Baring High Yield Bond Fund

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1 PROFESSIONAL ADVISERS ONLY Baring High Yield Bond Fund Quarterly Investment Review Q Contents Summary Performance & Investment Strategy Market Review & Investment Outlook Scenarios Important Information

2 Summary Performance In USD Terms (%) - Periods To 30 September 2015 Values As At 30 September Months YTD 1 Year 3 Years 5 Years s Portfolio Value Yield To Maturity Gross of OCF Yield To Maturity Net of OCF Underlying Yield Net of OCF Distribution Yield Net of OCF Modified Duration US$ million 7.2% 5.7% 3.5% 5.1% 3.6 years Portfolio Performance Comparison Past performance is not a guide to future performance. Inception: 19 July 1993 Source: Morningstar / Barings, performance figures are shown net of fees and charges on a NAV per unit basis (priced at midday) with gross income reinvested. Based on the A USD Income share class. Periods over 1 year are annualised. Performance Comparison: Morningstar Median of GIFS Global High Yield Bond (Customised). Performance And Asset Allocation Summary Fund performance was -6.1% over the quarter. The period under review was one of heightened market weakness across global high yield markets. Concerns over a China slowdown and implications for the wider economy, a delay in the US Federal Reserve's rate hike and oil price weakness all impacted investor sentiment negatively. US and Emerging market (EM) high yield were the weakest performing segments over the quarter both returning -5.0%. Russia was the one bright spot in EM with a return of +2.6%. Europe was the relative outperformer returning -2.2%. Generally, higher rated BB issuers were the best performing. Sector wise, Energy was the weakest returning -15.9% over the Quarter. We also saw noteworthy weakness in Basic Industry and Telecommunications sectors. (Merrill Lynch indices in US dollar hedged terms). There were no major changes to our investment strategy over the period. We continue to favour the US market over Europe following the strong outperformance of the European High Yield Market which has strongly benefitted from European Central Bank's quantitative easing policies. As at 30 September, the European market, although higher credit quality, yielded 5.7% compared to US (8.0%) and EM (10.2%). Although Emerging Market issuers have strongly outperformed the US this year, we continue to see value in these issuers which generally still offer higher spreads relative to US high yield, but with lower levels of debt and improving corporate governance. In terms of credit rating we retain single B rated bonds as our largest allocation. We acknowledge the risks from rising government bond yields over time. We remain constructive on the asset class given the prospect of a period of stable economic growth in the US and also the fact that the high yield market over time is less sensitive to changes in interest rates than other areas of fixed income. We believe global defaults rates are likely to remain at low levels, given active refinancing activity by corporates over the past couple of years and strong interest coverage levels. Our duration position remains defensive and we have allocated to sectors which will benefit from continued improving global economic conditions. Looking forward, China is likely to play a key role in future developments. The stress seen in the Chinese equity market has raised questions over how effective policy might be in ensuring a controlled slowdown, and therefore avoiding a hard landing. In advanced economies, we envisage that the US and UK economies will continue to grow moderately. Whilst in the Eurozone, the return of inflation into negative territory, combined with a high rate of unemployment is likely to encourage the ECB to increase its stimulus. Meanwhile, the Japanese economy risks falling back into recession, due to external factors (a slowdown in China) and weaker consumer spending. Market Review - Returns In USD Hedged Terms - Q High Yield Bond Indices Euro High Yield -2.2 ML Global HY - Major Sectors Real Estate Banking U.S. High Yield -4.9 Leisure -0.6 Global High Yield -4.5 Healthcare Retail EM High Yield -5.0 Consumer Goods -1.4 Insurance -1.8 Capital Goods -1.9 U.S. High Yield - BB U.S. High Yield - B Automotive Transportation Technology & Electronics U.S. High Yield - C -8.4 Financial Services Utility Media -3.3 Euro High Yield BB Euro High Yield B Services Telecommunications Basic Industry Euro High Yield CCC & Lower 2.3 Energy Source: Bank of America Merrill Lynch Source: Bank of America Merrill Lynch, Barings 1

3 Performance & Investment Strategy Q Absolute Contributions (%) Region BBB BB B CCC Total US Europe UK Emerging Markets Mutual Fund TOTAL Corporate Bonds Currency 0.03 Cash / Fees & Residual TOTAL Fund (Morningstar Net of Fees) Portfolio Positions 30 June 2015 and 30 September June September 2015 Automotive, 4.2 Consumer Goods, 4.4 Capital Goods, 7.5 Services, 8.4 Cash & Others, 6.4 Leisure, 3.4 Technology & Electronics, 4.1 Retail, 3.0 Telecomms, 13.2 Media, 13.0 Energy, 12.4 Leisure, 2.2 Technology & Electronics, 4.3 Automotive, 2.8 Consumer Goods, 3.7 Capital Goods, 8.1 Cash & Others, 13.5 Retail, 3.0 Telecomms, 11.9 Media, 13.3 Energy, 9.2 Healthcare, 8.8 Basic Industry, 11.2 Services, 6.6 Healthcare, 9.4 Basic Industry, 12.3 Portfolio Positions 30 June 2015 and 30 September June September 2015 BBB BB B CCC Total BBB BB B CCC Total US Europe UK Emerging Markets Mutual Fund Cash Total Portfolio Source: Barings 2

