Absolute Return Bond - Investing in an uncertain world
Introduction to RWC Partners• RWC Partners is an independent investment firm • Focus is exclusively on high-alpha asset management to institutions, professional investors and intermediaries • Business is built around highly-talented portfolio managers, an intense focus on performance and a strong risk management culture• Majority of equity in RWC Partners is owned by RWC personnel – the balance is owned by Schroders• 7 investment teams • UK Equity John Innes • European Equity Ajay Gambhir • US Equity Mike Corcell • Global Convertible Bond Davide Basile • Global Growth Equity Priya Kodeeswaran • Equity Income and Value Nick Purves & Ian Lance • Absolute Return Bond & Currency Peter Allwright & Stuart Frost• 65 personnel of which nearly half are investment professionals• Product focus: UCITS & non-UCITS high alpha & absolute return funds2
Introduction to RWC Absolute Rate & Currency Funds• Absolute Return funds investing in highly liquid bonds, interest rates and currencies • Alpha-generating investment positions underpinned by short-dated, high grade bond portfolio (beta component) • Currently all short-dated bonds are AAA-rated and the vast majority are government guaranteed• Strategy first launched by Peter Allwright and Stuart Frost at Threadneedle Asset Management • $3.5bn AUM in absolute return and high alpha strategies; awarded two Gold Medals by Sauren • Investment strategies generated by Price, Flow & Macro investment process developed by the Portfolio Managers• Proven risk management system based on extensive experience in financial markets • Real-time, market dependent approach to risk taking • Intense focus on instrument liquidity in both short and longer term investments• Funds aim to make alpha-driven returns with low volatility and low correlation to markets • Agnostic approach to market direction allows funds to take advantage of both rising and falling markets• Offers good diversification from traditional bond, equity and commodity funds • Low correlation with risk asset drawdowns; high volatility environments provide investment opportunities • Investment process does not depend on asset class rotation• Funds are sophisticated UCITS IV Luxembourg SICAVS with daily liquidity3
Absolute Return Bond & Currency Portfolio Management Team Peter Allwright - Portfolio Manager • Co-manager of Threadneedle Target Return Bond and Macro Funds • Awarded 2 Gold Medals by Sauren in 2009 Portfolio Management • MA Engineering, University of Cambridge • CFA Charterholder Peter Allwright Stuart Frost - Portfolio Manager Stuart Frost • Co-manager of Threadneedle Target Return Bond and Macro Funds • Established Natwest FX Chart and Analysis Risk Fundamental Research team in London • Various trading positions at Natwest New York – prop trader, FX forward Alice Leedale Peter Harrison Alice Leedale - Market Strategist Larry Furness Robert Ritchie • Financial Analyst at Goldman Sachs • MPhil Economics, University of Cambridge • BA Economics and Management, University Operations Sales and Marketing of Oxford • CFA candidate Compliance and Legal Administrator Larry Furness - Market Strategist • Investment Analyst at Permal Investment Management • BA Economics, University of Nottingham • Investment Management Certificate holder • CFA candidate4
RWC Absolute Rate & Currency Funds – Overview• Macro-orientated Absolute Return trading funds, investing in liquid interest rate and currency markets • Core, high grade, fixed income portfolio supports alpha-generating trading strategies • Alpha strategies provide returns with low correlation to markets and low volatility• Strategies aim to achieve a net return* of cash +3% and cash +6%, annualised, over the market cycle • Highly liquid securities ensure exposure can be de-risked efficiently to reduce “drawdowns” • Physical high grade bond investments provide a stable yield and exposure to duration • Directional and tactical “strategies” provide the majority of excess returns • Overlay adds pure alpha • Liquid rates and currencies Alpha Portfolio • Predominantly derivative instruments • Exchange traded rates and forward and OTC FX • No illiquid derivative structures • Physical high grade bond portfolio • Short maturities High Grade • Provides a cash return on investments Bond Portfolio • Some alpha component from duration management • Highly liquid and provides collateral if needed *Net of the institutional share class fee6
RWC ARC Funds –High Grade Bond Portfolio (Example of Holdings) • Provides beta element of portfolio • Emphasis on liquidity and quality Rating % of Fund Alpha Portfolio • Residual interest rate and/or credit risk can be hedged if necessary AAA 79.73% Country of Issuer % of Fund AA 0.00% Netherlands 38.94% A 0.00% High Grade Germany 20.42% BBB 0.00% Bond Portfolio Denmark 12.18% BB and below 0.00% Sweden 8.19% Unrated 0.00% Total 79.73% Country Issuer Coupon Maturity Rating Holding (%) Sector % of Fund Leaseplan Corporation (Govt. Guarantee) 3 1/8 10/02/2012 Aaa/AAA 14.33% Sovereign/Agency/Supra 75.61% Swedbank AB (Govt. Guarantee) 3 1/8 02/02/2012 Aaa/AAA 8.19% Financial 4.12% SNS Bank (Govt. Guarantee) 2 7/8 30/01/2012 Aaa/AAA 8.17% Corporate 0.00% HSH Nordbank (Govt. Guarantee) 2 3/4 20/01/2012 Aaa/AAA 8.17% Secured/Collateralised 0.00% Bayerische Landesbank (Govt. Guarantee) 2 3/4 23/01/2012 Aaa/AAA 8.17% Total 79.73% Spar Nord Bank (Govt. Guarantee) 2 1/2 10/07/2012 Aaa/AAA 8.10% NIBC Bank (Govt. Guarantee) 3 5/8 19/12/2011 Aaa/AAA 6.18% Analytics % of Fund NIBC Bank (Govt. Guarantee) 3 1/8 17/02/2012 Aaa/AAA 6.14% Duration 0.28 years Rabobank Nederland 4 1/8 04/04/2012 Aaa/AAA 4.12% Current Yield 0.79% Commerzbank (Govt. Guarantee) 2 3/4 13/01/2012 Aaa/AAA 4.08% Average rating AAA Source: RWC Partners 03/11/117
