S&P INDICES Research & Design June 2010

Transcription

1 June 2010 Thought Leadership by Global Research & Design International Corporate Bonds: A Primer A Short Guide to International Corporate Bonds and the S&P International Corporate Bond Index From a U.S. perspective, international corporate bonds refer to bonds issued by non- U.S. corporations in a currency other than the U.S. Dollar. The international corporate bond market accounts for about 54% of the global corporate bond market as of the end of Q1, International corporate bonds produce returns that have historically had low correlations with U.S. stocks and bonds, as well as international stocks, making them potential diversifiers in an asset allocation context. Risk factors affecting the asset class include credit risk, interest rate risk, currency risk, and liquidity risk. The S&P International Corporate Bond Index is designed to serve the investment community s need for an investable index that provides exposure to the international corporate bond market. Exchange Traded Products: PowerShares International Corporate Bond Portfolio (PICB) Standard & Poor s and its affiliates do not sponsor, endorse, sell, promote or manage any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return based on the returns of any Standard & Poor s index. For more information about the PowerShares International Corporate Bond Portfolio (PICB) please refer to the fund s prospectus which can be found at Frank Luo, Ph.D Analytical Contact (212) frank_luo@ sandp.com Dave Guarino Media Contact (212) dave_guarino@ sandp.com

2 Introduction to International Corporate Bonds What are international corporate bonds? International corporate bonds are issued by non-u.s. corporations in a currency other than the U.S. Dollar. When companies want to expand operations or fund new business ventures, they often turn to the corporate bond market to borrow money from investors. U.S.-based investors that buy international corporate bonds are effectively lending money to the non-u.s. company that issued the bonds, according to the terms established in the bond offering. The largest segment of the international corporate bond market is the Eurobond market, where the center of trading activities is the City of London. Domestic corporate bond markets outside the U.S. are typically small and less developed. How large is the international corporate bonds market? As of the end of Q1, 2010, the total amount of global corporate bond outstanding was US$ 11 trillion. Of the total, corporate bonds issued in U.S. Dollars contributed US$ 4.8 trillion, corporate bonds issued in non-u.s. Dollar currencies by U.S. corporations made up US$ 0.36 trillion, and international corporate bonds accounted for $5.9 trillion, or 54% of the total. Exhibit 1: Currency Distribution of Global Corporate Bond Markets 43% 54% 3% US Dollar US Issuer, non-usd International Sources: S&P Indices and CapitalIQ, as of Q1, Charts, calculations and values used in this analysis are shown for illustration purposes only. 2

3 How is the international corporate bond market broken down between developed market and emerging market currencies? About 90% of the international corporate bonds are issued in G-10 developed market currencies. Among G-10 currencies, EUR represents the largest share of the international corporate market, with a market share of 58%. Exhibit 2: Currency Distribution of International Corporate Bonds Currency Outstanding ($ Mil.) Percentage of Total EUR 3,447,763 58% JPY 899,306 15% GBP 431,658 7% CHF 177,163 3% DKK/NOK/SEK 201,887 3% AUD/NZD 89,971 2% CAD 54,190 1% non-g10 603,416 10% Total 5,905, % Sources: S&P Indices and CapitalIQ, as of Q1, Charts, calculations and values used in this analysis are shown for illustration purposes only. What is the role of international corporate bonds in U.S.-based portfolios? Exhibit 3: Asset Allocation for U.S.-Based Investors U.S. Stocks U.S. Bonds International Stocks International Corporate Bonds International bonds, as an asset class, are frequently ignored by U.S. investors. While U.S. investors often diversify among U.S. stocks or bonds, and diversify their equity portfolios with both U.S. and international stocks, international bonds, especially international corporate bonds, are often underutilized. However, international corporate bonds are an asset class which may be worthy of consideration when constructing diversified portfolios for the following reasons: International corporate bonds have low correlations with U.S. stocks and bonds, as well as international stocks, as shown in Exhibit 4. Thus, they have portfolio diversification characteristics. 3

