Hunting For Alpha in Core Fixed Income: Rich Pickings in Hard Times. November 2012

Transcription

1 Hunting For Alpha in Core Fixed Income: Rich Pickings in Hard Times November 2012

2 Times Are Hard: Eurozone Economic Weakness The Eurozone economy remains structurally weak rates will remain low Multi year fiscal tightening also demands easy monetary policy Eurozone GDP Growth (%) Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Eurozone Unemployment (%) Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Data source: BlueBay Asset Management, Bloomberg as at November

3 Benchmark Yields Are Low We believe bond benchmark returns are likely to be low for years to come If Aggregate benchmark yields return to a 5 year average of 3.55% over 5 years, then this index will post annualised returns of just 0.5% until 2017 Yet changes, such as Basel 3, imply pyfunds will remain reliant on core fixed income Euro Bond Index Yields(%) AAA rated Aggrgegate Corporate Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Data source: BlueBay Asset Management, Bloomberg, Barclays Indices as at November

4 Growing Importance Of Alpha As index returns decline, products become more reliant of alpha generation than beta Earning beta requires no skill Earning (repeatable) alpha depends on skill Figurative Example: Contributions of Alpha and Beta to total Portfolio Returns, assuming constant 150bp per annum alpha contribution Past 5 years: Total returns of 7%, of which alpha contributed 20% share Coming 5 years: Total returns of 2%, of which alpha contributed 75% share Alpha Alpha Data source: BlueBay Asset Management, Bloomberg, Barclays Indices as at November

5 An Environment Of Opportunity Volatility is elevated Market dislocations as a result of position capitulation Illiquidity also leads to mis pricing anomalies Plenty of alpha opportunities for active investors Has it ever been easier to beat benchmarks?? 5

6 Rich Pickings in Hard Times: Alpha Opportunities Exist! Performance ( gross of fees to 28 September 2012) 1M 3M YTD 2011 Ann. SI* BlueBay Funds BlueBay Investment Grade Euro Aggregate Bond Fund 2.78% 6.18% 18.05% 4.24% 10.44% Barclays Capital Euro Aggregate Index 1.00% 3.68% 8.14% 3.24% 4.55% Alpha 1.78% 2.50% 9.91% 1.00% 5.89% Cumulative Gross Relative Performance (to 28 September 2012) Risk/Return Characteristics 25% BlueBay Investment Grade Euro Aggregate Bond Fund Barclays Capital Euro Aggregate Index 20% Alpha 1.5% p.a. gross of fees 5.89% 15% Information 10% Ratio > ActualCumulative SI Target 5% 0% Tracking Error 2.25% 0 3% 5% Nov v 10 Dec c 10 Jan n 11 Feb b 11 Mar r 11 Apr r 11 May y 11 Jun n 11 Jul l 11 Aug g 11 Sep p 11 Oct t 11 Nov v 11 Dec c 11 Jan n 12 Feb b 12 Mar r 12 Apr r 12 May y 12 Jun n 12 Jul l 12 Aug g 12 Sep p Data source: BlueBay Asset Management Fund Type: UCITS IV Fund (Part I SICAV) *Annualised return. Fund inception 2November 2010 Please refer to the Disclaimer located at the back of this presentation for important information regarding the performance shown above 6

7 BlueBay Assets Under Management BlueBay manages over US$46.9 billion for institutional and private clients globally Assets Under Management (US$mn to 28 September 2012) Historical Assets Under Management (US$mn to 28 September 2012) Investment Grade* 19,062 50,000 Convertibles 46,942 High Yield** 8,382 Emerging Market 17,500 (US$mn) 40,000 30,000 Multi Strategy Emerging Market High Yield** Investment Grade* 39,633 36,301 34,277 Multi Strategy ,000 16,42316,701 Convertibles 1,737 Total Company AUM 46,942 10, ,588 4, , Notes: *The Investment Grade category includes the Investment Grade Constrained strategy which has a lower benchmark outperformance ( alpha ) target and more restrictive investment guidelines. As at 28 September 2012 the Investment Grade Constrained strategy had US$1.66 billion of AUM. ** High Yield consists of High Yield, Leveraged Loans, Distressed and Direct Lending. Direct Lending AuM is committed capital. Data source: BlueBay Asset Management 7

