EAST AYRSHIRE COUNCIL CABINET 23 NOVEMBER 2011 TREASURY MANAGEMENT UPDATE ON 2011/12 STRATEGY POSITION

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1 EAST AYRSHIRE COUNCIL CABINET 23 NOVEMBER 2011 TREASURY MANAGEMENT UPDATE ON 2011/12 STRATEGY POSITION Report by Executive Director of Finance and Corporate Support 1 PURPOSE OF REPORT 1.1 The purpose of the report is to provide Members of Cabinet with an update on the Treasury Management strategy for 2011/12 for the period to 30 September Treasury Management is a complex area with its own terminology and acronyms. In order to aid Members understanding a Glossary of Terms used in this report is attached as Appendix BACKGROUND INFORMATION AND ECONOMIC UPDATE 2.1 The Treasury Management Strategy for 2011/12 has been underpinned by the adoption of the Chartered Institute of Public Finance and Accountancy s (CIPFA) Code of Practice on Treasury Management 2009, which includes the requirement for determining a treasury strategy on the likely financing and investment activity for the forthcoming financial year. 2.2 The Code also recommends that Members are informed of Treasury Management activities at least twice a year. This report therefore ensures this authority is embracing Best Practice in accordance with CIPFA s recommendations. 2.3 Treasury management is defined as: The management of the local authority s investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks. 2.4 Global growth prospects deteriorated considerably over the six months to September, moving from an expectation of modest expansion to the risk of a double-dip recession. Quarter 1 GDP in the UK was 0.5% but fell to just 0.2% in quarter Inflation remained high, with annual CPI for September at 5.2%; CPI has now remained above the Monetary Policy Committee s 3% upper limit for 20 consecutive months.

2 2.6 The US debt crisis ultimately led Standard & Poor s to downgrade the US Sovereign rating from AAA to AA+. The Federal Reserve in the US have committed to exceptionally low interest rates until mid The European sovereign debt crisis also deepened, with concerns around a number of Eurozone countries including Spain, Portugal, Greece and Italy. 2.8 The economic uncertainty resulted in analysts anticipating no changes in the UK Base Rate until at least mid PWLB borrowing rates have fallen in the first part of this financial year, although the Board have maintained the +0.90% margin above the equivalent gilt yield for new borrowing. 3. DEBT MANAGEMENT ACTIVITY Long Term Borrowing TOTAL BORROWING Balance 01/04/11 m Debt Maturing m Debt Repaid m New Borrowing m Balance 30/09/11 m Increase/ (Decrease) in Borrowing m Despite the issue of Circular 147 in October 2010, where new borrowing rates for fixed loans increased by nearly 0.9% across all maturities, the PWLB remains an attractive source of borrowing for the Council as it offers flexibility and control. The large downward move in gilt yields in July and August resulted in PWLB rates falling with the largest falls for short-dated maturities. Appendix 2 provides illustrative PWLB rates for the six months to September Whilst there are alternatives to the PWLB for long term borrowing, the Council will continue to adopt a cautious and considered approach to funding from the capital markets. The Council s treasury advisor, Arlingclose, is actively consulting with investors, investment banks, lawyers and credit rating agencies to establish the attraction of different sources of borrowing, including bond schemes, loan products and their related risk / reward trade off. 3.3 The Council funded 20m of its capital expenditure in the year to date from borrowing from the PWLB. 4. INVESTMENT ACTIVITY 4.1 The Regulations on Local Government Investments in Scotland requires local authorities to identify the different types of treasury risk that their permitted types of investment are exposed to credit / security risk, liquidity risk and

