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  • 1. Kames Absolute Return Bond FundApril 2013Colin Finlayson – Investment Manager Fixed Income Manager,
  • 2. Introducing Kames Capital g p• Specialist investment management business Our investment capabilities• 267 employees, including 83 investment professionals in Edinburgh, London and the Fixed income Equities Netherlands• Funds nder F nds under management of €64 billion* Property Multi-asset Multi asset• Expertise in four principal areas: fixed income, equities, properties and multi-asset Our clients• Clients in the UK, Europe and Asia • Corporate pension funds• Wholly-owned subsidiary of AEGON NV, one of • Public funds the world’s leading financial services businesses • Financial institutions • Charities/foundations • Wealth managers • Financial advisersSource: Kames Capital as at 31 March 2013. *As at 31 December 2012 2
  • 3. Our investment capabilities p Total Retail Team* client funds pooled funds Products and services • Credit • Core plus Fixed 24 €35.1 billion €5.0 billion • High-yield • Absolute return income • Strategic bond • Ethical • All companies • Unconstrained Equities 23 €19.3 billion €1.3 billion • High dividend • Absolute return • Smaller companies • Ethical • Direct (pooled and segregated) Property 14 €1.2 billion - • Indirect • Specialist e.g. healthcare • Asset Allocation Service Multi-asset 11 €4.0 billion €0.5 billion • Inflation Linked • Strategic AssetsSource: *Kames Capital as at 31 March 2013. AUM as at 31 December 2012.In addition, Kames Capital manages €4.7 billion in cash and other assets in categories not attributable to the asset classes shown. 3
  • 4. Kames Absolute Return Bond Fund• We aim to generate returns while limiting downside volatility and preserving capital• Performance target: 3 month GBP LIBOR +2-3% p.a. net of fees over rolling 3 years 2 3%• Primary alpha sources: – Rates – duration neutral cross market and yield curve relative value positioning – Credit – market neutral stock and sector selection• No alpha derived from currency risk• Offers investors low risk NOT no risk Positive returns + low volatility + uncorrelated to underlying markets 4
  • 5. Performance since launch 4.5 Total since launch 4.0 Total return (net) 4.15% 3.5 Benchmark total return 1.23% Difference (net) 2.92% 3.0 Total return (gross) 5.17% wth 2.5 25% grow Best month (Oct 2011) 0.60% 2.0 Worst month (May 2012) -0.06% 1.5 Up months 14/18 1.0 Down months 4/18 0.5 Maximum Drawdown -0.32% 0.0 Volatility 0.71% Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Sharpe Ratio 2.71% Kames Absolute Return Bond B GBP Acc LIBOR GBP 3 MonthsSource: Lipper as at 29 March 2013. NAV to NAV total return with income reinvested. Local currency B (Acc) GBP class. Launch 30 September 2011.For table – All Fund Returns based on Cumulative Noon Lipper data. Gross Returns based on Lipper data grossed up for AMC. Benchmark is at close. Risk Statistics based on Annualised Monthlyreturns. Maximum Drawdown period based on Monthly Returns 5
  • 6. Kames Absolute Return Bond Fund - lower volatility opportunity y pp yAnnualised Volatility Fixed Income Asset Classes -30% Annualised Volatility 8%25% 7%20% 6% 5%15% 4%10% 3% 2% 5% 1% 0% 0% KARB DAX KARB GBP IG FTSE 100 GBP IG US Government European Government UK Government US Government European Government UK Government Global IG Global HY Global IG Global HY G G G G G GSource: Kames Capital, BoAML , Bloomberg. Based on annualised standard deviation of daily returns - 30 September 2011 – 31 March 2013. 6