8 BlueBay Investment Grade The Team Risk Management, Compliance & Legal Dominique Kobler (Head of Risk & Performance) Steve Thomas (Global Head of Compliance) James Brace (General Counsel) Lucien Orlovius (Head of Transactional Legal) Trade Execution & Treasury Daniel Grimstead (Execution Trader IG) Christopher hi h Lemmo (Execution Trader IG) Vinit Patel (Execution Trader IG) IG Investment Team 6 Portfolio Managers Raphael Robelin (Senior. Non Sovereigns) Mark Dowding (Senior. Sovereigns) Experience: The team has an average investment experience of 11 years Specialisation: Each team at BlueBay Asset Management has long only and long/short specialists Geraud dch Charpin (Non Sovereigns) Participation ii i at Investment Andrzej Skiba (Non Sovereigns) Marc Stacey (Covered Bonds) Russel Matthews (Sovereigns) 3 Assistant Portfolio Managers Sheraz Hussain (Sovereigns) Tom Moulds (Swaps) Chau Tran (Non Sovereigns) 7 Analysts Robert Lambert (Analyst Utilities, TMT) Nesche Yazgan (Analyst Industrials) Russell Vincett (Junior Analyst Industrials) Caroline McQueston (Analyst Financials) James MacDonald (Analyst Financials) Arun Konkoth (Analyst US TMT, Retail) John Guarnera (Analyst US Financials) Investment Committee Mark Poole (CIO) Alex Khein (COO) Senior investment professionals Committee: Senior investment professionals across all product areas are members of the Investment Committee, chaired by the CIO Dedicated research: Supported by a dedicated unit of credit analysts focusing on financials, industrials and crossover companies/issues Please refer to the Disclaimer located at the back of this presentation for important information regarding the performance shown above 8

9 Euro Aggregate g Fixed Income Fund Euro Aggregate (BlueBay Investment Grade Euro Aggregate Bond Fund) Fund Euro Aggregate (BlueBay Investment Grade Euro Aggregate Bond) Alpha Source Alpha Target (bps) Alpha Range Alpha source Risk measure Target Exposure (versus benchmark) Term Structure % Credit beta % Term Structure Interest rate duration Yield curve Swap spreads Inflation linked + / 1.6 years Credit alpha % Currency % Credit beta Total 150 Credit alpha Tracking Error 0 3% (relative) Currency Corporate spread duration Sovereign spread duration Country Sector Issuers Instrument 1.25 to +2.0 years + / 2.5 years 0 80 issuers Maximum 7.5 % active currency risk Please refer to the Disclaimer located at the back of this presentation for important information regarding the target performance shown above Data source: BlueBay Asset Management Please note expected contribution is not guaranteed Note: * This fund has not yet been launched 9

10 BlueBay Investment Grade Investment Process Stage 2 Preliminary Screening Macro and credit issuer outputs: 5 to +5 Stage 5 Technical Analysis Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6 Strategy Input Preliminary Fundamental Relative Value Technical Portfolio Screening Analysis Analysis Analysis Construction Portfolio monitoring Risk Control 10

11 A Template for the Euro Sovereign Crisis Successful monetary union requires fiscal / political union. Policy makers will be slow to surrender sovereignty and this means volatility in Europe for years to come Stress Complacency Policy Response Relief RlifRll Rally Data source: BlueBay Asset Management 11

12 Euro remains in Germany s interest EMU is in the German economic interest: Germany has been an EMU winner. Break up would see a sharp recession EMU is in the German financial interest: Germany could stand to lose >Euro 700bn in a full break up of the Eurozone EMU is in the German political interest: An integrated Europe should deliver a legacy of peace on the continent Debt / GDP remains much lower in the Eurozone than in the US or Japan 12

13 Peripheral Europe: Opportunity as well as Risk Default risks may become overstated at times of stress A history of emerging debt reminds us opportunities arise as a result of stress JP Morgan Emerging Market Bond Index Spread (bps) Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Data source: Bloomberg, BlueBay Asset Management, JP Morgan 13

14 Is Adopting a AAA Portfolio an Answer? Ratings are backward looking: Ireland and Iceland were AAA credits in 2008 Fiscal primary balance bl of France is the worst of any Eurozone country in past 20 years Eurozone Government Fiscal Primary Budget Balances as a % of GDP; Year Belgium Italy Ireland Netherlands Finland Austria Germany Greece Portugal Spain France Maximum Average (20 yrs) Data source: Bloomberg, BlueBay Asset Management 14