RWC ARC Funds – Alpha Portfolio• Managed as overlay to add return to high grade bond portfolio• Focused, highest conviction investment strategies: Alpha Portfolio• Strategies can be directional or market neutral • Typically a small number of strategies deployed at any point in time High Grade • One strategy may be implemented in a number of different ways Bond Portfolio• Liquid securities ensure overlay can be collapsed or de-risked efficiently and quickly• Option strategies may be used to take exposure, hedge risk or book profit where it is economic and efficient to do so• Range of instruments potentially employed: • Physical government bonds • Global and emerging markets Government • Government bond futures and options on • Currencies Spot and forward FX Bonds futures (exchange traded) • OTC FX options • Sovereign CDS • Short term interest rate futures and options • Corporate bonds Interest on futures Credit • CDS indices e.g. iTraxx Rates • Repos • New issues • Interest rate swaps8
Investment Process – Price, Flow & Macro Analysis Price Analysis • Aim: To establish current and future state of play in any given market, i.e. trend or range • Analyse: Charts of bonds, FX and indices • Action: Identification of trading opportunities and attractive entry and exit points Flow Analysis P.F.M. Macro Analysis • Aim: To anticipate economic •Aim: Identify supply/demand trends in growth and dynamics and inflation, future path of permanent positioning interest rates •Analyse: Monitoring actions of • Analyse: Key economic major market variables, qualitative participants analysis of economic •Action: Directional investments fundamentals • Action: Fundamental input for trading ideas10
Investment Process – Price, Flow & Macro Analysis• Investment process looks at opportunities from three critical perspectives: • Price Analysis • What market are we in? Trend / Range / Reversal Price • Market psychology – price performance relative to economic releases • Moving average support – confirmation of trend/range Flow Macro • Discipline – price and time – stop loss / stop profit • Flow Analysis • Bond auctions / QE buybacks / Index moves Price • CB/SWF currency diversification policy and resource management • Pension solvency regulation / Bank capital Flow Macro • Overall risk sentiment and positioning • Macro Analysis • Economic fundamentals – GDP / Employment / Retail sales etc. Price • Monetary policy, interest rates and inflation • Fiscal policy and debt outlook Flow Macro • Internal and geo-political outlook• The Price, Flow & Macro analysis is quantified through the P.F.M. ‘Scorecard’ (see overleaf) • Each of the macro, flow, and price chart-based input factors is scored on a scale of -3 to +3; scores should be forward-looking • Aggregate scores give representation of attractiveness of currencies, commodities, equity indices and various points on the yield curve • Ratings move frequently as P.F.M. inputs change – formally reviewed every week• Scorecard output is used to help assess and select investment opportunities • It is an idea generator and is not followed mechanically• A high conviction strategy developed from any of the P.F.M. processes will be tested against the other two analytical processes11
Investment Process – Current Themes and Evolving Ideas Board Priced-in Current Themes Evolving Ideas Risk-off, German Global Less Liquidity, French Debt Eurozone Political Deleveraging Lower Yields More Volatility Crisis Breakup? Crisis? Portugal & Eurozone Greek Greek Haircut: EFSF Italian Debt Ireland ECB does QE Fiscal Union / Restructuring How Large? Leveraging Crisis Haircuts Eurobonds Currency Developed ECB = Global DM: Inflation UK & EZ QE2 in the UK Wars: CHF, World Slowdown or Deflation? Downgrades Bad Bank? JPY, CNY Recession? US Debt US Stronger Bond Market US stronger Operation Republicans Global Trade Ceiling Q3, Weaker Crisis of than Twist vs. the Fed Wars Round 2 Q4 Confidence Eurozone? Commodity Commodity Gold Bubble Weak Asian China Hard Iran Nuclear Energy Prices Country Bubble Bursts Bursts? Equities Landing? Standoff Slowdown13
Investment Process – Implementation of Investment Opportunities Expression of Investment Opportunity • Market • Currency • Long or short • Proxy or security specific Choice of Instrument Entry and Exit Points • Cash securities • Price targets • Futures • Call level • Options • Rolling stop profits • Forwards • Time Limits • Swaps Sizing & Risk Management • Risk budget • Liquidity • Volatility • Transparency • Simplicity14