  • 7. Delivering returns uncorrelated to the underlying market g y g KARB Total Return vs 10yr US Treasury Yields KARB returns vs Credit market spreads 4.50% 1.30% 4.50% 140 4.00% 4 00% 4.00% 4 00% 160 1.50% 3.50% 3.50% 180 3.00% 1.70% 3.00% %) %)Total return (% Total return (% 2.50% 2.50% 200 Yield (%) bps 1.90% 2.00% 2.00% 220 1.50% 2.10% 1.50% 1 50% 240 1.00% 1.00% 2.30% 0.50% 260 0.50% 0.00% 2.50% 0.00% 280 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Mar 12 Mar 13 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 KARB Total Return % UST 10yr Yields % KARB IG OAS (RHS) ( ) Source: Kames Capital, Bloomberg and BoAML as at 31 March 2013 7
  • 8. Three key components y p Carry module Credit Rates module module d l Kames Absolute Return Bond Fund 8
  • 9. Three investment modules• Carry Module – Minimum weighting of +20% within the overall fund – Diversified range of investment grade quality bonds - maximum 2 years to maturity only• Credit Module – Primary alpha focus on credit neutral relative value positions – Net exposure limited to +/-50% within the overall fund• Rates Module – Primary alpha focus is on duration neutral relative value positions – Duration range: -2.5 to +2.5 years – neutral position of 0 years’ duration 9
  • 10. Carry module y• Diversified range of investment grade quality bonds• Maximum 2 years to final legal maturity only• Minimum weighting of +20% within the overall fund Net exposure 48% Holdings 42 Carry Average credit rating A module Modified duration 0.7 years Credit Rates module module Activity since launch 28 bonds have matured 2 positions sold Kames 1 RV trade Absolute Return Bond FundSource: Kames Capital as at 31 March 2013 10
  • 11. Credit module – long non-financials/short financials – via CDS giTraxx Main vs. iTraxx Senior Financials - 5yr CDS • ECBs OMT Program fuels risk rally 80 • Financials outperform non financials non-financials 60 enior Financials spread (bps) • Good news looks to be "priced in“ 40 Entered trade @ +27bps • Action - October 2012 20 – Long risk non-financials (iTraxx Main) 0 – Short risk financials (iTraxx Snr Fins) Result Traxx Main - Se -20 • Closed trade at -12bps -40 – Spread widens and position reviewed -60 60 – Financials weaken post Italy/Cyprus p y yp iT – Target hit and position closed -80 – Low risk alpha generated for fund Nov 12 Jun 12 Aug 12 Sep 12 Oct 12 Jan 13 Feb 13 May 12 Jul 12 Dec 12 Mar 13 Apr 13 J O M A D ASource: Bloomberg and Kames Capital as at 2 April 2013 11
  • 12. Credit module – long Intesa Sanpaolo/short Banco Popolare – via CDS g p p Intesa Sanpaolo vs Banco Popolare - 5yr CDS 350 • Italian banks mired in Euro Crisis 325 • Spread between stronger and weaker 300 banks is too narrow given mounting risks 275 221bps of spread tightening • Market has mispriced relati e credit risk relative 250 Spread (bps) 225 • Action – via 5yr CDS 200 Closed Trade – Long Intesa Sanpaolo risk @ 215bps 175 – Short Banco Popolare risk 150 • Result 125 Entered Trade – Spread widened 95bps @ 120bps – Value of Banco Popolare protection fell 2.9% 100 relative to Intesa Sanpaolo Jun 12 Feb 12 Mar 12 Jan 12 May 12 Apr 12 b n n y – Alpha added without taking explicit view onSource: Kames Capital and Bloomberg as at 21 June 2012. For illustrative purposes only. market direction 12
  • 13. Rates module – long 10yr Australia /short 10yr US Treasuries g y y Australia vs US treasury - 10yr yield spread • Australia offers a “safe haven” 200 alternative to core rates markets 190 But the easy money has been made10yr AUST vs UST yiel spread (bps) • 180 • Discipline needed to add further ld 170 Cheap Entered trade @ 162bps value al e Entered trade @ 159bps 160 • Action – July and August 2012 – Buy Australia Government 2022 Bonds A 150 Fair – Sell 10yr US Bond Futures 140 • Result Closed trade @ 141bps 130 Rich – Two trades successfully undertaken Closed trade @ 137bps – Cumulative excess total return of 3.56% 120 – Low risk alpha g p generated for p portfolio Jun 12 Jun 12 Apr 12 Apr 12 Apr 12 May 12 May 12 Aug 12 Aug 12 Sep 12 Sep 12 Oct 12 Jul 12 Jul 12Source: Bloomberg and Kames Capital as at 10 October 2012. For illustrative purposes only. 13