15 Opportunities: Market Direction Proprietary analysis can help to determine turning points in cycle and creates opportunities in market direction Stress May 2012 July 2012 Complacency Policy Response Otb October 2012 September 2012 Relief RlifRll Rally Data source: BlueBay Asset Management 15

16 Opportunities: Country Relative Value Trends in spreads have often been linked to changes in the policy framework in respective countries Spain 10 year Bono yield (%) Italy 10 year yield (%) Overweight Spain /underweight Italy Overweight Italy /underweight Spain Data source: Bloomberg as at August

17 Opportunities: Government Guaranteed Bonds Stress leads to dislocations and pricing anomalies Future opportunities in Spanish regional debt and other guaranteed bonds Ireland government versus government guaranteed bond yield (%) Overweight Irish governments Overweight govt guaranteed bonds Irish government guaranteed bond (IPBS 4% 2015) Irish government 4 year bond yield Data source: Bloomberg as at August

18 Opportunities: Issuer Domicile and Governing Law In Greece PSI; international law bonds outperform domestic law bonds International law bonds could be expected to trade at a premium; but often trade at a discount Example: Buy 2yr Italy UK (swapped) / Sell 2 yr Italy BTP... Pick up 250bp (June 2012) 18

19 Opportunities: Sovereign CDS basis Some investors buy sovereign CDS as a hedge in times of stress ISDA language: G7 country currency redenomination is not a CDS trigger event G7 country such as Italy may be more likely to leave Euro than default on debt CDS basis should trade negative; when positive sell Italy CDS and sell BTPs Italy CDS Basis : Italy 5year sovereign CDS spread (US$, bp) minus 10 year Italy BTP spread versus 10 year Bunds (bp) Bps May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Data source: Bloomberg as at August

20 Opportunities: Investor Capitulation & Mis Pricing Example of Spanish regional bond, which was purchased at a price of 77 (yield of 10.8%), at a meaningful discount to market levels Bond price for Navarra 3.875% 17/2/ (bps) Feb 10 Jun 10 Oct 10 Feb 11 Jun 11 Oct 11 Feb 12 Jun 12 Oct 12 Data source: Bloomberg as at 11 October

21 Opportunities Between Countries Market anomalies can exist due to behaviour of different investor groups with differing i needs France and Czech bond spreads and CDS levels (bp) France and Czech bond versus CDS basis (bp) Czech / Germany 10yr spread France /Germany 10yr spread 20 0 Czech CDS France CDS France CDS basis Czech CDS basis Data source: Bloomberg as at June

22 Opportunities Between Market Sectors Different investor bases lead to market inefficiencies and anomalies Implement box trades, or alternatively select the security which offers most value Italy and Intesa bond spreads and CDS levels (bp): March 2012 Italy and Intesa bond versus CDS basis s (bp): March Ispim / Germany 5yr spread 40 Italy /Germany 5yr spread 20 0 Ispim CDS 20 Italy CDS Italy CDS basis Ispim CDS basis Data source: Bloomberg as at March

23 Corporate Issuer Opportunities (Structure Mis pricing) Examples where issuers are priced as risk in one country when assets are in another Hit Finance BV French motorway network Spanish Majority shareholder (Abertis) Trades as weak BBB Spanish credit Jan 01 Spread over Midswaps HIT FINANCE (Baa2) ABERTIS (BBB) AUTOROUTES PARIS (BBB ) ATLANTIA (BBB+) VINCI (BBB+) Initial rationale Long risk Strong holding value Meaningful repricing potential Second Life morph into a basis trade Abertis faces risk of downgradeto junk as a resultof M&A activity Abertis CDS remains resilient creating attractive basis opportunity NON FIN CORP INDEX (A ) May 2012 HIT FINANCE Spread over Midswaps(Baa2) ABESM 5Y CDS Spread Data source: Bloomberg as at June

24 CorporateIssuerOpportunities (CrossCurrency Currency Anomalies) Examples of different spreads for same issuer across currencies Amgen Inc US based Pharma / Biotech company with Market cap of $50bn+ and EBITDA of $5bn+. Rated A /Baa1 stableoutlooks Needed $10bn of funding for its share buyback program Amgen recent issuance levels across currencies (sprd versus government bonds) 350 $ 300 EUR Jun 11 Nov 11 May 12 Data source: Bloomberg as at June