3 market risk. It also requires local authorities to consider the balance between security and liquidity, and the yield to be achieved. 4.2 Security of capital remains the Council s main investment objective. This has been maintained by following the Council s counterparty policy as set out in its Treasury Management Strategy Statement for 2011/12. This restricts new investments to the following institutions: Other Local Authorities; AAA-rated Stable Net Asset Value Money Market Funds; Deposits with UK Banks and Building Societies systemically important to the UK banking system, and deposits with select non-uk Banks (Australia, Canada, Finland, France, Germany, Netherlands, Sweden, Switzerland and the USA); with a minimum credit rating of A+; Debt Management Office; Bonds issued by Multilateral Development Banks, such as the European Investment Bank; Pooled funds (collective investment schemes) meeting the criteria in SI 2004 No 534 and subsequent amendments. 4.3 The following table summarises the investment position of the Council as at 30 September 2011, at which date there was m placed on deposit. Counterparty Credit Rating at Type of Investment Balance at 1 April /9/11 Investments Made to 30 Sept 2011 Investments Repaid to 30 September 2011 Balance at 30 September 2011 Average Int 30 September 2011 Royal Bank of Scotland A+ (Call Account) 1,939,140 3,142,700 3,210,000 1,871, % Royal Bank of Scotland A+ (30 Day Notice) 2,510,390 13,076,350 15,570,000 16, % Royal Bank of Scotland A+ (60 Day Notice) 278,210 4,700, ,000 4,203, % Royal Bank of Scotland A+ (Fixed term deposits) 0 3,900, ,900, % Bank of Scotland A+ (Call Account) 28,040 2,014, ,940 1,580, % Clydesdale A2 (Call Account) 2,005,050 80,951,460 82,707, , % Clydesdale A2 (15 Day Notice) 924,520 4,411,610 5,336, % Clydesdale A2 (30 Day Notice) 1,501, ,502, % Santander AA- (Call Account) 2,091,390 25,707,850 22,263,000 5,536, % Santander AA- (15 Day Notice) 4,010,690 16,028,200 20,020,000 18, % Santander AA- (Fixed term deposits) 0 4,425, ,425, % Barclays AA- (Call Account) 0 2,661,580 2,400, , % Barclays AA- (100 Day Notice) 6,032,480 3,693, ,726, % Bank of Scotland A+ (Fixed term deposits) 6,500,000 9,280,000 7,380,000 8,400, % Nationwide A+ (Fixed term deposits) 6,000,000 9,805,340 6,000,000 9,805, % Payden Sterling Reserve AAAMF 1,000, ,000,000 Var 33,821, ,798, ,625,920 50,994, % Counterparty credit quality is assessed and monitored with reference to: Credit Ratings (The council s minimum long-term counterparty rating of A+ (or equivalent) across rating agencies Fitch, S&P and Moody s); Credit Default Swaps; GDP of the country in which the institution operates; the country s net debt as a percentage of GDP;

4 Sovereign Support Mechanisms / potential support from a well-resourced parent institution; Share Price. 4.4 Credit Risk Counterparty credit quality has been maintained through the first half of the year, as can be demonstrated by the Credit Score Analysis summarised below: Date Value Weighted Average Credit Risk Score Value Weighted Average Credit Rating Time Weighted Average Credit Risk Score Time Weighted Average Credit Rating 31/03/ AA AA- 30/06/ AA AA- 30/09/ AA AA- Scoring: Value weighted average reflects the credit quality of investments according to the size of the deposit Time weighted average reflects the credit quality of investments according to the maturity of the deposit AAA = highest credit quality = 1 D = lowest credit quality = 15 Aim = A+ or higher credit rating, with a score of 5 or lower, to reflect current investment approach with main focus on security 4.5 Counterparty Update The lack of real progress in resolving the sovereign debt crisis in Europe began to affect even the stronger Eurozone nations and their banking systems. Market volatility, as measured by the VIX index, spiked sharply in August and banks share prices fell sharply. Having reviewed all credit indicators the Council, advised by Arlingclose, believed that there were no solvency issues with any of the banks on our recommended lending list. Nevertheless, the share price moves were too sharp to ignore and a prudent response to market conditions was required The Council responded to the growing stress by reducing maturities for new investments, as advised by the Council s treasury advisors. Limits for UK banks, Nationwide BS and Australian, Canadian and US banks were temporarily reduced to 6 months (Santander UK plc is restricted to 3 months). Limits for European banks have been temporarily reduced to 1 month. French institutions have been suspended for new investments in response to concerns over funding and their sovereign exposure to peripheral European nations During the first quarter Moody s placed the ratings of a number of UK institutions on review for possible downgrade. This was to align their ratings with evolving systemic support post credit crisis On 28 th September Clydesdale Bank was suspended from the Council s lending list following the bank s downgrade to A2 by Moody s, which falls