Sizing and Risk Management – Approach to Risk Management• Pragmatic, market dependant approach to risk taking• Consider three key sources of risk: market, liquidity and counterparty• Risk assessed on a top down „whole portfolio‟ view as well as an individual trade-by-trade basis• Aim to deliver portfolio return targets consistently and incrementally • Stop-loss markers at the portfolio and individual trade levels • Portfolio stop-losses consistent with return target (+3% and +6%)• Expected maximum VaR (Monte Carlo) • Cautious ARC 20 day 99% confidence, 500bps limit • Enhanced ARC 20 day 99% confidence, 1000bps limit• However, VaR measure is predominantly a backward looking indicator• Important to consider that: • Correlations move to extremes in times of stress • Market neutral strategies may have significant implicit directional bias16
Sizing and Risk Management – Position Sizing Market P.F.M.• Focus on position sizing as a basic risk control Assessment Scorecard• Examine four key variables for position sizing: conviction, volatility contribution, liquidity and potential correlation with other holdings Liquidity Conviction• Size of risk allocation dependant on market conditions:• High conviction and low expected volatility/risk Position suggests typical sizing Sizing• High expected volatility/risk requires reduced sizing Correlations Volatility with Other Contribution Holdings • DV01 risk (bonds, interest rates) and % NAV (FX) used to size and set stop profit/loss levels relative to expectations of market volatility and not just current market volatility Volatility Volatility Scorecard Scorecard17
RWC Cautious Absolute Rate & Currency Fund – Term Sheet• Launch Date 29th December 2006• Liquidity Daily subscriptions & redemptions / daily NAV• Fees A Share Class: Retail 1.35% AMC / 10% performance fee Fees B Share Class: Institutional 0.70% AMC / 10% performance fee• Performance Fee HWM Yes – highest previous calendar year end• Performance Fee hurdle Yes – HWM + LIBOR or equivalent• Fund structure Luxembourg SICAV (UCITS IV) Sub-fund of the “RWC Funds” SICAV• Currency EUR base currency – USD, GBP, CHF hedged share class• UCITS IV status Sophisticated Fund• Administrator Banque Privée Edmond de Rothschild Europe• Local Registrations Luxembourg / UK / Germany / Switzerland / Italy / Sweden• Tax UK / Germany / Austria19
RWC Enhanced Absolute Rate & Currency Fund – Term Sheet• Launch Date 14th February 2011• Liquidity Daily subscriptions & redemptions / daily NAV• Fees A Share Class: Retail 1.5% AMC / 15% performance fee Fees B Share Class: Institutional 0.8% AMC / 15% performance fee• Performance Fee HWM Paid quarterly. Share class level high water mark• Performance Fee hurdle Yes – HWM + LIBOR or equivalent• Fund structure Luxembourg SICAV (UCITS IV) Sub-fund of the “RWC Funds” SICAV• Currency EUR base currency – GBP, USD hedged share classes• UCITS IV designation Sophisticated Fund• Administrator Banque Privée Edmond de Rothschild Europe• Local Registrations Italy / Luxembourg / Germany / Switzerland / Sweden / UK• Tax UK / Germany / Austria Daily reporting available for Germany Tax Transparency20
Absolute Return Bond & Currency Portfolio Management TeamPeter Allwright – Portfolio Manager• Joined RWC Partners in September 2010 with Stuart Frost as co-head of the Absolute Return Bond & Currency Team• Threadneedle Asset Management – 2005-2010 • Co-manager on all Absolute and Target Return Bond Funds and Macro Funds from inception • $3bn AUM in absolute return and high alpha strategies • Absolute Return Bond Fund – AA rated by S&P / A rated by OBSR • Awarded 2 Gold Medals by Sauren in 2009 for Absolute Return funds and 2 for the Macro fund • Additional responsibilities included management of core Global and European Bond funds• Gartmore – Senior Portfolio Manager – 2004-2005• Royal London Asset Management – 2001-2004 • Manager of the award winning Overseas Bond Fund • Professional Pensions best performing Global Bond Fund 2002, 2003 and 2004• 1993 – 2001 Nomura, Nikko and Svenska Handelsbanken • Proprietary trader and market maker in government bond and credit markets• MA (Hons) from the University of Cambridge in Engineering and Management Studies• CFA Charterholder21
Absolute Return Bond & Currency Portfolio Management TeamStuart Frost – Portfolio Manager• Joined RWC Partners in September 2010 with Peter Allwright as co-head of the Absolute Return Bond & Currency Team• Threadneedle Asset Management – 2007-2010 • Co-manager on all Absolute and Target Return Bond Funds and Macro Funds from inception • $3bn AUM in absolute return and high alpha strategies • Absolute Return Bond Fund – AA rated by S&P / A rated by OBSR• Lloyds TSB Markets – Head of Global Charting - 2006• Gartmore – Senior Portfolio Manager – 2004-2005 • FX Hedge Fund• NatWest Markets – 1980-2000 • 1992-2000 Established and managed the NatWest Treasury FX chart and fundamental research team in London • 1980-1990 Forward FX dealer, Futures trader and Prop Trader in New York • A regular top 3 winner in the Euro money FX and Greenwich markets survey polls • Responsibilities for client coverage within research – Europe, UK and Asia • Qualifications from New York Institute of Finance in Technical Analysis and Bond Markets • 1994-1997 Guest lecturer in Charting at City University Business School22