25 Outlook: Bunds Risk free return or Return free risk?? The yield on a German government bond index has fallen to 0.8% A sharp rise in yields is unlikely, but unless EMU breaks Bunds appear unappealing Germany 5 year Government Bond Yield (%) / / / / / /2012 Data source: Bloomberg, BlueBay Asset Management, as at August

26 Outlook: Periphery Short term outlook suggests caution as a result of complacency Spain: Needs an aid programme; fundamentals are worsening Italy: Political risks rising in Q Greece: Further restructuring required but can be kept in Euro Medium term political commitment remains strong ECB as buyer of last resort can push spreads tighter Progress towards closer union remains key Data source: Bloomberg, BlueBay Asset Management, as at August

27 Outlook: Corporate Balance Sheets Are Strong Balance Sheets are in good health Companies have a much stronger liquidity profile today than in 2008 IG Gross Leverage. Debt/ EBITDA IG Cash/Debt 4.50x European Gross Leverage 4.00x US Gross Leverage Asia Gross Leverage 3.50x 3.00x 2.50x 2.00x 1.50x 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% European BS Cash to Debt US Cashto Debt Asian Cash to Debt 1.00x 0% Mar 99 Jan 00 Oct 00 Jul 01 Apr 02 Jan 03 Nov 03 Aug 04 May 05 Feb 06 Nov 06 Sep 07 Jun 08 Mar 09 Dec 09 Sep 10 Jul 11 Mar 99 Jan 00 Oct 00 Jul 01 Apr 02 Jan 03 Oct 03 Jul 04 May 05 Feb 06 Nov 06 Aug 07 May 08 Feb 09 Nov 09 Aug 10 Jun 11 Mar 12 Data source: Morgan Stanley Research, Bloomberg, to 31 March

28 Outlook: Margin Squeeze Limited ability to pursue further cost cutting Declining global growth is hurting exports European IG companies EBITDA Margin European IG companies Free Cash Flow / Debt 19.0% 18.5% 18.0% 25.0% LTM EBITDA margin FCF/Debt Average 20.0% Average 17.5% 17.0% 15.0% 16.5% 10.0% 16.0% 15.5% 5.0% 15.0% 0.0% Nov 09 Aug 10 Jun 11 Mar 12 Dec 99 Oct 00 Jul 01 Apr 02 Jan 03 Oct 03 Jul 04 Apr 05 Feb 06 Nov 06 Aug 07 May 08 Feb 09 Nov 09 Aug 10 Jun 11 Mar 12 Dec 99 Oct 00 Jul 01 Apr 02 Jan 03 Oct 03 Jul 04 Apr 05 Feb 06 Nov 06 Aug 07 May 08 Feb Data source: Morgan Stanley Research, Bloomberg, to March 2012

29 Outlook: Banks Raising Capital European banks Capital ratios (%) Foreign banks exposure to peripheral Europe (US$bn) (%) Total Tier 1 Ratio (%) Core Tier 1 ratio (%) (US$bn) ( 1,600 1,400 1,200 1, Spain Italy Ireland Portugal Greece Q Q Q Q Q Q Q Q Q Q Q Mar 05 Jul 05 Nov 05 Mar 06 Jul 06 Nov 06 Mar 07 Jul 07 Nov 07 Mar 08 Jul 08 Nov 08 Mar 09 Jul 09 Nov 09 Mar 10 Jul 10 Nov 10 Mar 11 Jul 11 Nov 11 Mar 12 Banks domiciled outside the periphery have meaningfully reduced their exposure to the region Data source: Bloomberg, BlueBay Data source: BIS, Citigroup 29

30 Outlook: Credit Spreads Structurally Cheap iboxx Euro Corporates Index Spread to Benchmark, to 28 September 2012 Breakeven Spreads, 5 year (bps) bps iboxx Euro Corp spread iboxx Euro Non financial spread iboxx Euro Financial spread Spread to benchmark Financial Non Financial 2003 to Average since 1998 to Rating 28 Sep 2012* 28 Sep 2012* AAA AA A BBB BBB BBB BB BB Jan 99 Nov v 99 Aug g 00 May y 01 Feb 02 Nov v 02 Aug g 03 May y 04 Feb 05 Nov v 05 Aug g 06 May y 07 Feb 08 Nov v 08 Aug g Jun Mar Dec c 11 Sep 12 BB B CCC ,242 At current spread levels investors are widely over compensated compared to historical defaults Data source: iboxx Data source: Moody s, iboxx, Merrill Lynch Index *Spread to benchmark 30