5 below the Council s minimum criteria of A+ (or equivalent). As the Clydesdale Bank is the Council s banker, although it does not meet the minimum credit criteria of A+ (or equivalent) long term, and will not be used for investment purposes, it will still be necessary to utilise the bank for all daily transactional activity, short-term liquidity requirements and business continuity arrangements On 7 th October Royal Bank of Scotland, Natwest and Nationwide BS were also suspended from the lending list following their downgrade to A2 by Moody s, which falls below the Council s minimum criteria of A+ or equivalent. On advice from Arlingclose, all instant access and notice account monies have been recalled, although term deposits with these institutions will be held until maturity On 13 th October Lloyds / Bank of Scotland were suspended from the lending list following their downgrade to A by Fitch, which falls below the Council s minimum criteria of A+ or equivalent. On advice from Arlingclose, all instant access and notice account monies have been recalled, although term deposits with these institutions will be held until maturity Following the suspensions noted above at to the only UK banks currently on the authorised investment list are Barclays and Santander. In line with the advice of Arlingclose and the Treasury Management Strategy for 2011/12, new investments are restricted to these banks, other local authorities, Money Market Funds and the Debt Management Office. It should be noted that whilst this strategy will continue to provide the necessary security for new investments it is anticipated that in the longer term this will have a negative impact on the interest earned on investments (i.e. the yield) As a result of the reduction in available counterparties, on Monday 17 th October there was a technical breach of investment limits with 3.596m being invested with Santander beyond the investment limit of 10m. The investment in excess of the limit was an overnight deposit and there have been no other instances where investment limits have been breached. The decision was taken to place the excess funds with Santander as, at that date, they held the strongest credit rating of the remaining counterparties m was invested in the Payden Sterling Reserve Fund, with further Money Market Fund Accounts opened with Prime Rate and Ignis although no funds have yet been placed with these agencies Money Market Funds (MMFs) are pooled funds that invest in short-term debt instruments. They provide the benefits of pooled investments as investors can participate in a more diverse and high-quality portfolio than they otherwise could individually. Each investor is considered a shareholder of the investment pool. The most important characteristic of an MMF is the highly diversified, high credit quality investments in the fund MMFs invest in securities issued by sovereign governments, gilts, treasury bills, investments with the DMO, Certificates of Deposit issued by financial

6 institutions, floating rate notes and medium term notes, commercial paper and very short dated term deposits. Each holding is limited to no more than 5% of the fund, although the diversification is often greater with investments spread across 30 to 40 products. An example of the investment pool for the Payden & Rygel sterling reserve MMF is attached for information at Appendix At present a prudent approach to investments has been taken with investments recently being placed with the DMO. It is anticipated that, subject to market conditions, MMF s will be more widely used in future to provide liquidity and yield while maintaining a high level of security. It is not proposed to seek approval at this stage to increase the investment limits for specific counterparties nor to reduce the minimum credit criteria being applied Until early September, where cash-flow permitted, the Council followed a cautious investment strategy of a rolling programme of 1 year deposits with named counterparties for a proportion of its investments. Longer-dated AAA investments such as bonds issued by the European Investment Bank and World Bank were not considered particularly attractive in relation to their yield. 4.6 Budgeted Income and Outturn The Council s budgeted investment income for the year is estimated at 0.300m, with the projected outturn broadly in line with this estimate. The average cash balances representing the Council s reserves and working balances were m during the period to 30 September The UK Bank Rate has been maintained at 0.5% since March 2009 and is not expected to rise until at least the middle of Icelandic Bank Investment Update Following the latest guidance issued by CIPFA in September 2011 (LAAP Bulletin 82 Update 5), the following is now known: The Scottish Government issued statutory guidance in March 2009 which permitted Scottish local authorities to defer charging impairment losses arising from Icelandic deposits to the General Fund until 2010/11. This was to allow time for the position to become clearer as to what, if any, losses local authorities will actually incur as a result of these investments. Heritable It is expected that 86p-90p/ will be recovered overall. At the time LAAP Bulletin 82 Update 5 was issued, interim payments totalling 60.42% of the claim had been made. In the current year 6.25% was received in April 2011 and 4.05% in July A further 4.50% is expected in October KSF It is now expected that 78p-86p/ will be recovered overall. The revised estimated repayment schedule assumes a prudent midpoint repayment of 82%. In the current financial year 5.00% was received in May 2011, with a further 8.00% anticipated in January 2012.

