Lombard Odier – Convertible bond expertiseLombard Odier Investment Managers (LOIM)December 2012                           ...
Contents       Introduction to convertible bonds       Convertible bonds’ interest in 2013       – Attraction of convertib...
Introduction to convertible bondsLombard Odier Investment Managers (LOIM)                                           Lombar...
The opportunity: a defensive and performing assetDefinition:       Convertibles are credit obligations with an embedded ca...
What factors affect their value?                                                                                          ...
Focus: balanced candidates with a high bond floor                                                    INCOME-STYLE CB      ...
Example : Shui on Land 4.5% 2015 CNY - Description Shui on Land is a Hong-Kong-based company engaged in the development, s...
Example : Shui on Land 4.5% 2015 CNY - ValuationPlease see important information at the end of the document.   Lombard Odi...
Basic terms: CONVERSION FEATURESConversion price: strike price of the option                                              ...
Basic terms: PARITYParity: the current value of the shares that would                                                     ...
Basic terms: PREMIUMConversion premium: the amount that the                         Exampleconvertible price exceeds parit...
Basic terms: DELTA / GAMMADelta: the sensitivity to changes in theunderlying equity price. Defined as change in           ...
Basic terms : INVESTMENT VALUE / BOND FLOORInvestment value / Bond floor is the current value of a vanilla fixed rate bond...
Basic terms : VOLATILITYImplied volatility is a valuation indicator for theoption as a measure of the underlying expected ...
How they look to investorsEquity Investors          Convertible                                                           ...
Convertible bonds’ interest in 2013Lombard Odier Investment Managers (LOIM)                                           Lomb...
Good to remember: CBs are an all-weather vehicleIn rising markets, convertible bonds participate well. In falling markets ...
One certainty: CBs are useful in a diversified portfolioConvertible bonds in a diversified portfolio have the double advan...
CB Universe: a worldwide and diversified market                                                                           ...
CB Valuation                                                                                    (31.10.2012)THE SUM-OF-THE...
CB Valuation by region                                                                                                    ...
CB Primary market                                                                                                         ...
Why should you invest in convertible bonds in the current market?Why invest in convertible bonds now ?  The asymmetrical p...
LO Funds – Our offering in convertible bonds                                               Lombard Odier Investment Manage...
Our Macro outlook - What to expect for the next 6 months?THE KNOWN KNOWNS                                               TH...
Our view : attractive opportunities within the convertible bonds asset class Investment grade CBs                         ...
Our CB expertise - A high conviction approach1                                                              2             ...
LO Funds – Convertible BondLombard Odier Investment Managers (LOIM)                                           Lombard Odie...
Key investment beliefsA high conviction approach and a focus on balanced convertible bonds lie at the heart of our investm...
Focus: balanced candidates with a high bond floor                                                    INCOME-STYLE CB      ...
Historical performance of the global fund (EUR)                                                                           ...
Fund outlook : How to position the fund for the likely scenario?                                             Expected mark...
What if we’re wrong?  Return to growth                                             Impact: A return to high levels of GDP ...
Performance & risk characteristics                                                                                        ...
Performance vs. Peer group – over 1, 2, 3 and 7 years                                                                     ...
Actively managed and balanced throughout                                                                                  ...
Portfolio details (sectors and regions)                                                                                   ...
Portfolio details (technical features)The portfolio is concentrated around the balanced area of the curve, reflecting a mo...
LO Funds – Convertible Bond AsiaLombard Odier Investment Managers (LOIM)                                           Lombard...
Key investment beliefsA high conviction approach and a focus on balanced convertible bonds lie at the heart of our investm...
The attraction of Asian convertible bondsWhy Asia?  Even in economic turmoil periods, emerging Asia economies have shown p...
Four reasons we like Asian convertible bonds                                                                              ...
Four reasons we like Asian convertible bonds (cont.)                                                                      ...
Four reasons we like Asian convertible bonds (cont.)4. A dynamic region                                                   ...
Historical** performance of the Asia fund (USD)                                                                           ...
Performance                                                                                                               ...
Portfolio details                                                                                                         ...
Portfolio details (countries)                                                                                             ...
Portfolio details (sectors)The portfolio is overweight consumer sectors in Asia Pacific.                                  ...
LO Funds III – Recovery Convertible BondLombard Odier Investment Managers (LOIM)                                          ...
Why High-Yield Convertible Bonds?High-yielding convertible bonds offer an opportunity to leverage the recovery in both cre...
Why Now?Long-only investors have neglected sub-investment grade instruments, at a time when arbitrage strategies struggle ...
Why the LOF III Recovery fund?As of 15.11.2012, the performance of the LOF III recovery fund since inception in July 2009 ...
A different type of fund                       1                                       2                               3  ...
Key investment beliefs1                                                              2                            3       ...
Performance                                                                                                               ...
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
2012 11 15   general cb presentation including cb school
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2012 11 15 general cb presentation including cb school

  1. 1. Lombard Odier – Convertible bond expertiseLombard Odier Investment Managers (LOIM)December 2012 © All rights reserved. Lombard Odier Investment Managers. December 2012.
