .Grade Rho W. Av erage -1.58 GBP -0.4 AAA -1.08 A- -1.04 A -2.38 BBB -1.55 -2.5 US D -0.2 -1.0 BBB- -1.65 BB- -1.45 EUR 0 AA- -3.41 Inv .Grade Rho W. Av erage -1.6 -3.5 -1 -4.0 -1.2 Rho Exposure by Currency and Yield Curve Segment Vega vs. Difference between Implied and Historical Vol. 25 60% OTHE R 20 EUR JPY 15 US D 10 Historical - Implied Volatility GBP 20% -0.2 0% 0 0.2 0.4 0.6 0.8 -20% -40% 5 Cheap Option 40% Portf olio Vega of 42.6% -60% - 0 to 1 1 to 2 2 to 3 3 to 4 4 to 5 5 to 6 6 to 10 10 to 14 14 to 18 >18 Expensiv e Option Source: RWC/ UBS RWC | 24
  26. 26. RWC RWC Global Convertibles – Portfolio Characteristics End of September 2013 Key Details Credit Rating (formal rating) Number of Holdings 128 Delta Cash BBB Credit Rating NR 4.4 53.5 B 0.9 51.6% B+ 2.5 0.91 BB- 3.2 BB 3.8 Gamma Current Yield Yield to Put or Mat. 2.1% -5.4% Conversion Premium 19.0% Historical - Implied Vol. -4.0% Vega Omega 42.5% -1.6% - Rho - 1.52 BB+ 1.7 A- 2.7 A JPY KRW 0.7 CNY 0.4 HKD 2.2 GBP 4.0 EUR 20.2 USD 60.8 0 20 40 60 80 3.2 % 16.4 0 1.2 10 20 30 50 40 5 % 4.4 2.1 Africa 6.5 5.6 1.5 Japan 9.2 6.2 9.4 North America 14.9 19.6 41.6 Asia 8.0 10.4 15.9 Eur ope 7.0 3.2 2.8 24.7 Australia 15 20 20 Region Sou th America 0.5 1.7 10 15 % Cash 5 10 60 4.4 0 17.9 Cons. Disc. 0.0 8.6 16.7 10.7 Finan. 6.6 Cash BB B+ BBBB BB+ BBB BBB BBB + AA AAAAA 9.6 2.8 Indust. Credit Rating Implied 3.1 4.7 IT 12.2 2.6 0 9.0 5.5 Telec. Svc. BBB + AA- 2.5 Cons. Stap. BBB AAA Util. Ene rgy Health Ca re 1.6 BBB - 4.4 Mat. Base Currency SGD Sector Cash 25 % 0.4 0 10 20 30 40 50 % Source: RWC/ UBS RWC | 25
  27. 27. RWC RWC Global Convertibles – Top 10 Holdings End of September 2013 By Weight # 1 2 By Delta Name Weight # Name Weight Delta Daimler (Aabar) 4% 16 2.5% 1 Siemens 1.65% 19 (WW) 2.5% 2 Saw ai Pharmceutical 0% 15 0.3% 100.0% BioMarin Pharm 1.875% 17 0.4% 98.4% 3 Galp Energia (ENI SpA) 0.25% 15 2.4% 4 Linear Technology 3% 27 2.1% 3 Covanta Holding Corp 3.25% 14 0.4% 98.0% 4 Ford 4.25% 16 0.3% 5 Intel 3.25% 39 95.2% 2.0% 5 Cubist Pharm 2.5% 17 0.5% 6 94.6% Glencore 5% 14 1.9% 6 Asahi Brew ery 0% 28 0.5% 94.5% 7 Archer-Daniels 0.875% 14 1.7% 7 Lennar Corp (144A) 2% 20 0.4% 93.4% 8 China Unicom 0.75% 15 1.7% 8 Xilinx Inc 2.625% 17 0.4% 90.6% 9 Standard Chartered (Temasek) 0% 14 1.6% 9 Novellus Systems 2.625% 41 0.5% 89.8% 10 Ares Capital 5.75% 16 1.6% 10 Nokia Oyj 5% 17 0.4% 88.6% Weight Gamma By Yield to Put/Mat # Name 1 China Precious Metal Resources 7.25% 18 2 3 Drillsearch Energy 6% 18 4 5 By Gamma Weight Yield to Put/Mat # Name 0.1% 12.6% 1 FLEXium Interconnect Inc 0% 16 0.3% 9.17% PennyMac (PennyMac Mtg) (144A) 5.375% 20 0.3% 6.2% 2 Nippon Meat Packers #5 0.7% 2.85% 0.4% 4.5% 3 Boston Properties (144A) 3.625% 14 1.3% 2.51% Starw ood Property Trust 4.55% 18 0.8% 3.5% 4 Linear Technology 3% 27 2.1% 2.43% Steinhoff 6.375% 17 0.5% 3.3% 5 Sainsbury 4.25% 14 1.0% 2.35% 6 Redw ood Trust 4.625% 18 0.6% 3.1% 6 LifePoint Hospitals 3.5% 14 0.9% 1.81% 7 Comtech Tel 3% 29 0.4% 2.8% 7 CapitaMall Trust 2.125% 14 0.6% 1.79% 8 Hologic 2% 37 (2010) (B) 0.5% 2.7% 8 Pennon Group Plc 4.625% 14 0.5% 1.73% 9 Ares Capital 5.75% 16 1.6% 2.6% 9 BioMed Realty (144A) 3.75% 30 0.5% 1.70% 10 BioMed Realty (144A) 3.75% 30 0.5% 2.5% 10 PPR (Artemis) 3.25% 16 0.7% 1.66% Source: RWC/ UBS RWC | 26
  28. 28. Global Convertibles Fund APPENDICES
  29. 29. RWC Repeat of 2008 Unlikely Europe CB Market - Chart 1: September 2008 2% Changing balance between long-only and hedge fund investors 0% HF (%) -2% Long Only (%) -4% 2007 63 37 -6% 2008 64 36 -8% 2009 45 55 2010 46 54 2011 41 59 2012 41 59 -10% -12% -14% 03/09/2008 08/09/2008 18/09/2008 28/09/2008 13/09/2008 23/09/2008 MSCI World Total Return Index UBS Global Focus Convertibles Index S&P 500 Total Return Index 500 Total Return Index 50 Euro Stoxx Total Return Index 29/08/2008 Chart 2: End of July 2011 - August 19th 2011 US CB Market 0% Changing balance between long-only and hedge fund investors HF (%) Long Only (%) 2007 76 24 2008 76 24 2009 62 38 2010 55 45 2011 52 48 2012 51 49 -5% -10% -15% -20% 29/07/2011 03/08/2011 MSCI World Total Return Index 500 Total Return Index S&P 50 Total Return Index 08/08/2011 13/08/2011 18/08/2011 UBS Global Focus Convertibles Index Euro Stoxx Total Return Index Source: RWC, Bloomberg, Barclays Capital, Greenwich Survey. June 2013. Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. RWC | 28