7 5. COMPLIANCE WITH PRUDENTIAL INDICATORS 5.1 All Prudential Indicators for 2011/12, agreed by Cabinet on 23 March 2011 as part of the Council s Treasury Management Strategy, have been complied with. 6. OUTLOOK FOR QUARTER 3 AND At the time of writing this activity report in October 2011, given the precarious outlook for growth it is believed the Bank of England would only raise rates after there was firm evidence that the economy had survived the fiscal consolidation. Therefore, the outlook is for official interest rates to remain low for an extended period. 7 FINANCIAL IMPLICATIONS 7.1 There are no immediate financial implications arising from the report. In compliance with the requirements of the CIPFA Code of Practice this report provides Members with a summary report of the treasury management activity during the first 6 months of 2011/12. As indicated in this report none of the Prudential Indicators have been breached and a prudent approach has been taken in relation to investment activity with priority being given to security and liquidity over yield. 8 LEGAL AND POLICY IMPLICATIONS 8.1 The treasury management policies and practices have been complied with during the year. 9 RECOMMENDATIONS 9.1 It is recommended that Members:- i) Note the contents of this report. Alex McPhee Executive Director of Finance and Corporate Support LIST OF BACKGROUND PAPERS NIL Members wishing further information should contact Craig McArthur, Head of Finance, Telephone (01563)

8 APPENDIX 1 TREASURY MANAGEMENT - GLOSSARY OF TERMS Bank of England - The Central Bank for the UK with ultimate responsibility for setting interest rates (which it does through the Monetary Policy Committee or MPC ). Bank Rate - The interest rate for the UK as set each month by the Monetary Policy Committee ( MPC ) of the Bank of England. Also commonly referred to as the Base Rate. Capital Expenditure - Expenditure on or for the creation of fixed assets that meets the definition within the accounting rules as setout in the annual Statement of Recommended Practice (SORP) and for which the Council are able to borrow. Credit Default Spread / Swaps (CDS) - This is the cost of insuring against default by a Counterparty. Increases in the CDS Spread for a Counterparty may indicate concerns within the market regarding a Counterparty. CIPFA - The Chartered Institute of Public Finance and Accountancy produces guidance, codes of professional practice, and policy documents for Councils and public sector organisations. Consumer Prices Index - The Consumer Prices Index ( CPI ) is a means of measuring inflation (as is the Retail Prices Index or RPI ). The Monetary Policy Committee of the Bank of England set the Bank Rate in order to try to keep CPI at or close to the target set by the Government (currently the target is 2%). The calculation of CPI includes many items of normal household expenditure but specifically excludes some items such as mortgage interest payments and Council Tax. Counterparty - An organisation or other body with whom the Council enters into a financial investment or borrowing transaction. E.g. if the Council enters a deal with a bank then the bank would be referred to as the Counterparty. Credit Ratings - Credit ratings are indicators produced by companies such as Fitch, Moody's or Standard & Poor's) that aim to give an opinion on the relative ability of a financial institution to meet its financial commitments. Credit ratings are not guarantees they are opinions based on investigations and assessments by the ratings providers and they are regularly reviewed and updated. The Council makes use of credit ratings to determine which counterparties are appropriate or suitable for the Council. DMO / DMADF - The UK Government Debt Management Office offer a Debt Management Account Deposit Facility as part of its cash management operations and in the context of a wider series of measures designed to support local authorities' cash management. The key objective of the DMADF is to provide users with a flexible and secure facility to supplement their

9 existing range of investment options while saving interest costs for central government. Eurozone - The group of countries that have the Euro as their currency. The Eurozone comprises 17 countries: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Federal Reserve - Sometimes referred to as the Fed, the Federal Reserve is the central bank for the US and is their equivalent of the Bank of England. Gilts - Gilts are bonds (i.e. debt certificates) that are issued (sold) by the UK Government. When they issue gilts, the Government sets the interest rate that applies to the gilt, sets when they will repay the value of the gilt, and it agrees to make interest payments at regular intervals until the gilt is repaid or redeemed. Gilts are traded in the financial markets with the price varying depending on the interest rate applicable to the gilt, when the gilt will be repaid (i.e. when it will mature), on base rate expectations, and on market conditions. Gilt Yields - A gilt yield is the effective rate of return that someone buying a gilt at the current market price will receive on that gilt. Since the market price of a gilt can vary at any time, the yield will also vary. Gross Domestic Product (GDP) - is a measure of the output of goods and services from an economy. Inflation - Inflation is the term used for an increase in prices over time. It can be measured in various ways including using the Consumer Prices Index ( CPI ) or the Retail Prices Index ( RPI ). Investment Regulations - The Local Government in Scotland Act 2003 allows the Scottish Ministers to introduce Regulations to extend and govern the rules under which Scottish Councils may invest funds. The Local Government Investments (Scotland) Regulations 2010 came into effect on 1st April Money Market Fund (MMF) - These are highly regulated investment products into which funds can be invested. An MMF offers the highest possible credit rating (AAA) whilst offering instant access and the diversification of risk due to the MMF s balances being investing in selected and regulated types of investment product with a range of different and appropriately credit-rated counterparties. MPC - The Monetary Policy Committee of the Bank of England meets each month to agree and set the Bank Rate for the UK. Prudential Code - Councils are required to comply with the CIPFA Prudential Code for Capital Finance in Local Authorities. These requirements include the production of Prudential Indicators. The Prudential Code was revised in November 2009 with the revisions including the reclassification of some