4 Exhibit 4: Correlation of International Corporate Bonds to Other Asset Classes Correlation US Treasury US Stocks International Stocks Source: S&P Indices. Data as of April 30, International corporate bonds are represented by the S&P International Corporate Bond Index. U.S. Treasury are represented by the S&P/BGCantor U.S. Treasury Bond Index; U.S. Stocks are represented by the S&P 500 and International Stocks are represented by S&P 700. Correlations are calculated based on monthly returns from April 2001 through April Charts, calculations, and values used in this analysis are shown for illustration purposes only. Hypothetical returns are for illustration purposes only. The S&P International Corporate Bond Index was launched on May 21, 2010 and was not in existence prior to that date. All data presented for the S&P International Corporate Bond Index prior to April 30, 2010 is backtested data. The backtest period for the S&P International Corporate Bond Index begins March 31, 2001 at the market close and ends April 30, 2010 at the market close. The monthly backtest data from March 31, 2001 at the market close through December 31, 2009 has been theoretically constructed from the historical returns of the non-public sectors of Credit Suisse indices and is not based on the methodology that would be used to calculate the International Corporate Bond Index at inception. Monthly backtest data from January 1, 2010 through April 30, 2010 has been constructed based on the index methodology that was in effect at inception as described in the methodology document. The inception date of the S&P/BG Cantor US Treasury Bond Index was December 31, The S&P/BG Cantor US Treasury Bond Index was not in existence prior to that date. All data presented prior to December 31, 2009 is backtested data. The actual performance period for the S&P/BG Cantor US Treasury Bond Index is December 31, 2009 at the market close through April 30, Please see the important information towards the end of this report regarding the inherent limitations of backtested performance. The index charts and/or other economic statistics are included solely for the purpose of presenting information on historic correlation between/among the indices and other economic statistics. Past correlation is no guarantee of future correlation. It is not possible to invest directly in an index. Returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Past performance is not indicative of future returns. Yield can change over time. Exhibit 5: Risk and Return Profile of International Corporate Bonds versus Other Asset Classes International Corp US Corp US Stock International Stock US Treasury Annualized Return 8.71% 6.86% 1.32% 5.02% 5.04% Standard Deviation 9.24% 6.76% 15.51% 18.42% 4.38% Risk Ratio Maximum Drawdown % % % % -3.94% 4

5 Risk Ratio is defined as annualized return divided by Standard Deviation. Maximum Drawdown is defined as maximum loss from a market peak to a market bottom during the sampled period. Source: S&P Indices. Data as of April 30, International corporate bonds are represented by the S&P International Corporate Bond Index. U.S. Treasury are represented by the S&P/BGCantor U.S. Treasury Bond Index; U.S. Stocks are represented by the S&P 500 and International Stocks are represented by S&P 700. Correlations are calculated based on monthly returns from April 2001 through April Charts, calculations and values used in this analysis are shown for illustration purposes only. Hypothetical returns are for illustration purposes only. The S&P International Corporate Bond Index was launched on May 21, 2010 and was not in existence prior to that date. All data presented for the S&P International Corporate Bond Index prior to April 30, 2010 is backtested data. The backtest period for the S&P International Corporate Bond Index begins March 31, 2001 at the market close and ends April 30, 2010 at the market close. The monthly backtest data from March 31, 2001 at the market close through December 31, 2009 has been theoretically constructed from the historical returns of the non-public sectors of Credit Suisse indices and is not based on the methodology that would be used to calculate the International Corporate Bond Index at inception. Monthly backtest data from January 1, 2010 through April 30, 2010 has been constructed based on the index methodology that was in effect at inception as described in the methodology document. The inception date of the S&P/BG Cantor US Treasury Bond Index was December 31, The S&P/BG Cantor US Treasury Bond Index was not in existence prior to that date. All data presented prior to December 31, 2009 is backtested data. The actual performance period for the S&P/BG Cantor US Treasury Bond Index is December 31, 2009 at the market close through April 30, Please see the important information towards the end of this report regarding the inherent limitations of backtested performance. The index charts and/or other economic statistics are included solely for the purpose of presenting information on historic correlation between/among the indices and other economic statistics. Past correlation is no guarantee of future correlation. It is not possible to invest directly in an index. Returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Past performance is not indicative of future returns. Yield can change over time. Exhibit 6: Hypothetical Growth of Investment in U.S. and International Stocks and Bonds Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 US Treasury International Corp. Bond US Corp. Bond US Stock International Stock Source: S&P Indices. Data as of April 30, International corporate bonds are represented by the S&P International Corporate Bond Index. U.S. Treasury are represented by the S&P/BGCantor U.S. Treasury Bond Index. U.S. Stocks are represented by the S&P 500 and International Stocks are represented by S&P 700. Returns are calculated based on monthly 5