4 Market Review & Investment Outlook Global government bond markets enjoyed a positive quarter. Concern over a slowdown in China, and its implications for global growth prospects, resulted in a deterioration of investor sentiment. Equity markets had their worst quarterly performance since 2011 and both global high yield and investment grade corporate spreads reached a three year high. US monetary policy was another source of uncertainty. China related financial market volatility had already seen rate hike expectations diminish prior to September s Federal Open Market Committee (FOMC) meeting. As such, it came as no real surprise that the Federal Reserve (Fed) decided to delay the commencement of its monetary policy tightening cycle. The Fed noted risks from global economic developments and their potential impact on domestic economic activity and inflationary pressures. Reflecting the low growth and low inflationary environment, a number of central banks (Canada, New Zealand, Norway, Sweden, Hungary and Taiwan) eased monetary policy conditions over the quarter. Meanwhile, many Emerging Markets (EM) policy makers face a dilemma, as a depreciation of their currencies create inflationary pressures against a backdrop of deteriorating growth prospects. A number of EM central banks have been forced to raise rates against this unfavourable backdrop (Brazil, Colombia, Peru and South Africa). The Fed s decision to delay the commencement of its monetary policy tightening cycle seems to be the catalyst for a wave of dovish comments emanating from European Central Bank (ECB) officials. President Draghi acknowledged that the recovery in the Eurozone, and a return to higher inflation was "somewhat weaker" than expected, leaving the option open for expanding its quantitative easing (QE) programme. The Bank of Japan (BoJ) was also firmly on hold, although the board did acknowledge that inflation would remain around zero for the time being. It looks increasingly likely that further monetary accommodation will be necessary in order to achieve the inflation target. Meanwhile, S&P cut Japan s credit rating from AA- to A+, noting the country s very weak fiscal attributes. In the UK, the release of a number of downbeat activity indicators has become a cause for concern for overall growth in Q3. Industrial production and trade data disappointed, whilst the Services Purchasing Managers Index (PMI) suggested that the soft patch that the UK is experiencing might be spreading to this sector. As expected the Bank of England (BoE) kept rates unchanged, with only one dissenter. The BoE s monetary policy committee minutes highlighted a preference to see some further evidence of stabilisation ahead of any decision to raise rates. Meanwhile, UK inflation fell, adding weight to the BoE s cautious stance. These conditions saw the UK government bond market outperform other major markets, as rate hike expectations were pushed back. In Europe, the peripheral markets of Spain and Italy were the main beneficiaries of an increasingly dovish sounding ECB. Markets were unfazed by elections in Spain and in Greece. In Spain, the Catalonian regional elections saw the separatist movement gain share, but fail to achieve an absolute majority, whilst the result of the Greek elections (the second in eight months) gave the far-left Syriza party a more convincing victory than expected. Having failed to gain an absolute majority however, a coalition will be formed with the right- wing Independent Greeks. In currencies, the US dollar had a strong start to the quarter, before reversing some of its gains amid fading expectations that the Fed would move on rates. Meanwhile, the Japanese yen benefitted from the risk-off environment due to its lower volatility characteristics, whilst EM currencies suffered the greatest losses, with double digit declines across a number of currencies. Political turmoil in Brazil, and a sovereign credit rating downgrade, saw the Brazilian real underperform. Outflows from emerging markets have accelerated on both growth concerns and on US monetary policy uncertainty. For emerging markets, clarification of Fed policy will be helpful, indeed, a number of EM policymakers urged the Fed to implement the first rate rise in September in order to reduce the uncertainty. Looking forward, China is likely to play a key role in future developments. The stress seen in the Chinese equity market has raised questions over how effective policy might be in ensuring a controlled slowdown, and avoiding a hard landing. China s official Purchasing Managers Index (PMI) data has moved to a three year low, with the detail of the survey revealing sharp declines in production and new orders. The country s trade surplus surged as the value of imports slumped, increasing concerns of a China related global growth downturn. The