Absolute Return Bond & Currency Portfolio Management TeamAlice Leedale – Market Strategist• Joined RWC Partners in March 2011 as a Market Strategist in the Absolute Return Bond & Currency Team• Goldman Sachs International – 2006-2009 • Financial analyst in the UK Mergers and Acquisitions Advisory Group • Extensive experience in financial modelling, company valuation and capital structure analysis• University of Cambridge – MPhil Economics – 2009-2010 • Specialist subjects: Asset Pricing, International Finance, Monetary Policy • Dissertation: „Asset Prices and Monetary Policy: Evidence from the UK‟• University of Oxford – First Class BA (Hons) Economics and Management – 2002-2006Larry Furness – Market Strategist• Joined RWC Partners in August 2010 as a graduate recruit • Joined the Absolute Return Bond & Currency Team in February 2011• Permal Investment Management – Investment Analyst (Internship) – 2010 • Involved with manager research which included attending Cap Intro events as an Analyst• Government Economic Service – Assistant Economist (Internship) – 2008• Graduated in 2009 with an honours bachelor‟s degree in Economics from The University of Nottingham23
Performance of Strategy Since Inception (Net of Fees) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD Threadneedle TRF - - - - 0.4% -0.1% 0.1% -0.6% 0.6% 0.3% 0.4% -0.1% 0.9%2006 EURIBOR – 3 month - 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 2.3% Threadneedle TRF -0.2% 1.1% -0.3% -0.4% -0.7% -0.5% 1.8% 1.5% 1.5% 0.8% 1.0% 0.0% 5.6%2007 EURIBOR – 3 month 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 4.4% Threadneedle TRF 2.8% 1.3% 1.9% -1.8% -1.1% -0.4% 0.5% 1.7% 0.9% 1.9% 2.4% 1.3% 12.0%2008 EURIBOR – 3 month 0.4% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.5% 0.4% 0.3% 0.3% 4.6% Threadneedle TRF 0.1% 0.3% 0.4% 0.8% 0.9% 0.7% -0.2% 0.4% 0.3% 0.4% -0.1% 0.0% 4.1%2009 EURIBOR – 3 month 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 1.2% Threadneedle TRF 0.0% 0.0% 0.2% -0.2% -0.5% 0.0% n/a n/a n/a n/a n/a n/a -0.4%2010 EURIBOR – 3 month 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% n/a n/a n/a n/a n/a n/a 0.3% RWC Cautious ARC n/a n/a -0.5% -0.1% -0.1% -0.1% 0.8% 0.3% 0.8% -0.3% 0.6%2011 EURIBOR – 1 month n/a n/a 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 1.0% % of up- % of down- Annualised Total Return Annualised Vol Sharpe Ratio months months Return Strategy 64 36 24.5% 4.6% 3.0 0.69 Source: RWC Partners / Bloomberg. Data shown is for the period April 2006 – end October 2011, calculated on a NAV‐NAV basis, net of fees with Gross income reinvested. Data is not included for the period July 2010 – February 2011 as Peter Allwright and Stuart Frost were not managing the strategy. Performance from March 2011 relates to the RWC Cautious ARC Fund (B‐EUR). The Fund became sophisticated24 on 8th March 2011. Performance shown for the period April 2006 to June 2010 is for the Threadneedle Target Return (Threadneedle TRF) Fund, EUR institutional share class, calculated on a Bid‐Bid basis, net of fees. The index used is 3‐Month EURIBOR for the period April 2006 – June 2010, and 1‐month EURIBOR from March 2011 – September 2011. 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.
Performance of Strategy Since Inception (Net of Fees) Performance of Strategy since inception 40% Note: Period relates to when 35% the portfolio managers were in between companies and were 30% not managing the strategy 25% 20% Cumulative Return 15% 10% 5% 0% -5% -10% Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Cumulative Strategy Ref erence Index Source: RWC Partners / Bloomberg. Data shown is for the period April 2006 – end October 2011, calculated on a NAV‐NAV basis, net of fees with Gross income reinvested. Data is not included for the period July 2010 – February 2011 as Peter Allwright and Stuart Frost were not managing the strategy. Performance from March 2011 relates to the RWC Cautious ARC Fund (B‐EUR). The Fund became sophisticated25 on 8th March 2011. Performance shown for the period April 2006 to June 2010 is for the Threadneedle Target Return (Threadneedle TRF) Fund, EUR institutional share class, calculated on a Bid‐Bid basis, net of fees. The index used is 3‐Month EURIBOR for the period April 2006 – June 2010, and 1‐month EURIBOR from March 2011 – September 2011. 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.
Performance of Strategy Since Inception – Distribution of Returns Strategy - Distribution of Monthly Returns Strategy - Distribution of Monthly Returns 18 25 16 14 20 12 15 Months Months 10 8 10 6 4 5 2 0 0 -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0%0.0% -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.5%0.5%1.0%1.0%1.5%1.5%2.0%2.0%2.5%2.5%3.0%3.0%3.5%3.5%4.0%4.0% Monthy Return Monthy Return Returns from period when the fund was unsophisticated Source: RWC Partners / Bloomberg. Data shown is for the period April 2006 – end October 2011, calculated on a NAV‐NAV basis, net of fees with Gross income reinvested. Data is not included for the period July 2010 – February 2011 as Peter Allwright and Stuart Frost were not managing the strategy. Performance from March 2011 relates to the RWC Cautious ARC Fund (B‐EUR). The Fund became sophisticated26 on 8th March 2011. Performance shown for the period April 2006 to June 2010 is for the Threadneedle Target Return (Threadneedle TRF) Fund, EUR institutional share class, calculated on a Bid‐Bid basis, net of fees. The index used is 3‐Month EURIBOR for the period April 2006 – June 2010, and 1‐month EURIBOR from March 2011 – September 2011. 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.