  • 14. KARB investment modules – allocation since launchKARB Module Allocation - Gross exposure KARB module allocation - Net exposure 100% 200% 90% 180% 80% 160% 70% 60% osure % 140% sure % 50% 120% 40% Gross expo Net expos 100% 30% 80% 20% 60% 10% 0% 40% -10% 20% -20% 0% -30% Oc 11 No 11 De 11 Ja 12 Fe 12 Ma 12 Ap 12 Ma 12 Ju 12 Ju 12 Au 12 Se 12 Oc 12 No 12 De 12 Ja 13 Fe 13 Ma 13 Oc 11 No 11 De 11 Ja 12 Fe 12 Ma 12 Ap 12 Ma 12 Ju 12 Ju 12 Au 12 Se 12 Oc 12 No 12 De 12 Ja 13 Fe 13 Ma 13 ct ov ec an eb ar pr ay un ul ug ep ct ov ec an eb ar ct ov ec an eb ar pr ay un ul ug ep ct ov ec an eb ar Cash Carry Credit Rates Rates Cash Carry Credit Net Exposure Carry Credit Rates Cash Total Carry Credit Rates Cash Total AVERAGE 41% 48% 50% 19% 158% AVERAGE 41% 24% -6% 19% 78%Source: Kames Capital as at 31 March 2013 14
  • 15. Aggregate Fund positioning gg g p g Gross exposure +166% Net exposure +98% 98% Modified duration +0.8 years Number of holdings 86 Unhedged currency exposure 1.38% Average credit rating A+ VaR 0.40% Spread duration 0.81 years (non-beta adjusted) Correlation to Government yields 0.12 0 12 Correlation to Credit spreads -0.07Source: BoAML, Bloomberg and Kames Capital as at 31 March 2013. Correlation based on daily returns since launch using BoAML UK Gilt Index and BoAML Global Corporate Index. VaRcalculated at 95% over 1 month. 15
  • 16. Balanced risk profile pParallel Moves Credit Spreads 0.8% 0.8% 0.6% 0.6% Estimated fun return 0.4% Estimated fund return 0.4% 0.2% 0.2% nd d 0.0% 0.0% -0.2% -0.2% -0.4% 0 4% -0.4% E -0.6% -0.6% -0.8% -0.8% bps bps bps bps 1bp 1bp bps bps bps bps Credit Credit Credit Credit Credit Prl -100b Prl -50b Prl -30b Prl -10b Prl +10b Prl +30b Prl +50b Prl +100b Prl -1 Prl +1 Spreads Spreads Spreads Spreads Spreads Down Down Up 25% Up 50% Up 100% 50% 25%Source: Kames Capital as at 4 April 2013 16
  • 17. Why invest in Kames Absolute Return Bond? y• Award winning fixed income team• Proven fixed income investment process• Three module investment approach• A core investment, targeting low risk cash plus returns 17
  • 18. Appendices pp 18
  • 19. Kames Absolute Return Bond FundLaunch date 30 September 2011Fund manager Stephen Snowden and Colin FinlaysonInvestment policies Invest in diversified portfolio of fixed interest investmentsPrimary performance target Performance target 3 month GBP LIBOR + 2%-3% net of feesExpected volatility < 5% VaR – (99% 1 month VaR) Government 0-95% Investment Grade Corporate 0-95%Asset allocation ranges: Bonds High Yield 0-20% Emerging Market 0-20% Cash >5% Government -75%-95% Investment Grade Credit I t t G d C dit -50%-95% 50% 95%Asset allocation ranges: Bonds + Derivatives High Yield Credit -20%-20% Emerging Market Credit -20%-20% Carry Module > 20%; Minimum BBB- & <2yrs maturity Credit Module C dit M d l +/-50%; HY+EM = +/-20% / 50% HY EM / 20%Fund restrictions Rates Module +/-75%; Duration range -2.5 to +2.5yrs Unhedged currency 0-5% Cash > 5%Base currencyB UK St li SterlingHedged share classes Sterling, Euro, US Dollar 19