  2. 2. Contents Introduction to convertible bonds Convertible bonds’ interest in 2013 – Attraction of convertible bonds – Convertible bond universe – Convertible bond valuation – Convertible bond primary market LO Funds – Our offering in convertible bonds – Macro outlook – LOF CB FUND : Seeking asymmetrical returns in a global portfolio – LOF CB ASIA FUND : Seeking Asian growth with limited volatility – LOF III RECOVERY CB FUND : Seeking high yield returns through CBs. Team and investment process Investment examples Appendices & GlossaryPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 2
  3. 3. Introduction to convertible bondsLombard Odier Investment Managers (LOIM) Lombard Odier Investment Managers. December 2012. 3
  4. 4. The opportunity: a defensive and performing assetDefinition: Convertibles are credit obligations with an embedded call option Convertible bonds are senior to common stock, on par with bondsCharacteristics: Capital preservation : downside protection from bond characteristics Performance : providing a compelling upside / downside asymmetry Convertible bonds offer investors attractive risk-adjusted returnsLONG TERM AIM: TO GENERATE HEALTHY RETURNS, WHILE LIMITING RISK-TAKINGPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012.
  5. 5. What factors affect their value? ISSUER’S EARLY REDEMPTION STRAIGHT BOND EQUITY OPTION OPTION• Stream of coupons • Investor’s option to convert • Investor’s option to convert• Principal at maturity •Upon conversion, bond is • Upon conversion, bond is cancelled cancelledTerms of the instrument Terms of the instrument Terms of the instrument• Maturity Date, Put Date • Conversion price • Conversion price• Coupon • Pricing Inputs• Redemption / Put Value • Volatility, Stock price • Dividend yield, interest ratesPricing Inputs Pricing Inputs• Risk-free rates • Volatility, Stock price• Credit spread • Dividend yield, interest rates Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012.
  6. 6. Focus: balanced candidates with a high bond floor INCOME-STYLE CB BALANCED CONVERTIBLE BONDS EQUITY-STYLE CB “BUSTED” "OUT OF THE MONEY“ “AT THE MONEY“ "IN THE MONEY“ DeltaCONVERTIBLE BOND PRICE Share/parity Convertible bond Bond floor Premium Conversion ratio 40 70 120 SHARE PRICE Source: Lombard Odier Investment Managers. Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 6
  7. 7. Example : Shui on Land 4.5% 2015 CNY - Description Shui on Land is a Hong-Kong-based company engaged in the development, sale, leasing, management and ownership of residential, office, retail, entertainment and cultural properties in China. Market cap: HKD 22bn (~ USD 2.8bn)Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012.
  8. 8. Example : Shui on Land 4.5% 2015 CNY - ValuationPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012.
  9. 9. Basic terms: CONVERSION FEATURESConversion price: strike price of the option ExampleConversion ratio: The fixed number of ordinary For this security, the conversion ratio is 25’590 :1shares that the investor receives if he chooses which means that one bond (with a CNY 100’000to convert his bond into stock, per “unit” par value) can be exchanged for 25’590 shares of the Shui on Land stock.The option to convert is one-time only : onceconverted, shares cannot be changed back to Conversion ratio =bonds 100’000 / 3.9077 = 25’590 shares Conversion ratio = nominal value / conversion pricePlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012.
  10. 10. Basic terms: PARITYParity: the current value of the shares that would Examplebe received upon immediate conversion • Shui on Land CB price: 102.75% • Shui on Land Stock price: HKD 3.67 • The CB has a conversion ratio of 25’590 (with a nominal of CNY 100’000). It means that one unit of Shui on Land CB gives investors the right to get 25’590 stocks of Shui on Land: Parity = 3.67 * 0.8029 * 25’590 / 100’000 = 75.4 % Parity = (with FX 0.8029 HKD/CNY or 1.2452 share price * no. of shares / nominal CNY/HKD)Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012.
  11. 11. Basic terms: PREMIUMConversion premium: the amount that the Exampleconvertible price exceeds parity Shui on Land convertible price: 102.75% Conversion parity: 75.4%A low conversion premium implies a high degreeof equity sensitivity, usually expressed inpercent Conversion premium = (102.813% - 75.4%) / 75.4%Premium is key for equity investors : it is a = 36%measure of how much they are paying for the CB price Convertible bondbond and its protection relative to the equity Share Conversion premium = Conversion premium (convertible price – conversion parity) Share price / conversion parity Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012.
  12. 12. Basic terms: DELTA / GAMMADelta: the sensitivity to changes in theunderlying equity price. Defined as change in Bond pricefair value for a one point move in the parityDelta is only constant for small changes in Delta=80%stock price Delta= 30%If the stock price keeps moving, the delta willchange Share priceAs the stock price rises, delta rises; as stockprice falls, delta falls. Delta Bond priceThe change in delta is known as gamma Share pricePlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012.
  13. 13. Basic terms : INVESTMENT VALUE / BOND FLOORInvestment value / Bond floor is the current value of a vanilla fixed rate bond:– Issued by the same issuer– Same maturity– Same couponInvestment value is determined by current interest rates and credit spread of the issuerInvestment value is equal to the present value of the coupons and final redemption of the bond, alsoexpressed in percentage termsPremium to investment value is the amount by which the convertible exceeds that value : low premiumto bond floor low equity sensitivityPremium to investment value tells an investor how much they are paying for the equity option if theysell or hedge the bond partPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012.
  14. 14. Basic terms : VOLATILITYImplied volatility is a valuation indicator for theoption as a measure of the underlying expected Examplevolatility (reflected from the market price) Shui on Land 2015Implied volatility is the volatility that would justify Implied volatility: 25%an option’s price. It is therefore used to measure 1y historical volatility on CB stock : 35%the richness or cheapness of an option vs theexpected level of volatility on the shares going Option is at a slight discountforward.Convertible users will typically draw assumedvolatility levels from historical stock volatilitylevels or implied volatility levels from singlestock optionsThis reflects the market’s expectations forvolatility looking forwardPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012.