Performance of Threadneedle Macro Trading Fund (Net of Fees) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD Threadneedle Macro2008 - - - - - - - - - 0.96% 3.65% 2.11% 6.85% Trading Fund Threadneedle Macro2009 0.09% 0.31% 1.82% 1.35% 2.07% 0.37% 0.17% 1.43% 0.31% 1.23% 0.66% 0.04% 10.28% Trading Fund Threadneedle Macro2010 0.65% -0.19% 0.60% -1.20% -1.72% -0.29% - - - - - - -2.16% Trading Fund % of up- % of down- Annualised Total Return Annualised Vol Sharpe Ratio months months Return Strategy 81% 19% 15.29% 8.47% 4.09% 1.79 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 08 08 08 08 09 09 09 09 09 09 09 09 09 09 09 09 10 10 10 10 10 10 Threadneedle Macro Trading Crescendo Fund - Class A USD Source: RWC Partners / Bloomberg. NAV to NAV net income reinvested. Net of fees27 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
Price Analysis Methodology Overview • The main thrust of our chart/price analysis is to establish the type of investment arena a market is currently in Key Aim • Key question: range-bound or trend? • This defines our investment horizons: trading positions in range-bound markets will be shorter term in nature and positions in trending situations will be longer term • We use simple chart analysis of hourly, daily, weekly and monthly bar charts Instruments • We do not use black box systems or chart techniques that follow standardised rules, e.g. DeMark, Elliot wave, Gann analysis etc.; all views are discretionary • We look for patterns in the price of a security of a reversal or continuation nature; some are standard market patterns Pattern such as double tops, double bottoms and some are proprietary to our knowledge and experience Recognition • We also look at the angle of trend and how that can impact on market retracements. Past experience with market bubbles is key and we are able to identify these situations as they occur, before they break down, with market experience back to 1985 • We examine price developments in relation to fundamentals, looking for price to confirm or not confirm Macro views Confirmation • This gives us early warning signals of trend or range reversals when price fails to confirm prior moves at some point • We also look at the psychology of the market and historical support and resistance levels, particularly 100% Market retracements of prior moves Psychology • Is the market overbought or oversold and struggling at historical levels? • In summary we employ a tape reading technique that uses simple support and resistance lines, pattern Summary recognition, and market psychology as it relates to price vs. macro views • We also consider round numbers and price against time to be very important30
PriceP.F.M. Scorecard – Guide to Price Scoring Flow Macro Price Rating USD EUR GBP Currency -1 0 -1 • Scores represent attractiveness from a technical / price action perspective 2Y 1 0 1 • Scores imply trading opportunities and target entry and exit points 5Y 1 0 1 • Price discipline is key in confirming economics / flow 10Y 1 0 1 30Y 1 0 1 • Price numbers reflect medium to long term time horizon • Score of +3 indicates a strong long term upward trend, -3 indicates a strong long term downward trend • Score of -1, 0 or +1 represents a range bound market • Key areas of consideration and analysis for price scoring: • Trend or range bound • Support and resistance levels • Trend or range bound • Potential range breakout • Psychological levels • Potential range breakout • Reversal or continuation • Contrarian views when appropriate • Reversal or continuation Investment Market • Market positioning – overbought or oversold • • Inflection points Pattern recognition Environment Psychology • Does price action confirm economic • • Short term or long term market Timing releases? • • Pattern recognition Short term or long term • Are fundamentals already priced in? • Inter-market analysis and correlations • Stop losses • Intraday high/low day moving average Moving • Stop profits bands Average Discipline • Trailing stops • Used for trend confirmation Support • Time discipline – stale investments • Can suggest continued or persistent trending markets • Identify targets on trends or ranges31
PriceP.F.M. Scorecard – Guide to Flow Scoring Flow Macro Flow Rating USD EUR GBP • Scores indicate positive and negative flow and positioning dynamics Currency -2 1 1 • Score of +3 could represent buybacks, regulation or bad market positioning 2Y 1 -1 1 • Score of -3 could reflect large supply, asset allocation flows or sentiment 5Y 1 -1 1 10Y 0 -1 1 • Time frame is market dependent (e.g. pension flows LT, auctions ST) 30Y 0 0 2 • Flow factors can produce idiosyncratic scores at points on the yield curve (e.g. pension regulation, upcoming auctions) • Risk sentiment toggle adjusts for current overall level of market risk aversion Risk Sentiment Factor: risk-off -2 • A negative score reflects a more “risk-off” market sentiment • General rule in a “risk-off “market: USD, JPY, CHF and bonds benefit, at the expense of the other currencies • Key areas of consideration and analysis for flow scoring: • Government bond auctions • CB/SWF currency diversification Bond Supply FX Supply & • QE and buybacks • Reserve regulation & Demand Demand Dynamics • Mortgage convexity hedging Dynamics • FX market intervention • Month end index extension • Exchange controls policy (EM) • Risk-on vs. risk-off market sentiment • Pension fund regulation Market • Market positioning Regulation Sentiment & • Bank capital requirements • Asset allocation: safe havens, carry trade Positioning • Key market bull and bear themes32