10 Prudential Indicators as Treasury Management Indicators covered by the Treasury Management Code. Prudential Indicators - Indicators set-out in the Prudential Code that will help Councils to meet requirements in relation to borrowing limits or which will help Councils demonstrate affordability and prudence with regard to their prudential capital expenditure. PWLB - The Public Works Loan Board is a government agency and part of the Debt Management Office. The PWLB provides loans to local authorities and other specified bodies. PWLB Rates - These are the interest rates chargeable by the Public Works Loan Board for loans. The rates for fixed rate loans are determined by the day on which the loan is agreed. The rates to be charged by the PWLB for loans are set each day based on gilt yields at the start of business each day and then updated at least once during the day. Retail Prices Index - The Retail Prices Index ( RPI ) is a means of measuring inflation (as is the Consumer Prices Index or CPI ). The calculation of RPI includes most of the same items as the CPI as well as some items not included in the CPI such as mortgage interest payments and Council Tax whilst excluding items that are in the CPI such as charges for financial services. Treasury Management Code - This is the Treasury Management in the Public Services: Code of Practice and is a code of practice for Council treasury management activities. Yield - The yield is the effective rate of return on an investment.

11 APPENDIX 2 PWLB Rates 2011/12 Table 1: PWLB Borrowing Rates Fixed Rate, Maturity Loans Change Date Notice No 1 year 4½-5 yrs 9½-10 yrs 19½-20 yrs 29½-30 yrs 39½-40 yrs 49½-50 yrs 01/04/ / /04/ / /05/ / /06/ / /07/ / /08/ / /09/ / Low Average High Table 2: PWLB Borrowing Rates Fixed Rate, Equal Instalment of Principal (EIP) Loans Change Notice Date No 4½-5 yrs 9½-10 yrs 19½-20 yrs 29½-30 yrs 39½-40 yrs 49½-50 yrs 01/04/ / /04/ / /05/ / /06/ / /07/ / /08/ / /09/ / Low Average High