31 Outlook : Lessons From Japan Yield ratio theory suggests a grab for yield with government bonds stuck at low levels Bond Yields in Japan for Government and non government bonds (%) 8% 7% 6% 5% 4% 3% 2% Euroyen 1% JGBs 0% Nov 99 Mar 99 Jul 98 Oct 97 Feb 97 May 96 Sep 95 Jan 95 Apr 94 Aug 93 Nov 92 Data source: Bloomberg 31

32 Longer Term There Is Too Much Debt In The World Debt is a burden on future generations Market Capitalisation of Global Government Bond Index, US$ trillions US$ trillions /31/ /30/ /31/ /30/ /31/ /30/ /31/ /30/ /31/2011 Data source: Bloomberg, Bank of America, BlueBay Asset Management, as at October

33 Long Term: How will debt shrink Economic growth: Ever harder to achieve Austerity: Not a systemic solution Default / Restructure: Anawful solution Inflation: Is QE a stepping stone to Debt cancellation? 33

34 Inflation in Germany is Necessary Bundesbank is powerless to stop German prices rising Germany HICP Inflation yoy (%) How high will it go?? German wages and prices may need to rise by 15% in order to realign competitiveness Apr 15 Apr 14 Apr 13 Apr 12 Apr 11 Apr 10 Apr 09 Apr 08 Apr 07 Apr 06 Apr 05 Apr 04 Apr 03 Apr 02 Apr 01 Apr 00 Data source: Bloomberg, BlueBay Asset Management, as at May

35 Summary Core fixed income could be managed in house when beta was what mattered Alpha is now key to earning attractive returns There is a strong case for outsourcing management Hunting for alpha: Rich pickings in hard times 35

36 Appendix 36

37 BlueBay Investment Grade : Sources of Alpha Fund Euro Government (BlueBayB Investment t Grade Euro Government Bond Fund) Euro Aggregate g (BlueBay Investment Grade Euro Aggregate Bond Fund) Euro Corporate (BlueBay Investment Grade Bond Fund) IG Global Corporate (BlueBay Global Investment Grade Corporate Bond Fund)* Euro Corporate Libor (BlueBay Investment Grade Libor Fund) IG Absolute Return (BlueBay Investment Grade Absolute Return Bond Fund) Alpha Source Alpha Target (bps) Alpha Range Alpha Target (bps) Alpha Range Alpha Target (bps) Alpha Range Alpha Target (bps) Alpha Range Alpha Target (bps) Alpha Range Alpha Target (bps) Alpha Range Term Structure % % % % % % Credit beta % % % % % % Credit alpha % % % % % % Currency % % % Total Tracking Error 0 3% 0 3% 0 3% 0 3% 0 4% 0 6% (relative) (relative) (relative) (relative) (absolute) (absolute) Please refer to the Disclaimer located at the back of this presentation for important information regarding the target performance shown above Data source: BlueBay Asset Management Please note expected contribution is not guaranteed Note: * This fund has not yet been launched 37

38 BlueBay Investment Grade : Exposure Targets Fund Alpha source Term Structure Risk measure Interest rate duration Yield curve Swap spreads Inflation linkedlinked Euro Government Euro Aggregate Euro Corporate (BlueBay (BlueBay (BlueBay Investment Grade Investment Grade Investment Grade Euro Government Euro Aggregate Euro Corporate Bond) Bond) Bond) IG Global Euro Corporate IG Absolute Corporate Libor Return (BlueBay (BlueBay (BlueBay Investment Grade Investment Grade Investment Grade Global Corporate Euro Corporate Absolute Return Bond)* Libor Bond) Bond) Target Exposure Target Exposure Target Exposure Target Exposure Target Exposure Target Exposure (versus (versus (versus (versus (versus (versus benchmark) benchmark) benchmark) benchmark) benchmark) benchmark) + / 2.0 years + / 1.6 years + / 1.0 years + / 1.0 years 0 to 1.0 years 2.5 to +2.5 years Credit beta Credit alpha Currency Corporate spread duration Sovereign spread duration Country Sector Issuers Instrument 0 to years 1.25 to +2.0 years + / 2.0 years + / 3.0 years 1.0 to +4.0 years 4.0 to +4.0 years + / 3.75 years + / 2.5 years + / 1.0 years + / 1.0 years + / 1.0 years +/ 3.75 years 0 80 issuers 0 80 issuers issuers issuers issuers issuers Maximum 7.5 % Maximum 7.5 % Maximum 10% active currency active currency 0% 0% 0% active currency risk risk risk Data source: BlueBay Asset Management Note: * This fund has not yet been launched 38