PriceP.F.M. Scorecard – Guide to Macro Scoring Flow Macro Macro Rating USD EUR GBP • Scores reflect relative macro fundamental strength (-3 to +3) Currency 2D 2 1 2Y -2 -2 -1 • Currency scores below 0 signal recession (-3 equivalent to Sep-01/Sep-08) 5Y -2 -2 -1 • Scores are updated as views change based on new data and news flow 10Y -2 -2 -1 • Scores are forward looking and represent short term horizon (0 – 6 months) 30Y -2 -2 -1 • Outlook for longer term bonds incorporate long term expectations • Signals potential downgrade (D) or upgrade (U) (e.g. recent data inconsistent with current score but not yet conclusive) • EUR bond scores refer to core Eurozone bonds (i.e. Germany), not peripheral sovereign debt • Key areas of consideration and analysis for macro scoring: • Inflation: headline, core, target • Growth and business cycle metrics: GDP, industrial production, trade, retail sales • Inflation expectations • Forward looking indicators and surveys Monetary • GDP relative to trend, unemployment Economic • Central bank communications: • Current account, terms of trade Policy & Fundamentals announcements, press conferences, • Labour market, unemployment Interest Rates minutes, speeches • Property market • Taylor rule analysis, real yields • Financial sector • QE, money supply • Fiscal deficit as % of GDP • Political instability: elections, minority and • Govt debt as % of GDP coalition governments, US Congress Fiscal Policy • Sovereign debt rating • Policy and regulatory changes & • Issuance and redemption profiles Political & • Wars, terrorism Sovereign • Fiscal consolidation Other • Natural disasters, extreme weather Debt • Sovereign debt crises and bail-outs • Demographics • Risk premia and default rates33
ARC Funds and RWC Partners Risk Management Overview Portfolio Risk Management Internal Risk Management & Oversight • Pragmatic, market dependant approach to risk taking • Separation of compliance, risk oversight and portfolio • Risk assessed at the individual trade and portfolio levels management • Independent Risk Manager reporting directly to CEO • Funds managed through : • Daily independent review of DV01, option and FX • Beauchamps hedge fund accounting system; and exposures via thinkFolio • thinkFolio portfolio modelling and trade management • Exposures considered within context risk observed system, designed specifically for bonds and currency and expected within market management (not a VaR system) • Market-dependent stress-testing and scenario analyses • Highly liquid securities ensure portfolio can be collapsed or de-risked efficiently and quickly • VaR monitoring (considering both expected correlations and extreme correlations) • Third party risk company AB Funds in Luxembourg using • Significant risks discussed directly with PM and Kinetic Software to measure daily VaR (Monte Carlo) highlighted to CEO who has ultimate oversight of risk. CEO has regular review meetings with PM teams. Independent Fund Monitoring Corporate Risk Management • RWC Asset Management LLP act as the fund‟s advisor • Revenue is diversified across investment teams, products • BPERE (Rothschild) are independent administrator & and clients. custodian • Business is managed to be profitable before performance • AB Fund Services appointed for local Luxembourg and fees are generated UCITS oversight • An independent third party consultant reviews our • Daily production and reconciliation of NAVs compliance infrastructure twice a year. • Daily cash reconciliation • Independent Board of Directors speak with portfolio manager and CEO once a quarter35
Yield Volatility Scorecard• Please see pages 16 and 17 for a guide to sizing and risk management• As with the P.F.M. Scorecard, an objective view of expected volatility is made as well as the following quantitative view As at 12 Jul 11 Yield Volatility Scorecard 1st 5th 3Month 3Month Short Medium Long Ultra Long 2yr 5yr 10yr 30yr USD ED1 ED5 TU1 FV1 TY1 US1 WN1 Curr Yield 0.43% 0.74% 0.98% 1.66% 3.09% 4.03% 4.18% 0.35% 1.42% 2.86% 4.15% 30d Yield Vol (bps) 69.8 122.4 87.1 150.6 116.8 96.0 96.3 54.0 119.3 105.4 83.3 180d Yield Vol (bps) 43.3 85.4 59.2 87.6 73.8 71.4 74.1 36.0 75.2 79.4 72.0 Extreme Yield Vol (bps) 68.1 100.5 79.7 118.2 122.0 125.4 44.5 124.4 149.1 157.7 EUR ER1 ER5 DU 1 OE1 RX1 Curr Yield 1.65% 1.74% 1.71% 1.95% 2.60% 1.20% 1.77% 2.60% 3.25% 30d Yield Vol (bps) 101.1 116.1 105.6 114.5 95.3 93.8 107.0 88.0 93.3 180d Yield Vol (bps) 77.0 79.3 80.5 76.2 59.9 72.9 67.7 57.5 59.1 Extreme Yield Vol (bps) 104.1 118.7 108.5 100.9 85.2 98.2 90.2 88.9 99.1 GBP L1 L5 G1 Curr Yield 0.92% 1.12% 3.20% 0.67% 1.68% 2.99% 4.08% 30d Yield Vol (bps) 58.6 65.3 128.4 46.9 82.6 86.7 58.5 180d Yield Vol (bps) 62.2 82.1 66.2 40.1 58.0 57.3 50.5 Extreme Yield Vol (bps) 70.3 100.1 106.6 60.4 84.3 97.1 94.8 JPY JB1 Curr Yield 1.31% 0.16% 0.42% 1.15% 2.10% 30d Yield Vol (bps) 27.3 9.2 21.8 28.7 27.0 180d Yield Vol (bps) 31.3 12.9 27.3 33.0 33.5 Extreme Yield Vol (bps) 64.4 35.9 53.1 68.4 88.2 AUD YM1 XM1 Curr Yield 4.45% 4.95% 0.16% 0.42% 1.15% 2.10% 30d Yield Vol (bps) 137.2 117.5 9.2 21.8 28.7 27.0 180d Yield Vol (bps) 70.1 63.2 12.9 27.3 33.0 33.5 Extreme Yield Vol (bps) 175.3 161.1 35.9 53.1 68.4 88.2 Please note this is a historical example and not the current scorecard and will therefore not reflect current values „Curr Yield‟ is the current yield to maturity on the contract; „30d Yield Vol‟ is the observed volatility in the yields of the contract over the past 30 calendar days in bps; „180d Yield Vol‟ is the observed volatility in the yields of the contract over the past 180 calendar days in bps; „Extreme Yield Vol‟ is the 95% highest „30d36 Yield Vol‟ observed over the past 10yrs in bps.