  15. 15. How they look to investorsEquity Investors Convertible Put Option Income Swap Bond = Stock + [ to exchange stock for a straight bond ] + [ sacrificing stock dividends in return for bond coupon payments ] Equity investors : some will occasionally seek to use convertibles where they wish to have a defensive bias Outright Convertible Investors : still a dominant feature in our market, they watch for solid fundamentals, good upside/ downside dynamic and yield enhancementFixed-Income Investors Convertible Straight Call Option Bond = Bond + [ to exchange the straight bond for a fixed number of shares ] Fixed income investors : The choice of corporate credits in the convertible market is broad and therefore appealing to fixed-income investors, who either purchase the bond outright or purchase asset-swaps Distressed Debt Investors : The body of sub investment-grade issues fluctuates ( having been a key component a couple of years ago) but can attract specialists’ attention.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012.
  16. 16. Convertible bonds’ interest in 2013Lombard Odier Investment Managers (LOIM) Lombard Odier Investment Managers. December 2012. 16
  17. 17. Good to remember: CBs are an all-weather vehicleIn rising markets, convertible bonds participate well. In falling markets they offer downside protection. (31.10.2012)5-year rolling annualized volatility is 8% for convertible bonds, compared to 21% for equities.CONVERTIBLE BONDS IMPROVE A DIVERSIFIED PORTFOLIO IN THE MEDIUM-TO-LONG TERM 375 Aggregate bond portfolio Cash 325 Convertible bonds Equities 275 225 175 125 75 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 BULL MARKET BEAR MARKET BULL MARKET DISLOCATION & RECOVERYPerformance based on: Cash (1 month libor), Aggregate Bond portfolio (JP Morgan Global aggregate bond index USD), Equities (MSCI World USD), Convertibles (UBS global convertible index USD).Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 17
  18. 18. One certainty: CBs are useful in a diversified portfolioConvertible bonds in a diversified portfolio have the double advantage of increasing performance (30.09.2012)over the medium term and reducing volatility.HISTORICAL PERFORMANCE AND VOLATILITY (IN %) 3 YRS 5 YRS 10 YRS EQUITIES CBS EQUITIES CBS EQUITIES CBS Performance 16.4 19.2 -19.7 9.9 77.7 111.4 Volatility 17.8 9.6 22.8 11.2 18.1 9.0PORTFOLIO ILLUSTRATIONPORTFOLIO ALLOCATION (IN %) Equities 50 45 40 35 Bonds 50 45 40 35 CB s 0 10 20 30 3 yrs perf 15.8 16.2 16.5 16.9 INCREASING PERFORMANCE Volatility 11.3 11.1 11.0 10.8 5 yrs perf 8.6 8.8 8.9 9.0 Volatility 14.3 14.0 13.7 13.4 10 yrs perf 46.5 53.0 59.5 66.0 DECREASING VOLATILITY Volatility 12.0 11.7 11.4 11.1Source: Lombard Odier. Equities: MSCI World (USD); CBs: UBS Global Index (USD); Bonds: JP Morgan Global Aggregate Bond Index (USD) – 30/09/02 to 30/09/12.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 18
  19. 19. CB Universe: a worldwide and diversified market (31.10.2012)GLOBAL CONVERTIBLE BOND MARKET: USD 393 BNSource: Deutsche Bank. USA: USD 195 BN EUROPE: USD 104 BN JAPAN: USD 26 BN (49%) (26%) (7%) ASIA PACIFIC: USD 59 BN (15%) OTHERS: USD 10 BN (3%)CB UNIVERSE: CREDIT QUALITY BREAKDOWN CB UNIVERSE: CAPITALISATION BREAKDOWN 4% 30% 27% Investment grade Large Cap (MC > $5bn) 46% Speculative grade Mid Cap ($1bn < MC < $5bn) Not rated Small Cap (MC < $1bn) 69% 25%Source: BoA Merrill Lynch.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 19
  20. 20. CB Valuation (31.10.2012)THE SUM-OF-THE-PARTS ANALYSIS SHOWS THAT EUROPEAN AND US CONVERTIBLE BONDS APPEAR CLOSE TOFAIR-VALUE WHEREAS ASIAN CONVERTIBLE BONDS STILL APPEAR ATTRACTIVE.60% Asia Europe50% US40%30%20%10% 0% >10% Rich 5%-10% Rich 1%-5% Rich 1% Rich - 1% 1%-5% Cheap 5%-10% Cheap >10% Cheap CheapSource: BoA Merrill Lynch.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 20
  21. 21. CB Valuation by region (31.10.2012)42% of Asian CBs are cheap vs. 26% in Europe and 35% in US.ASIA Asia 31-12-2010 28-2-2011 31-12.2011 31-10-2012 60% 31-12-2010 40% 28-02-2011 Expensive 23.9% 32.8% 4.3% 15.9% 20% 31-10-2012 0% Fair value 36.7% 37.0% 18.1% 41.7% >10% Rich 5% -10% 1% -5% Rich 1% Rich - 1% -5% 5% -10% >10% Cheap Cheap 39.3% 30.2% 77.6% 42.4% Rich 1% Cheap Cheap CheapEUROPE Europe 31-12-2010 28-2-2011 31-12-2011 31-10-2012 60% 31-12-2010 28-02-2011 Expensive 34.8% 58.4% 7.6% 36.9% 40% 31-10-2012 20% Fair value 33.0% 26.1% 23.4% 37.0% 0% Cheap 32.3% 15.5% 69.0% 26.1% >10% Rich 5% -10% 1% -5% Rich 1% Rich - 1% -5% 5% -10% >10% Cheap Rich 1% Cheap Cheap Cheap US US 31-12-2010 28-2-2011 31-12-2011 31-10-2012 60% 31-12-2010 Expensive 36.0% 42.4% 34.1% 34.1% 40% 28-02-2011 31-10-2012 20% Fair value 36.0% 34.3% 30.2% 30.9% 0% >10% Rich 5% -10% 1% -5% Rich 1% Rich - 1% -5% 5% -10% >10% Cheap Cheap 28.0% 23.3% 35.6% 35.1% Rich 1% Cheap Cheap CheapSource: BoA Merrill Lynch.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 21