  30. 30. RWC Why invest in Convertible Bonds? – Ideal for Multi-Asset Portfolios Annualised Return & Volatility of Global Equities, Convertibles & Bonds (1996 – June 2013) Why buy convertibles: • Upside potential of equities and downside protection of bonds • Provides an asymmetric risk/return profile • Strong risk adjusted returns • Low duration asset class • Lower duration exposure within a fixed income portfolio • Low correlation with other fixed income instruments • Increases diversification within a multi-asset portfolio • Improves efficient frontier • Provides exposure to volatility through embedded call options • Long-only investors can benefit from volatility exposure • Equity exposure without taking all the downside risk if equities fall • Puts, resets and takeover ratchets (which can be particularly attractive in this market environment) 20% 0.45 18% 0.40 16% 0.35 14% 0.30 12% 0.25 10% 0.20 8% 0.15 6% 0.10 4% 0.05 2% 0% Convertible Bonds Annualised Return (LHS) Equities Annualised Std. Dev. (LHS) Government Bonds 0.00 Sharpe Ratio (RHS) Source: Bloomberg, UBS, RWC RWC | 29
  31. 31. RWC Convertible Bonds – Correlation Analysis Correlation with Convertibles Bonds Annualised Volatility Global Convertible Bonds 1.00 8.89 Global Large-Cap Stocks 0.87 18.18 Global Mid-Cap Stocks 0.88 19.01 Global 7-10yr Corporate Bonds 0.13 5.52 Global 3-5yr Corporate Bonds 0.08 4.99 Global 7-10yr Sovereign Bonds -0.06 11.58 Global 3-5yr Sovereign Bonds -0.04 10.65 US Treasuries/Agencies 7-10yr -0.22 6.25 US Treasuries/Agencies 3-5yr -0.23 3.32 US 3month T-Bills -0.08 0.34 Asset Class Source: RWC, Bloomberg, UBS, MSCI, BoA-ML. Data as at end of 1996 to end of 2012. Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. RWC | 30
  32. 32. RWC New Issuance Trends Annual Convertible Issuance 2000-2013 Monthly Convertible Issuance 2012-13 12 220 200 10 180 160 US$bn US$bn 140 120 100 80 8 6 4 60 40 2 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (ann.) US Europe Asia ex-Japan Japan Other 0 Sep-12 Nov-12 US Jan-13 Mar-13 May-13 Jul-13 Asia Japan Other Europe • Issuance has recently been picking up on a global basis but is still subdued relative to past levels • Sep-13 Convertibles are an appealing financing vehicle and issuance increase as economy grows Source: UBS, 30 September 2013 RWC | 31
  33. 33. RWC Performance of RWC Global Convertibles Fund RWC Global Convertibles Fund - Cumulative Return 50% 40% Cumulative Return 30% 20% 10% 0% -10% -20% -30% Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 RWC Global Convertible Bond Fund UBS Global Focus Hedged (EUR) CB Index Source: Bloomberg & RWC as at 30 September 2013. Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. RWC | 32
  34. 34. RWC Portfolio Construction and Limits – Fund Structure Portfolio construction and limits • • • • • Diversified by security: 100-135 holdings Security concentration limits (initial limit 5%, absolute maximum 10%) Reference index: UBS Global Focus CB Index (hedged to base currency) Normally fully hedged to base currency (minimum 80% hedged) No tracking error limits. Focus on sharpe ratio rather than information ratio Fund structure • • • • Luxembourg SICAV – UCITS IV Daily priced, daily liquidity Retail and institutional share classes (€25,000 and €10m minimums respectively) Fees • • • • • • • A share class 1.5% annual management charge B share class 0.8% annual management charge Available in fully hedged share classes – USD / EUR / GBP / CHF USD / EUR / CHF / GBP Institutional Distribution / GBP share classes – registered for reporting status for 2010 Registered for sale: UK / Luxembourg / Switzerland / Italy / Germany / France (EUR share classes only) Investment Manager: RWC, London Custodian / Administrator: Banque Privee Edmond de Rothschild Luxembourg RWC | 33
  35. 35. RWC Breakdown of Global Convertible Bond Universe • • • • • • Significant proportion of issues not rated. Implied ratings on Total convertible market cap approximately $459bn Total number of issues: 1,924 Average issue size in the US and Europe larger than other regions Improved liquidity in the US and Europe Although US market mainly concentrated to certain sector issuance, opportunity still present given larger issue market • Asia and Japan offer attractive structures and usually more attractive valuations Market Capitalisation (US$bn) these bonds are a mixture of sub investment and investment grade bonds • Investment grade portion of the CB universe has shrunk (about 35%), mainly driven by new high yield issuance and financial downgrades • Index relative investment may lead to excessive high yield exposure, while similar yield may be achieved through investing in rated convertibles Credit Ratings Number of Issues Other 38 AAA 0.1% Other 288 US 206 AA 0.3% A 6.7% BBB 12.4% Japan 26 Japan 83 US 717 Asia Ex-Japan 74 BB 8.3% B 8.9% Europe 115 Asia ExJapan 501 Europe 335 CCC 2.5% Non Rated 60.7% CC 0.1% D 0.0% C 0.1% Source: UBS, September 2013 RWC | 34