6 returns from April 2001 through April Charts, calculations and values used in this analysis are shown for illustration purposes only. Hypothetical returns are for illustration purposes only. The S&P International Corporate Bond Index was launched on May 21, 2010 and was not in existence prior to that date. All data presented for the S&P International Corporate Bond Index prior to April 30, 2010 is backtested data. The backtest period for the S&P International Corporate Bond Index begins March 31, 2001 at the market close and ends April 30, 2010 at the market close. The monthly backtest data from March 31, 2001 at the market close through December 31, 2009 has been theoretically constructed from the historical returns of the non-public sectors of Credit Suisse indices and is not based on the methodology that would be used to calculate the International Corporate Bond Index at inception. Monthly backtest data from January 1, 2010 through April 30, 2010 has been constructed based on the index methodology that was in effect at inception as described in the methodology document. The inception date of the S&P/BG Cantor US Treasury Bond Index was December 31, The S&P/BG Cantor US Treasury Bond Index was not in existence prior to that date. All data presented prior to December 31, 2009 is backtested data. The actual performance period for the S&P/BG Cantor US Treasury Bond Index is December 31, 2009 at the market close through April 30, Please see the important information towards the end of this report regarding the inherent limitations of backtested performance. The index charts and/or other economic statistics are included solely for the purpose of presenting information on historic correlation between/among the indices and other economic statistics. Past correlation is no guarantee of future correlation. It is not possible to invest directly in an index. Returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Past performance is not indicative of future returns. Yield can change over time. International corporate bonds may offer a way to hedge U.S. Dollar weakness. Almost half of the return from international corporate bonds over the past decade have derived from holding foreign currencies that have gained versus the U.S. Dollar. As shown in Exhibit 5, the return from international corporate bonds is 8.71% annualized for the period from April 2001 to April The annualized return from holding foreign currency versus the U.S. Dollar in the same period, as calculated from the U.S. Dollar index, is 3.74% or 44% of the total annualized return from international corporate bonds (the remaining 56% of the return is due to intrinsic corporate bond risks). This may be seen as a compelling reason to invest in foreign bonds; they may be able to offer a means to currency diversification and a hedge against weakening of the U.S. Dollar. Exhibit 7: International Corporate Bonds Total Annualized Returns Breakdown Currency Return 44% Remaining Returns 56% 6