  • 20. Know what fund you are not buying y y g• What Kames Absolute Return Bond is… • And what it is not… – Fund offering returns in line with risk budget – Offering unrealistic returns given the risk limits – Targeting a positive total return for investors – Guaranteeing a given return for investors – Making use of six sources of alpha – Focusing on a single asset class – Sticking to what we know and are good at – Taking currency risk to generate performance 20
  • 21. Absolute Return Bond Fund vs. Strategic Bond Fund g Absolute Return Bond Strategic BondPerformance source Alpha + Beta Beta + AlphaManagement focus Absolute returns Total returnsReturn measurement Actual return Peer group relativeDefault duration Zero PositiveCredit risk Limited UnlimitedHigh yield limit Max 20% Up to 100% 21
  • 22. Kames Absolute Return Bond fund – monthly returns since launch y Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 0.60% 0.30% 0.49% 2012 0.20% -0.01% 0.37% -0.02% -0.06% 0.26% 0.44% 0.32% 0.09% 0.50% 0.02% -0.03% 2013 0.12% 0 12% 0.24% 0 24% 0.28% 0 28%Source: Bloomberg and Kames Capital as at 29 March 2013. Fund launched 30 September 2011 22
  • 23. Credit module – long Veolia/ short Casino– via CDS g Credit Module - long Veolia / short Casino - via CDS • Both French companies 70 s) 60 sion 5yr CDS spread (bps Entered • Both defensive industries 50 trade @ +46 bps 40 • No material reason for divergence S 30 • Mean reversion trade 20Veolia vs Cas 10 closed trade @ +15 bps 0 -10V -20 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Source: Bloomberg, Markit & Kames Capital as at 31 December 2012. For illustrative purposes only. 23
  • 24. Rates module – long UK 10yr Index Linked Gilts /short 10yr UK Gilts g y yUK Index Linked vs. Conventional Gilt - 10yr Spread • Sharp underperformance of Index Linked Gilts vs. Conventional Gilts bps) 28510yr UKT yield - 10yr UK Index Linked yield spread (b • Risk-off and CPAC fears the main 275 drivers • Market undervaluing inflation protection nder al ing d 265 Closed trade @ 252bps • Action - July 2012 255 KT – Buy UK Index Linked Gilt 2022 Bonds 245 – Sell 10yr UK Bond Futures • Result 235 T Entered trade @ 239bps – Spread rewidens – reversing underperformance 225 – Index Linked bond excess return of 1% Nov 11 Ma 12 Ap 12 Ju 12 Dec 11 Jan 12 Feb 12 May 12 Jun 12 Aug 12 Sep 12 v c n b ar pr y n ul g p – Low risk alpha generated for portfolioSource: Bloomberg and Kames Capital as at 11 September 2012. For illustrative purposes only. 24
  • 25. Important information pThis presentation has been prepared solely for this Citywire Event. This document and information contained herein is confidential and has been prepared andis intended for use on a confidential basis. It may not be reproduced, redistributed or passed on to any other persons or published in whole or in any part for anypurpose. It is strictly for private use by its holder and may not be passed on to any third parties or otherwise publicly distributed.This document is not intended for retail distribution and is directed only at investment professionals. It should not be distributed to, or relied upon by, privateinvestors. All data in this presentation is sourced to Kames Capital unless otherwise stated. The views expressed and information provided is accurate at thetime of writing. The views expressed in this document represent our understanding of the current and historical positions of the market. They should not beinterpreted as a recommendation or advice. Past performance is not a guide to future performance. The value of investments and the income from them mayggo down as well as up and is not g p guaranteed.While the investment objective of absolute return funds is to achieve a positive return in all market conditions, this is not guaranteed in any way.Investment professionals must ensure that they meet their obligations in relation