  36. 36. RWC Convertible Bonds – A Snapshot of 2008 & 2009 / 2 Extraordinary Years Sharp Reduction in Equity markets and subsequent recovery • • Markets fell sharply in 2008, contributing to the decline in convertibles Markets subsequently recovered some of the loss in 2009, however long only convertibles recovered by a greater extent Credit significantly wider and subsequent recovery • • Credits widened significantly following the Lehman Bankruptcy in 2008 Dramatic improvement from the 1st quarter of 2009 Reduced leverage and higher funding costs • Reduced availability of leverage and increasing funding costs have negatively affected convertible arbitrage funds which rely heavily on leverage. Convertible bonds were sold as positions became too expensive to hold • Leverage returned but to a much lower degree in 2009, but convertibles recovered regardless mainly driven by long only convertible investors Short selling restrictions • The short selling ban adversely affected the valuations of CBs as convertible arbitrageurs became unable to delta-hedge their positions. Over 7,000 securities with a total market cap of almost $3trillion were subject to short sale bans. • This ban has now been reversed Redemptions • Heavy redemptions from the convertible asset class caused a spiral of forced selling in a weak market, further propagating the spiral by forcing prices lower • Conversely 2009 saw significant inflows into the convertible asset class mainly favouring the long-only strategies, allowing recovery in pricing Source: Bloomberg, Hedge Fund Research RWC | 35
  37. 37. RWC Davide Basile - Head of RWC Global Convertibles Team “The unique selling points of convertible bonds do hold true through a multitude of different cyclical market environments.” Davide Basile, Portfolio Manager Joined RWC in January 2010 Morgan Stanley Investment Management, 2005 – 2009 • Previously Head of Convertible Bonds and lead portfolio manager • Responsible for the management of convertible accounts and institutional convertibles • Responsible for convertible bond management of multi-asset class portfolios Morgan Stanley International & Co. 2003 – 2005 • Member of the Morgan Stanley Convertible fund management team • Responsible for portfolio and risk management on convertible bond funds Morgan Stanley International & Co. 2001 – 2003 • As part of the client strategy group involved in derivative structuring for portfolio protection Bachelor of Material Science Engineering, Imperial College, London RWC | 36
  38. 38. RWC RWC Convertible Bond Funds As at end September 2013 RWC Global Convertibles Fund RWC Asia Convertibles Fund RWC Core Plus Fund Lead Manager Davide Basile Davide Basile Co-managed by Michelle Shi Davide Basile Co-managed by Lakshman Harendran Approach To achieve high risk-adjusted returns from a diversified global portfolio of convertible securities. The Fund combines four main sources of return: topdown macro and thematic positioning, bottom-up equity security selection, careful credit analysis and the blending of the derivative features of convertibles. To achieve high risk-adjusted returns by investing in a portfolio of convertible bonds issued by Asian corporates. The Fund combines four main sources of return: top-down macro and thematic positioning, bottom-up equity security selection, careful credit analysis and the blending of the derivative features of convertibles. To generate strong returns with low volatility whilst minimising drawdowns by using the convexity and capital protection that are inherent in convertible bonds, whilst enhancing the profile of returns with complementary asset classes and derivative exposure. Reference Index UBS Global Focus CB Index (hedged to base currency) UBS Asian ex Japan Focus CB Index (hedged to base currency) Benchmark: 1 month LIBOR (currency specific) Launch Date 29 December 20061 8 June 2011 1 October 20132 AuM USD 1,761.9m USD 37.5m USD 6.7m Capacity The level of AUM which the Fund’s current trading strategy would begin to be constrained or restricted is a function of the investible universe of convertible bonds.3 The Fund has a capacity of $350m given its current liquidity profile. The capacity of the Fund could be amended due to the size of the investible universe and client liquidity requirements. The Fund has a