39 Track Record: BlueBay Investment Grade Bond Fund Performance ( gross of fees to 28 September 2012) 1M 3M YTD Ann. SI* BlueBay Funds BlueBay Investment Grade Bond Fund 1.58% 4.86% 12.27% 0.40% 5.05% 20.87% 1.70% 3.11% 1.80% 6.83% iboxx Euro Corporates Index 0.68% 4.26% 10.30% 1.72% 4.73% 16.02% 4.00% 0.21% 0.39% 4.63% Alpha 0.90% 0.60% 1.97% 1.32% 0.32% 4.84% 5.70% 3.33% 1.41% 2.20% Cumulative Gross Relative Performance (to 28 September 2012) 90% 80% 60% BlueBay Funds BlueBay Investment Grade Bond Fund iboxx Euro Corporates Index Risk/Return Characteristics 70% 1.50% p.a. gross of fees Alpha 2.20% 50% Information 40% Ratio >0.5 30% 1.62 Actual Annualised SI Target 20% 10% Tracking Error 1.36% 0 3% 0% Nov 03 Aug 04 May 05 Jan 06 Oct 06 Jul 07 Apr 08 Jan 09 Oct 09 Jul 10 Apr 11 Dec 11 Sep 12 S Data source: BlueBay Asset Management Fund Type: UCITS IV Fund (Part I SICAV) *Annualised return. Fund inception date: 11 Nov 2003 Please refer to the Disclaimer located at the back of this presentation for important information regarding the performance shown above 39

40 Peer Group Performance: BlueBay Investment Grade Bond Fund Comparison vs Mercer Eurozone Fixed (Non Govt) IG Credit Universe. 5 years to December BlueBay Investment Grade Bond Fund 95 th Percentile Upper Quartile Median Lower Quartile th Percentile Return (% p.a.) Standard Deviation (% p.a.) Reward to Risk Tracking Error (% p.a.) Information Ratio Data source: Mercer. Mercer Eurozone Fixed (Non Govt) IG Credit Universe. 69 Funds. 40

41 Our Track Record: BlueBay Investment Grade Libor Fund Performance ( gross of fees to 28 September 2012) 1M 3M YTD Ann. SI* BlueBay Funds BlueBay Investment Grade Libor Fund 1.02% 2.34% 7.96% 2.91% 1.48% 19.60% 5.30% Merrill Lynch Euro Currency Libor 3 Month Constant Maturity Index 0.03% 0.20% 0.82% 1.32% 0.75% 1.80% 1.90% Alpha 0.99% 2.14% 7.14% 4.23% 0.73% 17.80% 3.40% Cumulative Gross Relative Performance (to 28 September 2012) Risk/Return Characteristics 30% 25% 20% BlueBay Funds BlueBay Investment Grade Libor Fund Merrill Lynch Euro Currency Libor 3 Month Constant Maturity Index Alpha 1.50% p.a. gross of fees 3.40% 15% 10% 1.46 Information Ratio Actual Annualised SI Target >0.5 5% 0% Tracking Error 2.34% 0 4% 5% 08 Apr Aug g 08 Nov v Mar 09 Jun 09 Oct 10 Jan May y 10 Aug g 10 c 10 Dec 11 Apr 11 Jul Nov v 11 Feb b Jun Sep p Data source: BlueBay Asset Management Fund Type: UCITS IV Fund (Part I SICAV) *Annualised return. Fund inception date: 17 April 2008 Please refer to the Disclaimer located at the back of this presentation for important information regarding the performance shown above 41

42 Our Track Record: BlueBay Investment Grade Euro Government tbond dfund Performance ( gross of fees to 28 September 2012) 1M 3M YTD 2011 Ann SI* BlueBay Funds BlueBay Investment Grade Euro Government Bond Fund 2.89% 5.92% 15.27% 5.19% 11.48% Barclays Capital Euro Aggregate Treasury Index 1.30% 3.67% 7.79% 3.36% 6.24% Alpha 1.59% 2.25% 7.48% 1.83% 5.24% Cumulative Gross Relative Performance (to 28 September 2012) 25% 20% 15% BlueBay Investment Grade Euro Government Bond Fund Barclays Capital Euro Aggregate Treasury Index Risk/Return Characteristics** Alpha 1.5% p.a. gross of fees 5.24% 10% Information Ratio > Actual Cumulative SI Target 5% 0% Tracking Error 2.03% 0 3% 5% Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 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 Data source: BlueBay Asset Management Fund Type: UCITS IV Fund (Part I SICAV) *Annualised return. Fund inception 22 December 2010 Please refer to the Disclaimer located at the back of this presentation for important information regarding the performance shown above 42