divergence between emerging market and developed market growth is likely to continue, the question is whether the weakness in emerging economies will be sufficient to derail the recovery in the advanced economies. Whilst acknowledging these downside risks, for the time being we expect a continued moderate pace of expansion in the US economy. Pressures on net exports from the stronger dollar and weaker global demand are likely to be offset by stronger consumption. Indeed, the latest retail sales and confidence indicators have reassured market participants of supportive domestic demand. Furthermore, most aspects of the labour market have returned to pre-crisis conditions. Despite September s disappointing Payroll s number, labour market trends seem to be fairly well embedded and insulated from EM stress. Expectations are similar for the UK, where modest wage growth and low inflation will likely feed through into consumption growth. Business and consumer confidence is likely to remain resilient, reflecting easing credit conditions. Similarly to the Fed, the dilemma for the BoE is the contrast between the steadily improving domestic economy and the weakening external environment. A question also remains over the timing over the commencement of the Fed s tightening cycle. The FOMC assessment of economic activity was upgraded at the September meeting, having expanded at a moderate pace. Since then, the Fed s chair (Yellen) and other officials have reiterated the intention to raise rates before the end of the year. Regardless of when this occurs, the US is still likely to move ahead of any other major central bank. The return of Eurozone inflation into negative territory is likely to increase pressure on the ECB to enlarge its stimulus package. Similarly in Japan, expectations are that increased accommodation will be required. With regards to portfolio construction, we aim to capture a number of possible market outcomes through our scenario process. The three themes that currently form our suite of scenarios are Chinese led competitive devaluation and rising disinflation, Eurozone joins in global growth upswing and Monetary policy slips behind the curve. 3

5 Scenarios UK Gilt Yield Euro Govt Yield US Treasury Yield Japan Govt Yield USD / JPY BUY AREA NEUTRAL AREA SELL AREA SCENARIO OVERVIEW Our process relies on a top down scenario analysis to model possible market responses to a variety of economic outcomes. Each scenario is then populated with macroeconomic forecasts, enabling us to develop forecasts for bond yield curves, currencies, swap spreads and credit spreads. By comparing the range of forecasts across scenarios with actual market levels, we can judge whether a particular asset is currently cheap or expensive given the potential scenarios that the market may move towards over the next few months. SCENARIO 1 Chinese led competitive devaluation and rising disinflation The theme of this Scenario is predicated upon the emergence of a period of global instability, caused by the outbreak of a currency war as Central Banks embark upon mutually reinforcing episodes of easy monetary policy. The cumulative effect of these serial policy orientations prevents those economies that would essentially benefit most from their deployment (on a unilateral basis) being able to sustain an adequate differential in monetary policy conditions, relative to their key trading partners. Currencies are influenced by the removal of expectation of widening interest rate differentials to the US and some pressure for non-usd currency appreciation is initially seen. However, with global financial conditions deteriorating, global trade volumes declining and persistent demand-deficient disappointments leading to activity and growth levels falling short of market expectations, commodity prices remain weak (negatively affecting G-10 commodity currency valuations). Furthermore, as easier monetary policy conditions are developed elsewhere there is some notable success by policy makers leaning against what otherwise would be a catalyst for US dollar depreciation. Emerging markets currency valuations retreat with some stabilization potential evident in energy deficit countries. SCENARIO 2 Eurozone joins in global growth upswing This Scenario is themed upon a continued recovery in the Eurozone economy under the influence of the plentiful supply of monetary policy accommodation and upon a less aggressive schedule of fiscal consolidation. Constraining factors that ensured that Eurozone economic performance trailed that of the rest of the global economy in 2013/4/5 are removed, and the region s recovery becomes much more selfsustaining than previously had been the case. Even while stronger activity levels are seen and inflation begins to rise, the ECB remains committed to its program of monetary policy easing, through to the end of Q3 2016, in line with its prior communication strategy. While the ECB starts to guide towards expectations of tighter policy being required by the end of 2016, there is no move to actually change monetary policy conditions during the forecast period. SCENARIO 3 Monetary policy slips behind the curve This