  22. 22. CB Primary market (31.10.2012)Of Note, some of the largest recent issues:Siemens ($3bn), Priceline ($1bn), Adidas ($655m), Teliasonera ($800m), Tibco Software ($600m), Subsea ($600m + $445m),Steinhoff ($523m), Severstal ($475m), Jarden ($500m), Unibail-Rodamco ($960m), British Land ($636m), Hong-Kong StockExchange ($500m), Jaiprakash ($150m) or TPK ($230m)ANNUAL CB ISSUANCE BY REGION SINCE 1998-2012 220 200 180 EXPECTED REDEMPTION 160 2012 2013 2014 2015 140 -10 US$BN 120 -30 100 -50 80 -70 60 -90 40 -110 20 -130 0 -150 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 US Europe Asia ex-Japan Japan OtherSource: UBS.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 22
  23. 23. Why should you invest in convertible bonds in the current market?Why invest in convertible bonds now ? The asymmetrical profile of CBs is particularly interesting in periods of limited visibility and high volatility The valuation of CBs, both in terms of remuneration of risk and of the pricing of the option, remains attractive Many CBs offer investors an asymmetrical return AND a positive yieldWhy Lombard Odier ? A continuous commitment to the CB asset class since 1987 An experienced team of professionals, 100% dedicated to convertible bonds A performance objective which reflects the natural asymmetry of the asset class A continuous search for the best return/risk profiles within the convertible bonds universe A high conviction approach, which has demonstrated its capacity to outperform over timePlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 23
  24. 24. LO Funds – Our offering in convertible bonds Lombard Odier Investment Managers. December 2012. 24
  25. 25. Our Macro outlook - What to expect for the next 6 months?THE KNOWN KNOWNS THE KNOWN UNKNOWNS THE LIKELY OUTCOMEWhat we all agree on What we’d all love to know Our core scenario for the next 6 months Corporate balance sheets are, on Can the ECB “save” the Euro? How Continued monetary easing by Fed, average, in excellent shape and cash deep will the European recession be? ECB, BoJ and probably from the Bank flow generation is strong Some US economic data (notably on of China also. … but Government spending is likely housing) is encouraging, but the Slow growth at best in developed to drop… economy is still very fragile and economies …and private consumption growth is flat vulnerable to external shocks. Will Uncertainty remains. Volatility in employment and consumption improve? equity and credit markets likely to be a Capex is still rising, but capacity utilisation is still too low for widespread Will global economic governance key factor in coming months. equipment spending. improve, to avoid periods of panic in the We continue to see attractive markets? investment opportunities in the Growth rates in the Asia-Pacific region will remain higher than in developed Can China avoid a hard landing? convertible bond space: economies Will rising tensions in the middle east – Both attractive positive yields and Attempts at competitive currency affect oil prices? cheaply priced options are devaluations will continue (currency What about the unknown unknowns? available wars) – Focusing on the most asymmetrical profiles in the asset class maximises risk-adjusted returnsPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 25
  26. 26. Our view : attractive opportunities within the convertible bonds asset class Investment grade CBs High-yield CBs Balanced CBs Solid bond floors Very high level of fixed-income yields, Increased convexity Lesser volatility even on short maturity instruments Embedded options are often under- Better remuneration of risk than in High volatility and reduced liquidity in valued normal market conditions some cases Many of these asymmetrical instruments also have positive yieldsPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 26
  27. 27. Our CB expertise - A high conviction approach1 2 3 LOF – Convertible Bond LOF – Convertible Bond Asia LO Funds III – Recovery Convertible Proven track record in both bull and Exposure to Asian stock markets Bond bear markets while limiting downside and volatility Exposure to high-yield CBs Focus on conviction ideas with Benefit from dynamic new CB Opportunity to leverage the recovery asymmetrical return profiles market, still attractively valued in both credit and equity markets Global exposure with bias towards Benefit through a team of investors Access to sub-investment grade good quality credit with regional expertise instruments, globally under-owned and likely to generate superior returnPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 27
  28. 28. LO Funds – Convertible BondLombard Odier Investment Managers (LOIM) Lombard Odier Investment Managers. December 2012. 28
  29. 29. Key investment beliefsA high conviction approach and a focus on balanced convertible bonds lie at the heart of our investment strategy.1 2 3 4 5 An objective which Focusing on the best Out-performance is Long term Currency movements reflects the reward/risk profiles possible when performance adjusted should not affect fund asymmetry of the of the asset class portfolio is structured to volatility is better performance: Portfolio asset class delivers means investing in around strong achieved with a strong is minimum 90% performance while balanced convertible convictions (in bias towards good currency hedged protecting capital bonds regions, sectors, style) quality names: during downtrends minimum B credit (Medium to long rating term objective: 60% of the upside, 40% of the downside)Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 29