43 BlueBay Investment GradeAbsolute Return Debt Strategy A strategy for all seasons aims to deliver excess returns in all market environments Rising government yields Designed to take advantage of rising and falling markets kt using a broad array of instruments and techniques Short duration Long credit spreads Short duration Short credit spreads Globally diversified extracting return opportunities from a broad investment universe Expertise across all segments of the fixed income asset class is vital to identify early trends and shocks that can spread across multiple types of assets; specialist knowledge of each component of the investable universe is also essential Falling credit spreads Long duration Long credit spreads Long duration Short credit spreads Rising credit spreads Falling government yields 43

44 Our Track Record: BlueBay Investment Grade Absolute Return BondFund Performance ( gross of fees to 28 September 2012) 1M 3M YTD 1YR Cum. SI* BlueBay Funds BlueBay Investment Grade Absolute Return Bond Fund 2.15% 3.59% 12.06% 13.75% 8.69% Merrill Lynch Euro Currency LIBOR 3 Month Constant Maturity Index 0.03% 0.20% 0.82% 1.25% 1.31% Alpha 2.12% 3.39% 11.24% 12.50% 7.38% Cumulative Gross Relative Performance (to 28 September 2012) 14.0% 12.0% 10.0% BlueBay Investment Grade Absolute Return Bond Fund Merrill Lynch Euro Currency LIBOR 3 Month Constant Maturity Index Risk/Return Characteristics** Alpha 3.0% p.a. gross of fees 7.38% 8.0% 6.0% 4.0% Information Ratio > Actual Cumulative SI Target 2.0% 0.0% Tracking Error 2.85% 0 6% 2.0% 4.0% Ma ay 11 Ju un 11 J ul 11 Au ug 11 Se ep 11 O ct 11 No ov 11 De ec 11 Ja an 12 Fe eb 12 Ma ar 12 Ap pr 12 Ma ay 12 Ju un 12 J ul 12 Au ug 12 Se ep 12 Data source: BlueBay Asset Management Fund Type: UCITS IV Fund (Part I SICAV) *Cumulative return. Fund inception 24 May 2011 Please refer to the Disclaimer located at the back of this presentation for important information regarding the performance shown above 44

45 Figurative Forward Looking Return Distributions: US Core Fixed Income & Absolute Return Probability (%) Core Bond Index: Figurative Return Distribution Absolute Return Strategy: Figurative Return Distribution Prospective Returns(%) Data source: BlueBay Asset Management. Figurative demonstration of prospective return distributions for illustrative purposes. Past performance is not necessarily a guide to future performance. Please refer to the Disclaimer located at the back of this presentation for important information regarding the performance shown above 45