12 APPENDIX 3 PAYDEN AND RYGEL STERLING RESERVE FUND SAMPLE PORTFOLIO Description Coupon Maturity S&P Moody Yield Industry % of Portfolio GBP-ONTARIO PROVINCE 2.00% 12/10/2013 AA- Aa1 1.10% Government 2.97% GBP-SWEDISH EXPORT CREDIT 2.13% 12/10/2013 Aa1 1.22% Import/Export 2.68% GBP-INTL BANK RECON & DEVELOP FRN 1.02% 1/19/2016 AAA Aaa 1.00% Banking 2.66% GBP-NEDER WATERSCHAPSBANK 2.38% 12/10/2013 AAA Aaa 1.29% Special Purpose 2.25% GBP-INVESTEC BANK FRN GOVT GNTD 1.51% 04/09/ % Banking 2.16% GBP-RABOBANK FRN 1.39% 06/06/2014 AAA Aaa 1.51% Banking 2.16% GBP-CAISSE DES DEPOT FRN 1.24% 06/10/2014 AAA Aaa 1.28% Government 1.80% GBP-EUROPEAN INVESTMENT BANK FRN 0.97% 2/19/2015 AAA Aaa 1.09% Banking 1.80% GBP-OESTERREICH KONTROLLBANK GOVT GNTD 4.88% 12/07/2012 AAA 1.06% Banking 1.56% GBP-KOMMUNALBANKEN 4.88% 12/10/2012 AAA Aaa 1.13% Sovereigns 1.56% GBP-KOMMUNALBANKEN 4.88% 12/10/2012 AAA Aaa 1.13% Sovereigns 1.56% GBP-BANK NEDERLANDSE GEMEENTEN 4.38% 12/14/2012 AAA Aaa 1.08% Special Purpose 1.55% GBP-CIE FIN FONCIER 4.63% 12/28/2012 AAA Aaa 1.90% Banking 1.54% GBP-HARTFORD LIFE INST FUNDING 5.38% 1/17/2012 A A3 4.02% Special Purpose 1.50% GBP-TESCO PERSONAL FRN GOVT GNTD 1.33% 2/27/2012 AAA 0.98% Finance 1.48% GBP-NORDEA BANK AB 3.88% 12/15/2015 AA- Aa2 3.15% Banking 1.45% GBP-SNS BANK GOVT GNTD FRN 1.48% 4/27/2012 AAA Aaa 1.09% Banking 1.45% GBP-KFW FRN 0.90% 2/15/2013 AAA Aaa 0.99% Banking 1.44% GBP-FINLAND GOVT FRN 0.97% 3/25/2015 AAA Aaa 1.00% Sovereigns 1.44% GBP-BNP PARIBAS FRN 1.11% 5/25/2012 AA- Aa2 1.84% Banking 1.44% GBP-HSBC BANK PLC FRN 1.52% 6/16/2014 AA Aa2 1.75% Banking 1.43% GBP-WESTPAC BANKING FRN 1.54% 06/03/2014 AA Aa2 1.88% Banking 1.43% GBP-BARCLAYS BANK FRN 1.82% 3/18/2013 AA- NR 1.92% Banking 1.26% GBP-ASB FINANCE (CBA) 3.25% 12/09/2013 AA Aa3 2.78% Finance 1.19% GBP-AUST & NZ BANK FRN 1.53% 10/23/2012 AA Aa2 1.30% Banking 1.19% GBP-GE CAPITAL CORP UK FRN 0.93% 1/30/2012 AA+ Aa2 1.40% Financial-Divrs 1.19% GBP-BANK NEDERLANDSE GEMEENTEN 4.38% 12/14/2012 AAA Aaa 1.08% Special Purpose 1.16% GBP-SNS BANK GOVT GNTD FRN 1.48% 4/27/2012 AAA Aaa 1.09% Banking 1.16% GBP-U.K. GILT 2.75% 1/22/2015 NR Aaa 0.99% Sovereigns 1.15% GBP-E.ON INTL FINANCE BV 6.38% 5/29/2012 A A3 1.59% Electric 1.14% GBP-RENTENBANK 5.25% 1/18/2012 AAA Aaa 0.74% Banking 1.13%

13 Description Coupon Maturity S&P Moody Yield Industry % of Portfolio GBP-FINLAND GOVT FRN 0.97% 3/25/2015 AAA Aaa 1.00% Sovereigns 1.08% GBP-CAISSE AMORT DET FRN 1.07% 6/17/2013 AAA Aaa 1.14% Government 1.08% GBP-EUROPEAN INVESTMENT BANK FRN 1.03% 01/05/2016 AAA Aaa 1.12% Banking 1.08% GBP-METLIFE GLOBAL 5.25% 01/09/2014 AA- Aa3 2.35% Insurance 1.03% GBP-TESCO PERSONAL FRN GOVT GNTD 1.33% 2/27/2012 AAA 0.98% Finance 1.03% GBP-NEW YORK LIFE FUNDING 5.13% 02/03/2015 AA+ Aaa 2.61% Special Purpose 1.00% GBP-ABBEY NATL TREASURY 5.50% 6/18/2014 AA- A1 5.20% Banking 0.96% GBP-COVENTRY BLDG SOCIETY GOVT GNTD 2.00% 04/05/2012 Aaa 0.82% Building-Maint& 0.91% GBP-ASIAN DEVELOPMENT BANK FRN 0.89% 02/08/2016 AAA Aaa 1.00% Banking 0.90% GBP-EUROPEAN INVESTMENT BANK FRN 0.90% 1/30/2014 AAA Aaa 1.06% Banking 0.90% GBP-BARCLAYS BANK FRN 1.82% 3/18/2013 AA- NR 1.92% Banking 0.90% GBP-CLYDESDALE BANK GOVT GNTD 3.38% 12/09/2011 AAA Aaa 0.57% Banking 0.82% GBP-AGENCE FRANCAISE 4.88% 10/30/2013 AAA 1.35% Special Purpose 0.80% GBP-MONUMENT GLOBAL 6.00% 1/30/2014 AA- A1 2.77% Insurance 0.80% GBP-TOTAL CAPITAL 5.50% 1/29/2013 AA- Aa1 1.36% Oil 0.79% GBP-SUNCORP-METWAY GOVT GNTD 4.00% 1/16/2014 AAA Aaa 1.22% Banking 0.79% GBP-SUNCORP-METWAY GOVT GNTD 4.00% 1/16/2014 AAA Aaa 1.22% Banking 0.79% GBP-OESTERREICH KONTROLLBANK GOVT GNTD 4.88% 12/07/2012 AAA 1.06% Banking 0.78% GBP-E.ON INTL FINANCE BV 6.38% 5/29/2012 A A3 1.59% Electric 0.76% GBP-RENTENBANK 5.25% 1/18/2012 AAA Aaa 0.74% Banking 0.76% GBP-NEDER WATERSCHAPSBANK 2.38% 12/10/2013 AAA Aaa 1.29% Special Purpose 0.75% GBP-TOYOTA CREDIT CANADA 5.13% 1/17/2012 AA- Aa3 1.36% Finance 0.74% GBP-ABBEY NATL TREASURY 5.50% 6/18/2014 AA- A1 5.20% Banking 0.74% GBP-LLOYDS GOVT GNTD 2.75% 3/16/2012 AAA Aaa 0.78% Banking 0.74% GBP-BARCLAYS BANK FRN GOVT GNTD 1.25% 2/13/2012 AAA Aaa 0.91% Banking 0.72% GBP-ASIAN DEVELOPMENT BANK FRN 0.89% 02/08/2016 AAA Aaa 1.00% Banking 0.72% GBP-ASIAN DEVELOPMENT BANK FRN 0.89% 02/08/2016 AAA Aaa 1.00% Banking 0.72% GBP-INVESTEC BANK FRN GOVT GNTD 1.51% 04/09/ % Banking 0.72% GBP-AUST & NZ BANK FRN 1.53% 10/23/2012 AA Aa2 1.30% Banking 0.72% GBP-BANK OF SCOTLAND FRN 0.95% 12/07/2011 A+ A1 1.11% Banking 0.72% GBP-BANK OF SCOTLAND FRN 0.95% 12/07/2011 A+ A1 1.11% Banking 0.72%