7 Sources: S&P Indices and Bloomberg. Returns for International Corporates are represented by the S&P International Corporate Bond Index. Currency return is represented by U.S. Dollar index. Returns are based on monthly returns from April 2001 through April Charts, calculations and values used in this analysis are shown for illustration purposes only. Hypothetical returns are for illustration purposes only. The S&P International Corporate Bond Index was launched on May 21, 2010 and was not in existence prior to that date. All data presented for the S&P International Corporate Bond Index prior to April 30, 2010 is backtested data. The backtest period for the S&P International Corporate Bond Index begins March 31, 2001 at the market close and ends April 30, 2010 at the market close. The monthly backtest data from March 31, 2001 at the market close through December 31, 2009 has been theoretically constructed from the historical returns of the non-public sectors of Credit Suisse indices. Monthly backtest data from January 1, 2010 through April 30, 2010 has been constructed based on the index methodology that will be in effect at inception as described in the methodology document. Please see the important information towards the end of this report regarding the inherent limitations of backtested performance. The index charts and/or other economic statistics are included solely for the purpose of presenting information on historic correlation between/among the indices and other economic statistics. Past correlation is no guarantee of future correlation. It is not possible to invest directly in an index. Returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Past performance is not indicative of future returns. Yield can change over time. What are the risks of investing in international corporate bonds? Currency Risk: For U.S. investors, international corporate bonds issued in non-u.s. Dollar currencies involve currency risk. If the U.S. Dollar strengthens against the currency a particular bond is denominated in, the return on that bond for a U.S. investor may suffer. Liquidity Risk: For U.S. investors, international corporate bonds are less liquid than U.S. bonds. In times of market uncertainty, it may be difficult or costly for investors to exit a position. Credit Risk: Credit risk refers to the possibility that the issuer of a security will be unable and/or unwilling to make timely interest payments and/or repay the principal on its debt. Debt instruments are subject to varying degrees of credit risk which may be reflected in credit ratings. There is a possibility that the credit rating of a fixed income security will be downgraded after purchase, which may adversely affect the value of the security. Interest Rate Risk: International corporate bonds are susceptible to changes in market interest rates. This risk is especially acute for longer-term bonds where the impact on the bond price movements is larger due to the longer duration of those bonds. What is the yield to maturity on international corporate bonds? The yield of the S&P International Corporate Bond Index was 3.54%, as of April 30, As shown in Exhibit 8, international corporate bond yield is higher than that of both U.S. Treasuries and international Treasuries. 7

8 Exhibit 8: International Corporate Bond Yield versus Treasuries Yield 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% International Treasuries US Treasuries International Corp Bond Sources: S&P Indices. Data as of April 30, US Treasuries are represented by the S&P/BGCantor U.S. Treasury bond Index; International Treasuries are represented by the S&P/Citigroup International Treasury Bond Index and International Corp Bonds is represented by the S&P International Corporate Bond Index. Returns and Risks are calculated based on monthly returns from April 2001 through April 2010, inclusive. Charts, calculations and values used in this analysis are shown for illustration purposes only. Hypothetical returns are for illustration purposes only. The S&P International Corporate Bond Index was launched on May 21, 2010 and was not in existence prior to that date. All data presented for the S&P International Corporate Bond Index prior to April 30, 2010 is backtested data. The backtest period for the S&P International Corporate Bond Index begins March 31, 2001 at the market close and ends April 30, 2010 at the market close. The monthly backtest data from March 31, 2001 at the market close through December 31, 2009 has been theoretically constructed from the historical returns of the non-public sectors of Credit Suisse indices and is not based on the methodology that would be used to calculate the International Corporate Bond Index at inception. Monthly backtest data from January 1, 2010 through April 30, 2010 has been constructed based on the index methodology that was in effect at inception as described in the methodology document. The inception date of the S&P/BG Cantor US Treasury Bond Index was December 31, The S&P/BG Cantor US Treasury Bond Index was not in existence prior to that date. All data presented prior to December 31, 2009 is backtested data. The actual performance period for the S&P/BG Cantor US Treasury Bond Index is December 31, 2009 at the market close through April 30, Please see the important information towards the end of this report regarding the inherent limitations of backtested performance. The index charts and/or other economic statistics are included solely for the purpose of presenting information on historic correlation between/among the indices and other economic statistics. Past correlation is no guarantee of future correlation. It is not possible to invest directly in an index. Returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Past performance is not indicative of future returns. Yield can change over time. 8