relatively large capacity of at least $5bn given its global and multi-asset investment universe. Fund Structure Luxembourg SICAV – UCITS IV Daily priced, daily liquidity, 1pm CET dealing cut-off4 Retail and institutional share classes (base currency 25,000 and 10,000,000 minimums respectively) Investment Manager: RWC, London Custodian / Administrator: Banque Privee Edmond de Rothschild Luxembourg Share Classes Available in fully hedged share classes – USD / EUR / CHF / GBP / GBP Institutional Distribution Available in fully hedged share classes – USD / EUR / GBP Available in fully hedged share classes – USD / EUR / GBP / CHF Annual Management Fees A share class 1.5% B share class 0.8% A share class 1.8% B share class 0.9% A share class 1.35% B share class 0.7% Performance Fees The Fund does not levy a performance fee. 10%; quarterly; only applied to performance over an annualised rate of 8% with a high watermark. 10%; quarterly; only applied to performance over the relevant reference index with a high watermark. Fund managed by Davide Basile since January 2010. Previously “RWC Cautious Absolute Rate & Currency Fund” launched on 29th December 2006; re-launched and renamed “RWC Core Plus Fund” on 1st October 2013 and managed as stated above. The specific variables are the overall market capitalisation of the asset class and the weighted average delta level of the asset class (given that the Fund targets the 30%-50% delta range). Currently, the market cap of the asset class is about $420bn and the weighted average delta level is at 45%-50% and so we believe that $2.1bn is an appropriate level (or about 50bps of the total cap of the asset class), if the delta of the asset class where to deviate substantially from our desired investment range, then 25bps of the market cap would be more appropriate. 4 Please note that a 3 day redemption period applies for the RWC Asia Convertibles Fund. 1 2 3 RWC | 37
  39. 39. RWC Contact Please contact us if you have any general questions or would like to discuss any of our strategies. RWC 60 Petty France, London, SW1H 9EU Tel: +44 20 7227 6000 Fax: +44 20 7227 6003 Email: invest@rwcpartners.com Web: www.rwcpartners.com RWC | 38
  40. 40. RWC Risk Warnings & Disclaimers This document contains information relating to RWC Partners Limited, RWC Focus Asset Management Limited and RWC Asset Management LLP (collectively, “RWC”), each of which is authorised and regulated in the United Kingdom by the Financial Conduct Authority (“FCA”), and services provided by them and may also contain information relating to certain products managed or advised by RWC (“RWC Funds”). RWC may act as investment manager or adviser, or otherwise provide services, to more than one product pursuing a similar investment strategy or focus to the product detailed in this document. RWC seeks to minimise any conflicts of interest, and endeavours to act at all times in accordance with its legal and regulatory obligations as well as its own policies and codes of conduct. The services provided by RWC are available only for and this document is directed only at, persons that qualify as Professional Clients or Eligible Counterparties under rules of the FCA. It is not intended for distribution to and should not be relied on by any person who would qualify as a Retail Client. In addition, although certain sub-funds of RWC Funds SICAV are recognised schemes for the purposes of Section 264 of the Financial Services and Markets Act 2000 of the United Kingdom (“FSMA”), all other RWC Funds are unregulated collective investment schemes for the purposes the FSMA, the promotion of which either in or from the United Kingdom is restricted by law. Accordingly, this document is issued and approved by RWC Limited for communication by RWC Partners only to, and is directed only at, persons reasonably believed by it to be of a kind to whom it may communicate financial promotions relating to unregulated collective investment schemes by virtue of the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001, as amended (the “Order”), or the Conduct of Business Rules of the FCA. Such persons include: (i) persons outside the United Kingdom; (ii) persons having professional experience of participating in unregulated collective investment schemes; and (iii) high net worth bodies corporate, partnerships, unincorporated associations, trusts, etc. falling within Article 22 of the Order. Any unregulated collective investment schemes described herein are available only to such persons, and persons of any other description may not rely