14 Description Coupon Maturity S&P Moody Yield Industry % of Portfolio GBP-KFW FRN GOVT GNTD 1.01% 03/09/2015 AAA Aaa 1.10% Banking 0.72% GBP-DEUTSCHE BANK LONDON FRN 0.88% 4/26/2012 A+ Aa3 1.45% Banking 0.72% GBP-NATL AUSTRALIA BANK FRN 1.55% 11/12/2013 AA Aa2 1.88% Banking 0.72% GBP-WELLS FARGO CO FRN 0.92% 1/25/2012 AA- A2 1.49% Banking 0.72% GBP-WELLS FARGO CO FRN 0.92% 1/25/2012 AA- A2 1.49% Banking 0.72% GBP-HSBC BANK PLC FRN 1.52% 6/16/2014 AA Aa2 1.75% Banking 0.72% GBP-WESTPAC BANKING FRN 1.54% 06/03/2014 AA Aa2 1.88% Banking 0.72% GBP-MERRILL LYNCH FRN 1.05% 2/21/2012 A Baa1 5.45% Brokerage 0.71% GBP-MERRILL LYNCH FRN 1.05% 2/21/2012 A Baa1 5.45% Brokerage 0.71% GBP-METLIFE GLOBAL 5.25% 01/09/2014 AA- Aa3 2.35% Insurance 0.67% GBP-ASB FINANCE (CBA) 3.25% 12/09/2013 AA Aa3 2.78% Finance 0.67% GBP-METLIFE GLOBAL 5.25% 01/09/2014 AA- Aa3 2.35% Insurance 0.63% GBP-TOTAL CAPITAL 4.63% 03/07/2012 AA- Aa1 1.23% Oil 0.62% GBP-MELLON FINANCIAL 6.38% 11/08/2011 AA- Aa2 2.72% Banking 0.59% GBP-TOTAL CAPITAL 5.50% 1/29/2013 AA- Aa1 1.36% Oil 0.59% GBP-ASIAN DEVELOPMENT BANK FRN 0.89% 02/08/2016 AAA Aaa 1.00% Banking 0.54% GBP-MERRILL LYNCH FRN 1.05% 2/21/2012 A Baa1 5.45% Brokerage 0.53% GBP-TOYOTA CREDIT CANADA 5.13% 1/17/2012 AA- Aa3 1.36% Finance 0.50% GBP-MONUMENT GLOBAL 6.00% 1/30/2014 AA- A1 2.77% Insurance 0.48% GBP-AGENCE FRANCAISE 4.88% 10/30/2013 AAA 1.35% Special Purpose 0.45% GBP-BARCLAYS BANK FRN GOVT GNTD 1.25% 2/13/2012 AAA Aaa 0.91% Banking 0.43% GBP-TOYOTA CREDIT CANADA 5.13% 1/17/2012 AA- Aa3 1.36% Finance 0.41% GBP-MONUMENT GLOBAL 6.00% 1/30/2014 AA- A1 2.77% Insurance 0.40% GBP-GE CAPITAL CORP UK FRN 0.93% 1/30/2012 AA+ Aa2 1.40% Financial-Divrs 0.40% GBP-BANK NEDERLANDSE GEMEENTEN 4.38% 12/14/2012 AAA Aaa 1.08% Special Purpose 0.39% GBP-ASB FINANCE (CBA) 3.25% 12/09/2013 AA Aa3 2.78% Finance 0.37% GBP-EUROFIMA 4.38% 02/11/2013 AAA Aaa 1.13% Finance 0.37% GBP-MELLON FINANCIAL 6.38% 11/08/2011 AA- Aa2 2.72% Banking 0.36% GBP-CAISSE DES DEPOT FRN 1.24% 06/10/2014 AAA Aaa 1.28% Government 0.36% GBP-CAISSE DES DEPOT FRN 1.24% 06/10/2014 AAA Aaa 1.28% Government 0.36% GBP-FINLAND GOVT FRN 0.97% 3/25/2015 AAA Aaa 1.00% Sovereigns 0.36%