9 The S&P International Corporate Bond Index What is the S&P International Corporate Bond Index? The S&P International Corporate Bond Index is an investable index of non-u.s. Dollar based, public investment grade corporate bonds issued by non-u.s. corporations. Denominated in U.S. Dollars, the index is designed to provide a benchmark of large, liquid international corporate bonds. Index calculations are published at the end of every U.S. business day. How are constituents selected for the index? To be selected as constituents of the S&P International Corporate Bond Index, bonds must meet the following criteria: The bond issuer must be a non-u.s. corporation. Government, government agencies, state, and any other forms of public debt are excluded. Corporate debts with a government or any other form of public guarantee are also excluded, as are bonds issued through private placements. Only non-u.s. Dollar G-10 currency denominated bonds are eligible. Each bond must have a maturity of at least one year from the last business day of the new month of inclusion. Bonds must have a bullet structure with no embedded optionality (no callable, putable, or sinking fund structures are permitted). Each index constituent must be rated a minimum of BBB- or Baa3 by either Standard & Poor s or Moody s, respectively. Thus, only investment grade issues are included. If an issue is rated by both Moody's and S&P, the lower of the two ratings is used as the issue's credit rating. Only fixed rate, non-zero coupon bonds are eligible. Fixed rate bonds with step-up coupons are excluded. Covered bonds, or bonds secured by mortgages, such as Pfandbriefe issues, are excluded from the index. Eligible bonds in each of the eligible currencies are drawn from the universe below. Each eligible bond must be priced in its corresponding bond universe on the rebalancing date to be included in the index. 9

10 Exhibit 9: Eligible Universe Currency AUD CAD DKK JPY EUR NZD NOK SEK CHF UK Bond Universe IDC IDC IDC CS Liquid Japanese Corporate Bond Index (LJCI) CS Liquid Eurobond Index (LEI) IDC IDC IDC CS Liquid Swiss Index (LSI) CS Liquid Eurobond Index (LEI) Each bond must meet minimum currency-level issuance outstanding thresholds at the monthly rebalancing of the index. These size thresholds reflect what is reasonably available for institutional investors under normal market circumstances. The current thresholds can be found in the table below, and are subject to change depending upon market conditions. Exhibit 10: Currency Level Issuance Outstanding Thresholds Currency AUD CAD DKK JPY EUR NZD NOK SEK CHF GBP Minimum Size A$ 1 bn C$ 1 bn DKr 1 bn 100 bn 1 bn NZ$ 750 mn NOK 1 bn SEK 1 bn SFr 1 bn 500 mn How do you define a non-u.s. corporation? For the purposes of this index, a corporation is considered a non-u.s. corporation if the ultimate parent of the issuer s country-of-risk, as defined on Bloomberg, is non-u.s. The following examples illustrate how this is determined. CH is a bond issued by TOYOTA MOTOR CREDIT CORP in Swiss Franc. The country of domicile of the issuer is U.S., but the country of risk of the parent is Japan so this bond would be eligible for the index. XS is a bond issued by GE CAPITAL EURO FUNDING in Euro. The country of domicile of the issuer is Ireland, but the country of risk of the parent, according to Bloomberg, is U.S. Therefore, this bond would be excluded from the index. 10

11 How are constituents weighted in the index? The weighting of each bond is based on its outstanding market value, which is set at the monthly rebalancing. In addition, exposure to any single currency is capped at 50% at each monthly rebalancing. How does the yield feature of the index work? On the monthly rebalancing date, if there are more than ten eligible bonds for any of the single currencies, the lowest yielding 25% of the eligible universe are removed from the single currency. The number of bonds that are subject to removal is rounded down to the nearest integer. For example, when there are 22 bonds in the eligible universe, the lowest yielding 25% of the universe equals 22*25% = 5.5. Rounded down to the nearest integer, the five lowest yielding bonds would be removed from the universe. How long a history is available for the index? The index launched on May 21, Prior to this date, all history for the S&P International Corporate Bond Index is back-tested data. The monthly history from January 31, 2001 through December 31, 2009 has been theoretically constructed from the historical returns of the non-public sectors of Credit Suisse indices, through a formula described in the index methodology, which is available on S&P Indices website at Daily history from January 1, 2010 through May 20, 2010 has been constructed based on the index methodology that is in effect at inception, as described in the methodology document. Please see the important Performance Disclaimer at the end of this report for further information on the inherent risks of backtesting. What are the index s characteristics? The index does not have a set number of constituents. Rather, the number of constituents is based on how many issues are eligible at each rebalancing. As of launch date, May 21, 2010, the index has 384 constituents. Exhibit 11: Index Characteristics Average Duration (yrs) 5.45 Average Yield (%) 3.60 Weighted Average Maturity (yrs) 6.98 Weighted Average Coupon (%) 5.07 Total Market Cap (billions $) 696 Source: S&P Indices. As of May 21, Yield can change over time and it is calculated based on the underlying constituents of the index. 11