  30. 30. Focus: balanced candidates with a high bond floor INCOME-STYLE CB BALANCED CONVERTIBLE BONDS EQUITY-STYLE CB “BUSTED” "OUT OF THE MONEY“ “AT THE MONEY“ "IN THE MONEY“ DeltaCONVERTIBLE BOND PRICE Share/parity Convertible bond Bond floor Premium Conversion ratio 40 70 120 SHARE PRICE Source: Lombard Odier Investment Managers. Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 30
  31. 31. Historical performance of the global fund (EUR) (15.11.2012)150 Performance contribution 2012 Benchmark * MSCI World (EUR-hedged) LOF Convertible bond fund I A EUR Sectors: (+) - Media sector (especially, overweight position in Time Warner, Aegis, WPP) - Consumer sector (overweight Steinhoff, PPR)125 - Pharma sector (overweight Gilead Sciences, Lincare, Illumina) - Property sector (good credit plays on high quality Asian names: New World Development, China overseas / Good stock picking in US: Health Care REIT)100 (-) - Financials (avoidance of PIGS related name like BES/Bradesco or Orix Corp in Japan) - Tech (underweight stance in general, and in high delta names like Verisign or Novellus) 75 Regions: (+) - overweight Asia Pacific (credit bets on hight quality & low delta Property names) (=) - Japan: neutral contribution from domestic names except from the avoided Orix Corp, a 50 Financial services company 12.04 07.05 01.06 07.06 01.07 08.07 02.08 08.08 02.09 08.09 03.10 09.10 03.11 09.11 03.12 10.12 Credit: (+) - Credit bets (especially on the High Yield segment)* UBS Global Convertible Composite index (EUR-hedged).Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 31
  32. 32. Fund outlook : How to position the fund for the likely scenario? Expected market conditions Positioning of LOF CB funds Overall economy Sluggish global growth, with low inflation in the Focus on asymmetry. Preference for early- US and Japan cycle recovery and defensive sectors in Continued difficulties in Europe developed economies. Stronger growth in Asia, with rising inflation Substantial overweight of Asia-Pacific region. Aim for short/medium duration with more equity Continued currency wars sensitivity than current level Equity markets Periods of high volatility consistent with market Selective delta exposure. The overall delta to panic due to macro-economic uncertainty remain within “balanced range” (30%-45%) Debt monetisation from the ECB & Fed. High sensitivity on high conviction names Support for risky assets through increased Overweight companies with high CF visibility. liquidity Substantial underweight of financials and basic resources. Credit markets Little change in credit dynamics Favour medium term duration Spreads have tightened considerably already, Credit-picking essential. Focus on issuers with but global search for yield continues strong balance sheets In some cases, the remuneration of risk is Concentrate on positions where we have challening strong fundamental viewsPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 32
  33. 33. What if we’re wrong? Return to growth Impact: A return to high levels of GDP growth (> 3% YoY) in the US and Europe would boost equity markets (and particularly the financial and real-estate sectors), as well as high-yield credit Our response: We will increase the fund’s equity sensitivity and reposition the portfolio further towards more cyclical sectors, once we are convinced of the viability of a strong recovery (sustained rise in domestic spending and capex, capacity utilisation >80%, substantial increase in employment levels) Expected performance of LOF CB funds: Substantially more than bonds. The fund should reflect a substantial amount of the equity rally with a fraction of the volatility Double dip Impact: Market panic over sovereign debt levels, geo-political instability leading to an energy crisis, or deteriorating macro data in the US and Europe will likely lead to a sharp correction in equity valuations and a widening of credit spreads Our response: In a deteriorating economic environment, the LOF Portfolio would be positioned to maximise capital protection (raise bond floor, focus on yield plays) Expected performance of LOF CB funds: Substantially more than equities. The fund should protect investors from a drop in equities (40% maximum participation)Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 33