FX Volatility Scorecard • Please see pages 16 and 17 for a guide to sizing and risk management • As with the P.F.M. Scorecard, an objective view of expected volatility is made as well as the following quantitative view As at 13 Jul 11 FX Volatility Scorecard USD EUR GBP JPY CHF AUD NZD NOK SEK CAD CNY BRL KRW MXN TRY ZAR SGD HUF PLN RUB Curr FX 1.41 1.60 0.01 1.21 1.08 0.83 0.18 0.15 1.04 0.15 0.64 0.09 0.09 0.61 0.15 0.82 0.53 0.35 0.04 30d Yield Vol (bps) 13.3% 7.7% 7.1% 10.1% 12.2% 14.2% 15.1% 17.5% 10.8% 1.9% 9.7% 8.1% 9.1% 10.6% 12.9% 5.9% 21.2% 18.2% 8.3% 180d Yield Vol (bps) 10.7% 7.6% 9.0% 10.2% 10.8% 12.2% 12.9% 13.8% 8.1% 2.0% 9.4% 8.2% 7.4% 10.7% 12.6% 5.1% 15.4% 14.2% 7.5% Extreme Yield Vol (bps) 15.0% 16.2% 16.1% 16.0% 23.1% 25.4% 21.4% 23.5% 16.4% 2.7% 33.7% 25.0% 17.5% 32.3% 29.6% 8.4% 28.8% 28.5% 16.9% Curr FX 0.71 1.13 0.89 0.86 0.76 0.59 0.13 0.11 0.74 0.11 0.45 0.67 0.06 0.43 0.10 0.58 0.37 0.25 0.03 30d Yield Vol (bps) 13.2% 8.0% 14.1% 16.1% 8.3% 10.6% 8.4% 7.3% 7.3% 13.1% 6.6% 12.5% 7.4% 10.7% 6.6% 9.0% 9.8% 8.2% 10.1% 180d Yield Vol (bps) 10.7% 8.4% 13.1% 10.9% 10.2% 12.7% 7.6% 7.0% 9.7% 10.5% 9.7% 11.5% 9.9% 11.2% 10.8% 8.2% 7.7% 7.1% 9.9% Extreme Yield Vol (bps) 15.1% 12.7% 21.4% 11.5% 17.7% 17.9% 14.1% 13.7% 15.2% 15.2% 35.3% 25.3% 20.6% 39.0% 29.2% 13.4% 19.7% 21.1% 16.3% Curr FX 0.63 0.88 0.79 0.76 0.67 0.52 0.11 0.10 0.65 0.10 0.40 0.59 0.05 0.38 0.09 0.51 0.33 0.22 0.02 30d Yield Vol (bps) 7.7% 8.1% 8.7% 11.7% 8.9% 10.9% 11.9% 13.0% 7.1% 7.6% 7.4% 7.5% 7.6% 10.1% 9.2% 4.4% 16.7% 13.6% 7.2% 180d Yield Vol (bps) 7.6% 8.4% 11.5% 10.8% 9.3% 12.0% 10.9% 11.2% 8.4% 7.5% 9.5% 8.1% 8.7% 10.7% 11.8% 6.1% 12.5% 11.6% 10.4% Extreme Yield Vol (bps) 16.4% 12.6% 23.6% 17.5% 18.0% 20.0% 16.9% 19.0% 14.5% 20.8% 33.1% 24.9% 21.8% 53.8% 31.4% 12.8% 24.7% 25.3% 18.4% Curr FX 79.2 111.8 126.6 96.0 85.1 66.0 14.3 12.2 82.6 12.2 50.3 7.5 6.7 48.1 11.6 65.0 0.4 27.8 2.8 30d Yield Vol (bps) 7.1% 13.9% 8.5% 9.2% 13.0% 13.8% 17.3% 18.9% 12.1% 7.0% 11.5% 9.9% 11.9% 12.0% 14.3% 7.3% 21.9% 20.0% 10.2% 180d Yield Vol (bps) 8.9% 13.1% 11.4% 9.1% 13.3% 15.1% 15.3% 16.5% 12.6% 9.2% 13.6% 13.0% 12.7% 14.8% 16.3% 9.7% 18.8% 17.0% 11.8% Extreme Yield Vol (bps) 15.9% 21.2% 23.3% 19.6% 32.6% 30.2% 28.0% 29.0% 25.2% 16.2% 39.8% 32.9% 28.3% 43.6% 37.2% 18.8% 34.6% 33.9% 22.4% Curr FX 0.82 1.16 1.32 1.04 0.89 0.69 14.90 12.69 0.86 0.13 0.52 0.08 0.07 0.50 0.12 0.68 0.43 0.29 0.03 30d Yield Vol (bps) 10.1% 16.0% 11.7% 9.3% 15.2% 15.1% 17.1% 20.5% 16.1% 10.7% 14.4% 13.1% 14.5% 15.3% 17.0% 11.4% 23.2% 21.7% 12.9% 180d Yield Vol (bps) 10.2% 10.8% 10.7% 9.2% 12.8% 14.4% 12.3% 14.2% 13.2% 10.2% 13.6% 12.8% 13.3% 14.3% 15.1% 10.1% 15.6% 14.9% 11.0% Extreme Yield Vol (bps) 15.9% 11.4% 17.3% 19.7% 22.7% 23.6% 18.4% 21.5% 17.8% 16.4% 37.8% 29.7% 22.2% 37.0% 32.0% 14.8% 23.7% 31.3% 15.9% Please note this is a historical example and not the current scorecard and will therefore not reflect current value „Curr Yield‟ is the current yield to maturity on the contract; „30d Yield Vol‟ is the observed volatility in the yields of the contract over the past 30 calendar days in bps; „180d Yield Vol‟ is the observed volatility in the yields of the contract over the past 180 calendar days in bps; „Extreme Yield Vol‟ is the 95% highest „30d37 Yield Vol‟ observed over the past 10yrs in bps.