12 What are the current currency weights and number of bonds for each currency in the index? Exhibit 12: Currency Weights Breakdown Currency Number of Bonds Weights AUD 9 3.7% CAD % CHF % DKK 1 0.1% EUR % GBP % JPY % NZD 1 0.2% SEK 8 1.0% Grand Total 384 Source: S&P Indices. As of May 21, % What is the current country distribution of weights for the index? Exhibit 13: Country Weight Distribution Country Number of Bonds Weights AUSTRALIA % AUSTRIA % BELGIUM % BRITAIN % CANADA % DENMARK % FINLAND % FRANCE % GERMANY % IRELAND % ITALY % JAPAN % LUXEMBOURG % NETHERLANDS % NEW ZEALAND % NORWAY % PORTUGAL % SPAIN % SWEDEN % SWITZERLAND % Grand Total 384 Source: S&P Indices. As of May 21, % 12

13 What is the current maturity distribution of constituents in the index? Exhibit 14: Maturity Distribution Maturity Ladder Weights Years 5.32% Years 8.90% Years 29.11% Years 15.28% Years 17.88% Years 13.38% Years 1.78% Years 7.83% Years Source: S&P Indices. As of May 21, % What is the rating distribution of the index? Exhibit 15: Rating Distribution Rating Weights AAA 4.00% AA 26.61% A 47.28% BBB 22.11% Grand Total Source: S&P Indices. As of May 21, % How does S&P International Corporate Bond Index differ from Barclays Capital s Global Aggregate ex-usd >$1B Corporate Bond Index? Exhibit 16: Index Comparisons Currency Cap Currency Diversification Yield Feature S&P International Corporate Bond Index YES. Any currency exposure is capped at 50%. YES. Exposure to any one currency is limited to 50% YES. Built-in feature of removing the lowest-yielding 25% in each currency. Barclays Capital Global Aggregate ex- USD >$1B Corporate Bond Index NO. No specific currency cap is included in the selection criteria NO. No specific diversification requirements are included in the selection criteria NO Emerging Market Exposure NO. All bonds from G10 developed countries. YES. Emerging market bonds are permitted by the selection criteria U.S. Corporate Exposure NO YES. U.S. Corporate Exposure is permitted by the selection criteria Sources: S&P Indices and Barclays Capital. For illustration purposes only. Barclays Capital Global Aggregate is a trademark of Barclays PLC. 13

14 How often are constituents added and removed from the index? The index is rebalanced on a monthly basis at the end of each month. The complete methodology is available on the web at What are the ticker symbols for the index? Index Bloomberg S&P International Corporate Bond Index Wtd Ave Cpn SPBDICBC S&P International Corporate Bond Index Wtd Ave Price SPBDICBB S&P International Corporate Bond Index Modified Duration SPBDICBD S&P International Corporate Bond Index Wtd Ave Mty SPBDICBL S&P International Corporate Bond Index Wtd Ave YTW SPBDICBY S&P International Corporate Bond Index Market Value SPBDICBV S&P International Corporate Bond Index Price Return SPBDICBP S&P International Corporate Bond Index Total Return SPBDICBT 14