Scenario describes a reticent start to the Federal Reserve s upcoming interest rate tightening program: an initial hike is delayed so that it occurs towards the end of the forecast period and, after a pause a further hike is possibly delivered. However, the speed of response is too slow to fully counter the growing inflation threat presented by the tightening of the labor market. While the US economy does not develop into an inflationary boom, the prevailing level of nominal GDP growth that is established contains a greater proportion of inflation, and a lower level of real growth, relative to current consensus. The Federal Reserve eventually charts a new path towards rates normalization by adopting a more hawkish bias, suggesting that the pace of policy tightening that will continue in the period beyond the forecasting horizon will be more aggressive than that discounted by the market at the point when tightening commences. In the meantime, the US Treasury curve steepens to reflect the market s expectations of deterioration in inflation risk premia. A period of market stress emerges as monetary policy is, for a transitory period, inappropriate for the developing economic conditions. Growth and inflation in Europe and Japan stabilize given that these economies start to benefit from their relatively helpful, easier, monetary and fiscal policy conditions, variously established in the prior period. Source: Barings 4

6 FOR FURTHER INFORMATION PLEASE VISIT OR CONTACT: France and Belgium: Benoit du Mesnil du Buisson +33 (0) Germany and Austria : Lars Albert +49 (0) lars.albert@barings.com Luxembourg: Thomas Justen +49 (0) thomas.justen@barings.com Nordic region: Peter Curry (+44) peter.curry@barings.com South America: Brian Corris (+44) brian.corris@barings.com Spain: Rod Aldridge (+44) rod.aldridge@barings.com Switzerland: Veronique Fournier veronique.fournier@barings.com UK, Ireland and Channel Islands: Rod Aldridge (+44) rod.aldridge@barings.com IMPORTANT INFORMATION For Professional Investors/Advisers only. It should not be distributed to or relied on by Retail Investors. This document is approved and issued by Baring Asset Management Limited, authorised and regulated by the Financial Conduct Authority and in jurisdictions other than the UK it is provided by the appropriate Baring Asset Management company/affiliate whose name(s) and contact details are specified herein. This is not an offer to sell or an invitation to apply for any product or service of Baring Asset Management and is by way of information only. Before investing in any product, we recommend that recipients who are not professional investors contact their financial adviser. The Key Investor Information Document (KIID) must be received and read before investing. All other relevant documents relating to the product such as the Report and Accounts and Prospectus should also be read. The information in this document does not constitute investment, tax, legal or other advice or recommendation or, an offer to sell or an invitation to apply for any product or service of Baring Asset Management. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed. Past performance is not a guide to future performance. Where yields have been quoted they are not guaranteed. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. There are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or developing markets. Investments in higher yielding bonds issued by borrowers with lower credit ratings may result in a greater risk of default and have a negative impact on income and capital value. Income payments may constitute a return of capital in whole or in part. Income may be achieved by foregoing future capital growth. We reasonably believe that the information contained herein from 3rd party sources, as quoted, is accurate as at the date of publication. The information and any opinions expressed herein may change at any time. This document may include internal portfolio construction guidelines. As guidelines the fund is not required to and may not always be within these limits. These guidelines are subject to change without prior notice and are provided for information purposes only. This document may include forward looking statements which are based on our current opinions, expectations and projections. We undertake no obligation to update or revise any forward looking statements. Actual results could differ materially from those anticipated in the forward looking statements. Compensation arrangements under the Financial Services and Markets Act 2000 of the United Kingdom will not be available in respect of any offshore fund. Shares in the Fund are not available in any jurisdiction in which the offer or sale would be prohibited; in particular the Fund may not be sold directly or indirectly in the US or to a US person. Subscriptions will only be received and shares issued on the basis of the current Prospectus. For data sourced from Morningstar: Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Version 11/SD Baring Asset Management Limited 155 Bishopsgate, London, EC2M 3XY Authorised and regulated by the Financial Conduct Authority Follow us on twitter.com/barings 5