Example Trades Overview Bonds and Interest Rates Currency Futures on: Spot and Forwards on: • Government Bonds: Gilts, Bunds, USTs • Global and emerging market currencies • Short term interest rates: Short Sterling, EURIBOR, Euro$) Derivatives: Instruments • OTC puts and calls Derivatives: • OTC option structures • Puts and calls • Option structures, such as butterfly spreads, strangles and condors Relative Relative/Directional • US curve trade (e.g. 5s vs. 30s) • Buy AUDCAD, 1 month forward • Gilts vs. Bunds • Sell USDZAR, 1 month forward Outright Long/Short Directional • Buy/Sell 10 yr USTs • Buy/Sell EURUSD put • Buy/Sell 3m Euro EURIBOR Investment Volatility Strategies Directional • Buy/Sell USDJPY broken call fly • Short sterling call spread • Euro$ long call Volatility • Short sterling butterfly spread • USTs 10y straddle/strangle • Short sterling call condor39
Position Sizing Process• Size of risk allocation dependant on market P.F.M. Volatility Market conditions: Scorecard Scorecard Assessment • Assess volatility, correlations and liquidity (e.g. holidays, auctions or economic releases) • DV01 risk (bonds, interest rates) and % NAV (FX) used to size and set stop profit/loss levels relative to expectations of market volatility and not just Potential Potential current market volatility Correlations Conviction Volatility Liquidity with Other• Examples of typical risk budget sizing: Contribution Holdings• Relative trade e.g. 5s/10s curve trade • 1bp / 2bp per bp of fund P+L for CARC / EARC• Spread trade e.g. Gilts/Bunds • ½bp / 1bp per bp of fund P+L for CARC / EARC• Outright long/short e.g. long 10y treasuries • ¼bp / ½bp per bp of fund P+L for CARC / EARC Position• G10 currency trade e.g. EURCHF Sizing • 2% / 4% of NAV for CARC / EARC• Emerging market currency trade e.g. USDZAR • ½% / 1% of NAV for CARC / EARC• High conviction and low expected volatility/risk suggests typical sizing Bonds / STIRs: Currency:• High expected volatility/risk requires reduced sizing # of Contracts % NAV40
Example 1: Gilts / Bunds Spread Trade Date: Oct-2010 • Investment view: UK government bonds expected to underperform relative to German government bonds i.e. UK yields will rise faster than German yields and the spread between them will widen • Macro perspective: UK government bonds outperformed throughout Oct-2010 as a result of expectations of QE and government spending cuts (1); however, 3rd quarter GDP released on 26-Oct-2010 was stronger than expected, shocking the market (2) Investment View • Flow perspective: UK government bonds had become overbought i.e. the price was too high and due for a correction; GDP shock saw longs panic, with follow through selling around gilt syndication (4) • Price perspective: the spread between UK and German government bond futures contracts had broken a „double bottom‟ around 520 ticks (3); the price action suggested an initial target for this breakout of 565 ticks with a stop loss at 480 ticks • Trade idea: take long position in German government bonds and short position in UK government bonds • Highly liquid exchange-traded government bond futures Choice of • UK 10 year government bond futures (“Gilts”) Security • German 10 year government bond futures (“Bunds”) • Trade strategy: purchase Bund contracts and sell short Gilt contracts (1:1 ratio) • Number of Bund and Gilt contracts traded represented risk budget (DV01) of 1bp for CARC Sizing and • i.e. 1bp move in the Gilt-Bund spread results in 1bp of fund performance Risk Mgmt. • Initial futures price spread target of 565 ticks (difference between price of 1 Bund contract and 1 Gilt contract) • Stop loss of 480 ticks (based on price action) • Entered trade at spread of 535 ticks (represents difference between price of long Gilt future and price of short bund future) Entry and • Closed half of trade at 595 ticks , profit of 60 ticks per contract (pre-hedging of gilt syndication) Exit Points • Closed remaining half of trade at 633 ticks , profit of 98 ticks per contract (pricing of gilt syndication)41
Example 1: Chart of Bunds - Gilts Futures Price Spread „out‟ at 633 „out‟ at 595 4 1 – Spread driven tighter on UK QE and spending cuts 1 2 – UK GDP positive surprise „in‟ at 533 3 – Spread breaks out of double 3 bottom at 520 ticks 4 – Gilt syndication 242
Example 2: EUR/CHF FX Trade Date: Jun-2011 • Investment view: Swiss Franc (CHF) to outperform relative to Euro (EUR) in the short term • Macro perspective: worries were dominating markets about EU/IMF refusing to release next tranche of bail-out money to Greece, which would have resulted in a Greek sovereign default in July and extreme market volatility and stress Investment View • Flow perspective: broad „risk-off‟ sentiment in markets, CHF to benefit from flight-to-quality flows, particularly with month- and quarter-end approaching • Price perspective: price action suggested a long term trend of CHF strength vs. EUR, USD and GBP • Trade idea: take long position in Swiss Francs vs. short position in Euros Choice of • 1 month EURCHF FX forward Security • Trade strategy: sell EURCHF (long CHF, short EUR) • Amount of EURCHF traded represented 2% of CARC and 4% of EARC Sizing and • CARC: 1 percent change in EURCHF rate results in 2bps of fund performance Risk Mgmt. • EARC: 1 percent change in EURCHF rate results in 4bps of fund performance • Stop loss of EURCHF = 1.23000 (based on price action) • Entered trade at EURCHF = 1.2112 (1m forward rate, spot rate = 1.2123) Entry and • Closed half of trade 1 day later at EURCHF = 1.2006 (spot rate = 1.2015), percentage change: -0.87% Exit Points • Close remaining half of trade 2 days later at EURCHF = 1.1901 (spot rate = 1.1910), percentage change: -1.74%43
Example 2: Chart of Intraday EUR/CHF Exchange Rate „in‟ at 1.2112 (spot rate = 1.2123) „out‟ at 1.2006 (spot rate = 1.2015) „out‟ at 1.1901 (spot rate = 1.1910) Source: Bloomberg44
thinkFolio – Portfolio Management System • thinkFolio is a simple, intuitive and sophisticated portfolio modelling and trade management system designed specifically for bonds and currency management46
thinkFolio – Portfolio Management System Source: www.thinkfolio.com47
Linedata Beauchamp – Hedge Fund Accounting System Source: www.linedata.com48
Contact UsPlease contact us if you have any general questions or would like to discuss any of our strategies RWC Partners Ltd 60 Petty France London SW1H 9EU Tel: +44 20 7227 6000 Fax: +44 20 7227 6003 Email: email@example.com
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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.Shareholders 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 satisfyclaims 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.50