  34. 34. Performance & risk characteristics (15.11.2012) BENCHMARK (UBS GLOBAL LO FUNDS – CONVERTIBLE CONVERTIBLE COMPOSITE MSCI WORLD PARTICIPATION IN THE BOND (I EUR) INDEX HDGD IN EUR) (HDGD IN EUR) PERFORMANCE OF EQUITIESPerformance*2012 YTD 6.7% 7.1% 5.3% 1.26 x2011 -3.7% -3.3% -7.8% 0.48 x2010 6.8% 7.8% 6.3% 1.08 x2009 18.8% 21.5% 22.1% 0.85 x2008 -18.7% -25.5% -40.7% 0.46 x2007 8.5% 6.1% 2.3% 3.64 x2006 7.9% 12.0% 12.2% 0.64 x2005 13.3% 4.0% 12.9% 1.03 xSince launch (09.12.2002) 47.9% - 22.9%Volatility (ex pos / ann)** 4.8% 8.2% 21.4%Duration 4.0 4.2Avg maturity / distance to best 4.8yrs / 4.3yrs 5.0yrs / 4.9yrsYield-to-maturity / best -2.0% / -2.0% -3.1% / -3.1%Current yield 1.66% 1.67%Modified yield *** 0.62% -0.04%Premium 32% 30%Bond floor 89% 89%Delta 40% 39%Gamma 0.7 0.9Rho 1.7 1.9* net of fee.** 5 years annualised, based on daily performances.*** Modified yield is the delta-adjusted average yield (using YTM and current yield).Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 34
  35. 35. Performance vs. Peer group – over 1, 2, 3 and 7 years (31.10.2012) Sorted by volatility-adjusted-performance (Perf/Vol)Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 35
  36. 36. Actively managed and balanced throughout (31.10.2012) FUND BREAKDOWN BY REGION (%) BENCHMARK BREAKDOWN BY REGION (%) WEIGHT SENSI YTB PREMIUM EXPECTATIONS WEIGHT SENSI YTB PREMIUMUS 28 57 -5.2 29 Neutral 40 37 -5.6 29Europe 30 34 -1.4 34 Neutral 31 26 -0.9 34Japan 8 55 -6.7 9 Underweight/Neutral 10 54 -6.6 14Asia Pacific 19 25 1.8 62 Overweight 13 23 0.0 39Africa 1 31 6.0 31 Neutral 2 35 3.4 38Others 2 13 1.7 23 Neutral 5 37 0.3 30Cash 11REGIONAL WEIGHTINGS & CASH (IN %) DELTA & BOND FLOOR SINCE 2005 (IN %) 50% US Europe 60% 110% Japan Asia Pacific Delta Bond Floor 40% Cash 50% 100% 40% 30% 30% 90% 20% 20% 80% 10% 10% 0% 0% 70% 01/08 05/08 10/08 03/09 08/09 12/09 05/10 10/10 03/11 07/11 12/11 05/12 10/12 01/05 01/06 01/07 12/07 12/08 11/09 11/10 10/11 10/12Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 36
  37. 37. Portfolio details (sectors and regions) (31.10.2012) FUND BENCHMARK SENSI-WEIGHTED WEIGHT SENSI WEIGHT SENSI POSITION 11.2%Basic Materials 3.0% 47% 8.7% 49% -2.8% 1.8% 28.1% 1.3%Communications 7.8% 62% 9.2% 35% 1.6%Consumer Non-cyclical 8.6% 39% 7.3% 27% 1.4% 19.1%Consumer Cyclical 9.4% 41% 9.4% 32% 0.8%Energy 6.0% 48% 8.6% 46% -1.0% 7.9% 30.5%Financial 3.9% 36% 6.6% 52% -2.0% Americas EuropeIndustrial 6.8% 52% 9.0% 32% 0.6% Japan Asia Pacific Africa OtherPharmaceutical 14.2% 57% 12.0% 40% 3.3% CashProperty 10.9% 33% 9.3% 29% 1.0%Technology 11.3% 42% 19.1% 48% -4.4%Utilities 2.0% 59% 0.8% 22% 1.0%Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 37
  38. 38. Portfolio details (technical features)The portfolio is concentrated around the balanced area of the curve, reflecting a more normalised (31.10.2012)CB market. The high-yield portion is focused on the better quality names. SENSI AVERAGE AVERAGETYPE WEIGHT RANGE SENSI PREMIUM YTMEquities 0.7%Derivatives 0.5%Equity-linked names 19.9% 60% < S < 100% 76% 5% -11.9%Balanced names 22.4% 35% < S < 60% 45% 19% -1.8%Bond-linked names 27.4% 15% < S < 35% 26% 43% 1.1%Credit names 15.1% S < 15% 6% 82% 3.0%Fixed income 2.7% 3.4%Cash 11.2% FINAL MATURITY BREAKDOWNAAA 0.7% <1 year 17.1%AA 1.2% 1-3 years 31.1%A 17.5% 3-4 years 11.4%BBB 48.6% 4-5 years 16.5%BB 15.5% 5-7 years 10.6%B 5.3%Cash (AAA) 11.2% 7-10 years 0.7%Average rating BBB- >10 years 12.5% Average maturity to best 4.3 yearsPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 38
  39. 39. LO Funds – Convertible Bond AsiaLombard Odier Investment Managers (LOIM) Lombard Odier Investment Managers. December 2012. 39
  40. 40. Key investment beliefsA high conviction approach and a focus on balanced convertible bonds lie at the heart of our investment strategy.1 2 3 4 5 An objective which Focusing on the best Out-performance is Long term No currency hedge reflects the reward/risk profiles possible when performance adjusted vs. USD as we bet on asymmetry of the of the asset class portfolio is structured to volatility is better local currencies’ asset class delivers means investing in around strong achieved with a strong appreciation in the performance while balanced convertible convictions (in bias towards good medium term protecting capital bonds regions, sectors, style) quality names: during downtrends minimum B credit ratingPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 40
  41. 41. The attraction of Asian convertible bondsWhy Asia? Even in economic turmoil periods, emerging Asia economies have shown positive economic growth Consumption in Asia will continue growing in the long term Economy growth will be supported by fiscal measures Inflation fears largely explain the poor recent equity performance in Asia … but the inflation trend now appears to have reversed Medium-term, the inflation/growth trade-off is still attractive, in our view A Chinese hard-landing scenario seems extreme, we rather bet on a soft-landing scenarioWhy Asian Convertible bonds? Cheap options An exposure with reduced risk to Asian stock markets Ideal solution in terms of return/risk ratio in volatile marketsPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 41