15 Performance Disclosure The S&P/BG Cantor US Treasury Bond Index (Treasury Index) and S&P International Corporate Bond Index (ICB Index) are composite indices. Indexes are not collective investment funds and are unmanaged. It is not possible to invest directly in an S&P index. Past performance of an index is no indication of future results. The inception date for the Treasury Index is December 31, 2009 at the market close. The Treasury Index had not been in existence prior to that date. The base date, the date when the index history begins, is December 29, 1989 after the market close. The backtest period used in this document begins March 31, 2001 at the market close and ends December 31, 2009 at the market close. The actual performance period shown begins December 31, 2009 at the market close and ends April 30, 2010 at the market close. The Treasury Index is a market value-weighted index and the index calculation includes accrued interest. Securities are added to the Index as long as S&P has access to price and/or coupon information from BGCantor Market Data, L.P. The ICB Index was launched on May 21, 2010; it was not in existence prior to that date. The base date of the ICB Index is December 31, The backtest period runs from March 31, 2001 at the market close through April 30, Two types of methodologies were used during the backtest period. The first backtest period used in this presentation begins March 31, 2001 at the market close through December 31, 2009 and has been theoretically constructed from the historical returns of the non-public sectors of the following existing Credit Suisse indices: the CS Liquid Eurobond (LEI) sub-indices in Euro and Sterling, the CS Liquid Japanese Corporate Bond Index (LJCI) and the CS Liquid Swiss Index (LSI). Constant weights of 50%, 25%, 20% and 5% were applied to the LEI-Euro, LEI-GBP, LJCI and LSI, respectively, throughout the historical calculation period. The second backtest period runs from December 31, 2009 at market close through April 30, 2010 and has been constructed based on the index methodology that was in effect at inception as described in the methodology document. After December 31, 2009, accrued interest will be included in the index calculations. Prospective application of the methodologies used to construct the Treasury Bond Index and the second backtest period of the ICB Index may not result in performance commensurate with the backtest returns shown. The backtest periods do not necessarily correspond to the entire available history of the indexes. Please refer to the methodology papers for both indexes, available at for more details about the indexes, including the manner in which they are rebalanced, the timing of such rebalancing, criteria for additions and deletions and index calculation. The indexes are rules based, although the Index Committee reserves the right to exercise discretion, when necessary. Where applicable foreign exchange conversions to U.S. dollars are calculated on a daily basis. The index performances shown have inherent limitations. The index returns shown do not represent the results of actual trading of investor assets. Standard & Poor s maintains the indexes and calculates the index levels and performance shown or discussed, but does not manage actual assets. Indices are statistical composites and their returns do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and backtested performance to be lower than the performance shown. For example, if an index returned 10 percent on a $100,000 investment for a 12-month period (or $10,000) and an annual asset-based fee of 1.5 percent were imposed at the end of the period (or $1,650), the net return would be 8.35 percent (or $8,350) for the year. Over 3 years, an annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.1%, a total fee of $5,375 and a cumulative net return of 27.2% (or $27,200). Disclaimer This document does not constitute an offer of services in jurisdictions where Standard & Poor s or its affiliates do not have the necessary licenses. Standard & Poor s receives compensation in connection with licensing its indices to third parties. All information provided by Standard & Poor s is impersonal and not tailored to the needs of any person, entity or group of persons. Standard & Poor s and its affiliates do not sponsor, endorse, sell, promote or manage any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return based on the returns of any Standard & Poor s index. Standard & Poor s is not an investment advisor, and Standard & Poor s and its affiliates make no representation regarding the advisability of investing in any such investment fund or other vehicle. A decision to invest in any such investment fund or other vehicle should not be made in reliance on any of the statements set forth in this presentation. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by Standard & Poor s to buy, sell, or hold such security, nor is it considered to be investment advice. 15

16 Exposure to an asset class is available through investable instruments based on an index. It is not possible to invest directly in an index. There is no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. Standard & Poor's is not a tax advisor. A tax advisor should be consulted to evaluate the impact of tax-exempt securities on portfolios and the tax consequences of making any particular investment decision. These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. Standard & Poor s makes no representation with respect to the accuracy or completeness of these materials, the content of which may change without notice. The methodology involves rebalancings and maintenance of the indices that are made periodically during each year and may not, therefore, reflect real-time information. 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