on the information in this document. Where this document is received outside the United Kingdom, it is the responsibility of every person reading this document to satisfy himself as to the full observance of the laws of any relevant country, including obtaining any government or other consent which may be required or observing any other formality which needs to be observed in that country. Nothing in this document constitutes an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. Interests in RWC Funds are available only in jurisdictions where their promotion and sale are permitted. No person receiving this document may further distribute it, or copies of it, to any other person or publish any of its contents, in whole or in part, for any purpose. This document is provided for informational purposes only. The information contained in it is subject to updating, completion, modification and amendment. RWC does not accept any liability (whether direct or indirect) arising from the reliance on or other use of the information contained in it. The information set out in this document is to the reasonable belief of RWC, reliable and accurate at the date hereof, but is subject to change without notice. In producing this document, RWC may have relied on information obtained from third parties and no representation or guarantee is made hereby with respect to the accuracy or completeness of such information. Performance figures and data analysis within this document are shown and calculated net of fees and expenses and represent the reinvestment of dividends and income. Market index information shown within this document is included to show relative market performance for the periods indicated and not as standards of comparison. Such broadly based indices are unmanaged and differ in numerous respects from the portfolio composition of RWC Funds. This document does not constitute offer or solicitation to anyone in any jurisdiction of or to acquire interests in any RWC Fund. Investment in any RWC Fund should be considered high risk. Past performance is not a reliable indicator of future results and may not be repeated. The value of investments in RWC Funds and the income from them may fall as well as rise and may be subject to sudden and substantial falls. Changes in rates of exchange may cause the value of such investments to fluctuate. An investor may not be able to get back the amount invested and the loss on realisation may be very high and could result in a substantial or complete loss of the investment. In addition, an investor who realises their investment in RWC Funds after a short period may not realise the amount originally invested as a result of charges made on the issue and/or redemption of such investment. The value of such interests for the purposes of purchases may differ from their value for the purpose of redemptions. No representations or warranties of any kind are intended or should be inferred with respect to the economic return from, or the tax consequences of, an investment in RWC Funds. Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns. There is no guarantee that the securities referred to in this document will be held by RWC Funds in the future. Nothing in this document constitutes advice on the merits of buying or selling a particular investment. This document does not constitute investment, legal or tax advice. This document expresses no views as to the suitability or appropriateness of the RWC Funds or any other investments described herein to the individual circumstances of any recipient. Potential investors in the RWC Funds should refer to the latest relevant Full Prospectus, KIID and latest Annual and Interim Reports for more information. A United Kingdom investor may not have the right (otherwise provided under the FCA Handbook of Rules and Guidance) to cancel any agreement constituted by acceptance by or on behalf of an RWC Fund of an application for interests in an RWC Fund. In addition, most if not all of the protections provided by the United Kingdom regulatory structure will not apply to investments in an RWC Fund. Investors in an RWC Fund will not receive compensation under the Financial Services Compensation Scheme in the United Kingdom in the event that the fund is unable or likely to be unable to satisfy claims against it. This document is issued by RWC Partners Limited, a company registered in England and Wales (No. 03517613) with its registered address at 60 Petty France, London SW1H 9EU. . RWC | 39

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