  42. 42. Four reasons we like Asian convertible bonds (31.10.2012)1. A dynamic and diversified marketAll sectors of the economy are represented, with a notably high proportion of real estateAll large economies of the region are represented, with Hong-Kong and China representing half of the universeASIA-PACIFIC BY COUNTRY ASIA-PACIFIC BY SECTOR Australia 0.6% 0.5% 6.4% 4.7% 2.0% 10.7% China Financial / Property Hong Kong 12.1% Consumer, Cyclical 13.2% India Energy 27.4% Indonesia 4.2% Technology Korea Communications 2.1% 5.3% 48.9% Malaysia Consumer, Non-cyclical 1.0% 0.9% 5.2% Philippines Basic Materials 5.6% 0.7% Singapore Industrial 7.9% Taiwan Utilities 24.3% 11.3% Diversified Thailand 5.0% VietnamSource: Deutsche Bank.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 42
  43. 43. Four reasons we like Asian convertible bonds (cont.) (31.10.2012)2. CBs with attractive technical features Perfect combination of quality companies, attractive yields, short duration, long dated and cheap options Generally investor-friendly characteristics (dividend protection, ratchet protection, short maturities)3. CBs with attractive valuations 60% Asia-Pacific Worldwide 50% 40% 30% 20% 10% 0% Greater than 10% rich 5% to 10% rich 1% to 5% rich 1% rich to 1% cheap 1% to 5% cheap 5% to 10% cheap Greater than 10% cheapPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 43
  44. 44. Four reasons we like Asian convertible bonds (cont.)4. A dynamic region GROSS FIXED INVESTMENT PUBLIC DEBT 2011 EST. GDP (% OF 2011 EST. GDP) (% OF 2011 EST. GDP)Indonesia 6.4% 32.0% 24.5%South Korea 3.9% 27.4% 22.9%Malaysia 5.2% 20.3% 57.9%Taiwan 5.2% 22.4% 34.9%Hong Kong 6.0% 21.7% 10.1%Autralia 1.8% 27.4% 30.3%US 1.5% 12.4% 69.4%European Union 1.6% 18.6% n.aJapan -0.5% 20.9% 208.2%Source: CIA World Fact Book, February 2012.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 44
  45. 45. Historical** performance of the Asia fund (USD) (15.11.2012) LOF II Convertible bond Asia I A USD MSCI Asia ex Japan (USD) Benchmark * This year, the fund165 succeeded in capturing 60% of Asian equities155 performance (8.9% vs. 13.7%)145 … despite a delta close to135 25% … with a fraction of its125 volatility (3.7% vs. 15.7%)115 … thanks to good credit105 bets in high quality Property & Utilities names 95 05.09 08.09 11.09 02.10 05.10 08.10 11.10 02.11 05.11 08.11 11.11 02.12 05.12 08.12 … and good equity plays in Property, Industrial and Utilities names* UBS Global Convertible Asia (USD unhedged)** Since inception of the institutional share class (May 2009)Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 45
  46. 46. Performance (15.11.2012)Performance and technical features. UBS LO FUNDS II - CB CONVERTIBLES ASIA MSCI LO FUNDS - CB LO FUNDS - CB ASIA (I USD) EX - JAPAN (USD) ASIA EX – JAPAN (USD) ASIA (P EUR) ASIA (P CHF)Performance*2012 YTD 8.9% 8.7% 13.7% 7.8% 7.3%2011 -8.5% -7.3% -17.3% -9.6% -10.7%2010 15.5% 15.6% 19.6% 14.8% 13.1%2009 23.2%** 38.6% 72.1% 22.6% 21.2%Duration 2.72 2.55 2.72 2.72Average maturity (best) 5.5 2.1 5.5 5.5Yield-to-best 1.5% 2.1% 1.5% 1.5%Average maturity 2.9 2.7 2.9 2.9Yield-to-maturity 1.2% 1.6% 1.2% 1.2%Current yield 2.0% 1.3% 2.0% 2.0%Modified yield**** 1.9% 2.1% 1.9% 1.9%Premium 46% 75% 46% 46%Bond floor 92% 97% 92% 92%Delta 29% 23% 29% 29%Gamma 0.7 0.7 0.7 0.7Volatility*** 5.8% 6.2% 21.8% 5.7% 5.7%Number of issues 63 63 63 63* Net of fees (110bp).** Class P USD.*** Annualised since inception, based on daily performances.**** Modified yield is the delta-adjusted average yield (using YTM and current yield).Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 46
  47. 47. Portfolio details (31.10.2012) AVERAGE AVERAGE TYPE WEIGHT IN PORTFOLIO SENSI RANGE SENSI PREMIUM YTMEquities 3.3%Equity-linked names 4.0% 60% < S < 100% 72% -1% -2.1%Balanced names 24.2% 35% < S < 60% 49% 9% -2.5%Bond-linked names 23.0% 15% < S < 35% 25% 35% 1.1%Credit names 33.6% S < 15% 3% 88% 4.7%Fixed Income 6.7% 4.3%Cash 5.2% FINAL MATURITY BREAKDOWNAAA 2.5% <1 year 9.9%AA 2.0% 1-3 years 53.7%A 17.7% 3-4 years 14.5%BBB 44.4% 4-5 years 17.8%BB 22.0% 5-7 years 2.7%B 6.2%Cash (AAA) 5.2% 7-10 years 0.5%Average rating BBB- >10 years 0.9% Average maturity to best 2.3 yearsPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 47
  48. 48. Portfolio details (countries) (31.10.2012) FUND 2% 7% WEIGHT SENSI YIELD 4%Hong Kong 31.03% 20.4% 1.2% 31% 7%China 16.28% 25.1% 0.4% 2%Singapore 16.00% 25.9% 1.4% 5%India 8.60% 14.0% 4.8% 9%Korea 1.62% 34.1% -4.3% 16%Malaysia 7.27% 62.5% -1.2% 16% Hong Kong SingaporePhilippines 4.26% 56.0% 0.0% China IndiaTaiwan 7.39% 21.2% 2.7% Cash Korea Malaysia PhilippinesAustralia 2.34% 7.2% 5.4% Taiwan AustraliaPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 48
  49. 49. Portfolio details (sectors)The portfolio is overweight consumer sectors in Asia Pacific. (31.10.2012) FUND BENCHMARK SENSI-WEIGHTED WEIGHT SENSI YTM WEIGHT SENSI YTM POSITION Basic Materials 2.9% 7% 4.3% 3.4% 4% 5.2% 0.1% Communications 8.2% 52% -1.7% 8.7% 34% -2.0% 1.3% Consumer Non-cyclical 6.9% 11% 3.4% 8.4% 14% 3.1% -0.4% Consumer Cyclical 8.8% 17% 3.3% 10.6% 6% 2.1% 0.8% Energy 3.2% 3% 4.0% 6.3% 3% 6.5% -0.1% Financial 2.8% 12% 1.8% 1.0% 23% -1.4% 0.1% Industrial 15.1% 34% -0.5% 11.4% 37% 0.0% 1.0% Pharmaceutical 0.0% 0% 0.0% 0.0% 0% 0.0% 0.0% Property 29.8% 22% 1.2% 29.7% 16% 1.5% 1.8% Technology 7.4% 21% 2.7% 15.4% 14% 1.7% -0.6% Utilities 9.8% 48% 0.6% 5.1% 37% 1.2% 2.7%Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 49