to their understanding of this product and the risks involved, and the extent towhich this product meets the needs of their clients. Please refer to the Full Prospectus.This document is accurate at the time of writing but can be subject to change without notification.Kames Capital Investment Company (Ireland) plc, is an umbrella type open-ended investment company with variable capital registered in the Republic ofIreland (Company Number 442106), registered office at 25-28 North Wall Quay, International Financial Services Centre, Dublin 1. Board of Directors: AndrewBell (UK), Mike Kirby (Ireland) and Bronwyn Wright (Ireland). Kames Capital Investment Company (Ireland) plc is regulated by the Central Bank of Ireland.Kames Capital is an Aegon Asset Management company and includes Kames Capital plc (Company Number SC113505) and Kames Capital ManagementLimited (Company Number SC212159). Both are registered in Scotland and have their registered office at Kames House, 3 Lochside Crescent, Edinburgh,EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Conduct Authority, (FCA reference no: 144267). Kames Capital plc is theInvestment Manager and Marketing Agent for Kames Capital Investment Company (Ireland) plc. Kames Capital Management Limited is an appointedrepresentative of Scottish Equitable plc (Company Number SC144517), an Aegon company, whose registered office is 1 Lochside Crescent, Edinburgh Park,Edinburgh,Edinburgh EH12 9SE (PRA/FCA reference no: 165548)165548). 25
  • 26. Important information pThe Kames Absolute Return Bond Fund is registered in the UK, Channel Islands, Ireland, Netherlands, Switzerland, Luxembourg and Malta.For Investors in Luxembourg - Kames Capital Investment Company (Ireland) plc is a UCITS collective investment scheme registered in Luxembourg by theCommission de Surveillance du Secteur Financier. The Prospectus, Supplement and Key Investor Information of Kames Capital Investment Company (Ireland)plc are available from CACEIS Bank Luxembourg 5, allée Scheffer, L-2520 Luxembourg.For Investors in the Netherlands - Kames Capital Investment Company (Ireland) plc is a UCITS collective investment scheme registered in the Netherlands bythe Netherlands Authority for Financial Markets in Amsterdam. The Prospectus, Supplement and Key Investor Information of Kames Capital InvestmentCompany ( p y (Ireland) p are available free of charge from our website www.kamescapital.com ( ) plc g p (Dutch edition of the Key Investor Information only). y y)The Funds may not be offered directly or indirectly in the Republic of France. This presentation has not been submitted to the Autorité des marchés financiers,nor any offering material, Prospectus or information contained therein relating to the Funds, may be supplied in connection with any offer of the Funds in theRepublic of FranceThe offering of this Fund has not been and will not be notified to the Belgian Financial Services and Markets Authority (Autoriteit voor Financiële Diensten enMarkten/Autorité des Services et Marchés Financiers) nor has this document been, nor will it be, approved by the Financial Services and Markets Authority. TheFund may be offered in Belgium only to a maximum of 99 investors or to investors investing a minimum of €250,000 or to professional or institutional investors,in reliance on Article 5 of the Law of August 3, 2012. This document may be distributed in Belgium only to such investors for their personal use and exclusivelyfor the purposes of this offering of this Fund Accordingly this document may not be used for any other purpose nor passed on to any other investor in Belgium. Fund. Accordingly, BelgiumFP ID: 2013/15622 26