46 Disclaimer This document is issued by BlueBay Asset Management LLP, which is authorised and regulated by the UK Financial Services Authority (FSA) and registered with the US Securities and Exchange Commission (SEC) as an Investment Adviser. BlueBay Asset Management USA LLC is a subsidiary of BlueBay Asset Management (Services) Ltd. BlueBay Asset Management International Limited is registered in Japan as an investment adviser and discretionary investment manager. The document is intended for professional clients and eligible counterparties (as defined by the FSA handbook of rules and guidance) only and should not be relied upon by any other category of customer. This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product in any jurisdiction. Any such offer or solicitation may only be made by means of delivery of an approved confidential Prospectus. This document is confidential and may not be distributed without the express written consent of BlueBay Asset Management LLP. No BlueBay Fund will be offered, except pursuant and subject to the offering memorandum and subscription materials (the "Offering Materials"), which may be provided to Canadian permitted clients only, and not to any other category of investor. This document is for general information only and is not a complete description of an investment in any BlueBay Fund. If there is an inconsistency between this document and the Offering Materials for the BlueBay Fund, the provisions in the Offering Materials shall prevail. Information herein is believed to be reliable but BlueBay Asset Management LLP does not warrant its completeness or accuracy. The opinions expressed within are entirely those of BlueBay and do not constitute an offer of investment advice. All information provided in this document is for informational purposes only and should not be deemed as a guide to investing or a recommendation to buy the securities mentioned. BlueBay closely monitors the markets and may make changes to BlueBay s investment strategy or outlook when warranted by changing market conditions. There is no guarantee that the opinions expressed herein will be valid beyond the date of this document. Any indices shown are presented only to allow for comparison of the BlueBay funds performance to that of certain widely recognised indices. The volatility of the indices may be materially different from the individual performance attained by a specific fund or investor. In addition, the BlueBay fundholdings may differ significantly from thesecurities that comprise theindicesshown shown. Investors cannotinvest directly in an index. Gross performance figures reflect the reinvestment of all dividends and earnings, but do not reflect the deduction of investment management and performance fees. An investor s return will be reduced by the deduction of the applicable fees, which will vary with the rate of return on the fund. For example, the compounding effect of a 0.60% management fee and a 0.20% performance fee would reduce annualised returns from 10% to 9.32% over a 5 year period. In addition, the typical fees and expenses charged to a fund will offset the funds trading profits. A description of the specific fee structure for each BlueBay fund is contained in the fund s Prospectus. Net performance figures reflect the reinvestment of all dividends and earnings, and the deduction of investment management and performance fees. In addition, the typical fees and expenses charged to a fund will offset the funds trading profits. A description of the specific fee structure for each BlueBay fund is contained in the fund s Prospectus. Figures may not sum due to rounding. Hypothetical/forecast performance figures are based on the stated facts and assumptions. No representation is being made that BlueBay Funds will or are likely to achieve profits or losses similar to those shown. There are frequently sharp differences between hypothetical/forecast performance results and the actual results subsequently achieved by any particular investment or trading strategy. There are numerous other factors related to the markets in general or to the implementation of any specific investment or trading strategy which cannot be fully accounted for in the preparation of hypothetical/forecast performance results and all which can adversely affect trading results. The performance track record may include a named fund manager s activity for and on behalf of their previous firm in their capacity as the named fund manager of a named fund. Investors should be aware that any performance should not be attributed solely to that named fund manager as it derived from their previous firm s investment process and support functions. Risk statistics are annualized and calculated using weekly data points since inception. Risk statistics will be produced once there are 3 complete months of data available; for meaningful results a minimum sample of 36 data points is recommended and where history is less than 3 years caution should be taken with the interpretation and representation of this data. Returns for periods of less than 1 year have not been annualized in accordance with current industry standard reporting practices. Past performance willnot necessarily be repeated and isnot indicative of future results. The investments discussed may fluctuate in value and you may not get back the amount invested. There is no guarantee that the objectives shown willbeachieved. Changes in rates of exchange may have an adverse effect on the value of investments. Investment in derivatives may involve a high degree of gearing or leverage, so that a relatively small movement in the price of the underlying investment results in a much larger movement in the price of the instrument, as a result of which prices are more volatile. The BlueBay funds are subject to various other risk factors and conflicts of interest. For further information regarding the risk factors and conflicts of interest with respect to each BlueBay fund please refer to the fund s Prospectus. Any investor who proposes to subscribe for an investment in any of the BlueBay funds must be able to bear the risks involved and must meet the respective fund s suitability requirements. No assurance can be given that a fund s investment objectives will be achieved. BlueBay fund investments may be speculative and involve a substantial degree of risk. The funds may be leveraged and engage in other speculative investment practices that may increase the risk of investment loss. An investor must realise that he or she could lose all or a substantial amount of his or her investment in a BlueBay fund. The investments and strategies discussed here may not be suitable for all investors; if you have any doubts you should consult your investment adviser. Investments in the BlueBay funds may be highly illiquid and there may not be a secondary market for an investor s interest in the funds, inwhichcasenoneshouldbeexpected to develop. There are restrictions on transferring interests in the funds. The fees and expenses charged to a fund may offset the funds trading profits. 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Copyright 2012 BlueBay, the investment manager, advisor and global distributor of the BlueBay Funds, is a wholly owned subsidiary of Royal Bank of Canada and the BlueBay Funds may be considered to be related and/or connected issuers to Royal Bank of Canada and its other affiliates. BlueBay Asset Management LLP, registered office 77 Grosvenor Street, London W1K 3JR,England, partnership registered in England and Wales number OC All rights reserved. V1 Data end September