  50. 50. LO Funds III – Recovery Convertible BondLombard Odier Investment Managers (LOIM) Lombard Odier Investment Managers. December 2012. 50
  51. 51. Why High-Yield Convertible Bonds?High-yielding convertible bonds offer an opportunity to leverage the recovery in both credit and equity markets.They often combine positive return profile with superior risk/reward characteristics to other credit instruments.The extra yield can be captured without buying companies in difficulty While there is a wide range of credit quality in high yield, there are companies which offer the extra yield beyond investment grade, but have healthy enough credit quality that envisages repayment without difficulty.It is critical to differentiate within high yield We avoid issues whose sole sources of repayment are: – Refinancing : in the current environment, the lack of bank liquidity and tight capital markets limit the ability to refinance. – Asset sales : we are not in the liquidation business.It is possible to buy the higher quality within high yield Focus on companies which generate positive free cash flow with manageable maturity schedules and do not have too much leverage. We demand strength and stability of cash flow, and reliable company management with a viable strategy.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 51
  52. 52. Why Now?Long-only investors have neglected sub-investment grade instruments, at a time when arbitrage strategies struggle toraise funds…...leaving more value opportunities across capital structure and versus options.Some issuers are fallen angels These companies have made mistakes, but are on the path to notable financial improvement, usually through cutting capex, and changing strategy to focus on cash.Many CBs trade at wider spreads than their straight bond counterparts Fewer investors understand the convertible bond market, and a CB may not have an official credit rating. Many hedge funds are no longer able to raise money. As a result, there are attractive values for outright investors with the funds to deploy. Our objective is to determine if the convertible is pari passu (equal recovery) to a straight bond, and capture it at that greater yield, if available.Tight capital markets mean fewer companies are able to issue new bonds Existing bonds in secondary will continue to tighten as a result.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 52
  53. 53. Why the LOF III Recovery fund?As of 15.11.2012, the performance of the LOF III recovery fund since inception in July 2009 is 40.4%.A reputable manager Lombard Odier as a continuous commitment to convertible bonds since 1987. LOIM has a strong focus on risk management and transparencyA convertible bonds team with a proven track record A team of 9 dedicated professionals, 100% focused on the asset class. A total of 120 years investment experience. A continuous search for the best risk/reward profiles in the convertible bonds universe. A strong conviction approach to investing, which has showed its capacity to out-perform over the years.A growing expertise in High Yield Convertible bonds Recruitment in 2011 of a Senior Credit Analyst within the CB team, with extensive experience of HY Convertible bonds worldwide.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 53
  54. 54. A different type of fund 1 2 3 Investors in the fund must The risk profile of the The liquidity of the fund is have an investment horizon investments is very different weekly, compared to daily for of 3-5 years. from the Global or Asian our other funds funds.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 54
  55. 55. Key investment beliefs1 2 3 4 Successfully investing in high- A focus on fundamentals to The fund management team We are targeting an annual yielding convertible bonds avoid the landmines of the seeks to maximize returns return of 7%-10% at the time requires a very strong team of high-yield universe through an actively managed of launch with a 5 year professionals with a long and portfolio (focusing on yields horizon, and a substantial distinguished track record and capital appreciation to portion of the returns from benefit from macro trends) current cash yieldsPlease see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 55
  56. 56. Performance (31.10.2012)LOF III - RECOVERY CB FUND145 LOF III RECOVERY CB (I EUR) LOF III - Recovery CB fund Performance*135 2012 YTD 14.3% 2011 -4.4% 2010 13.3%125 2009** 13.2% Since launch** 40.2% Duration 3.9115 Average maturity (best) 3.84 Yield-to-best 5.9% Average maturity 4.56105 Yield-to-maturity 5.8% Current yield 5.0% Premium 77% 95 Bond floor 99% 06-2009 11-2009 03-2010 08-2010 12-2010 05-2011 09-2011 01-2012 06-2012 10-2012 Delta 14% Number of issues 39* Net of fees.** Inception date 08.07.2009.Please see important information at the end of the document. Lombard Odier Investment Managers. December 2012. 56

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