15 Description Coupon Maturity S&P Moody Yield Industry % of Portfolio GBP-BANK OF SCOTLAND FRN 0.95% 12/07/2011 A+ A1 1.11% Banking 0.36% GBP-BANK OF SCOTLAND FRN 0.95% 12/07/2011 A+ A1 1.11% Banking 0.36% GBP-MERRILL LYNCH FRN 1.05% 2/21/2012 A Baa1 5.45% Brokerage 0.36% GBP-EUROFIMA 4.38% 02/11/2013 AAA Aaa 1.13% Finance 0.35% GBP-MONUMENTAL GLOBAL 4.63% 1/18/2013 AA- A1 2.61% Insurance 0.34% GBP-CLYDESDALE BANK GOVT GNTD 3.38% 12/09/2011 AAA Aaa 0.57% Banking 0.30% GBP-SNS BANK GOVT GNTD FRN 1.48% 4/27/2012 AAA Aaa 1.09% Banking 0.29% GBP-BARCLAYS BANK FRN GOVT GNTD 1.25% 2/13/2012 AAA Aaa 0.91% Banking 0.29% GBP-NEW YORK LIFE FUNDING 5.13% 02/03/2015 AA+ Aaa 2.61% Special Purpose 0.28% GBP-CIE FIN FONCIER 4.63% 12/28/2012 AAA Aaa 1.90% Banking 0.27% GBP-HARTFORD LIFE INST FUNDING 5.38% 1/17/2012 A A3 4.02% Special Purpose 0.26% GBP-AUST & NZ BANK FRN 1.53% 10/23/2012 AA Aa2 1.30% Banking 0.25% GBP-EUROFIMA 4.38% 02/11/2013 AAA Aaa 1.13% Finance 0.23% GBP-GE CAPITAL CORP UK FRN 0.93% 1/30/2012 AA+ Aa2 1.40% Financial-Divrs 0.22% GBP-EUROFIMA 4.38% 02/11/2013 AAA Aaa 1.13% Finance 0.21% GBP-TESCO PERSONAL FRN GOVT GNTD 1.33% 2/27/2012 AAA 0.98% Finance 0.20% GBP-MONUMENT GLOBAL 6.00% 1/30/2014 AA- A1 2.77% Insurance 0.20% GBP-TOTAL CAPITAL 5.50% 1/29/2013 AA- Aa1 1.36% Oil 0.20% GBP-EUROFIMA 4.38% 02/11/2013 AAA Aaa 1.13% Finance 0.19% GBP-U.K. GILT 2.75% 1/22/2015 NR Aaa 0.99% Sovereigns 0.19% GBP-MONUMENTAL GLOBAL 4.63% 1/18/2013 AA- A1 2.61% Insurance 0.19% GBP-TOYOTA CREDIT CANADA 5.13% 1/17/2012 AA- Aa3 1.36% Finance 0.19% GBP-TOTAL CAPITAL 4.63% 03/07/2012 AA- Aa1 1.23% Oil 0.19% GBP-TESCO PERSONAL FRN GOVT GNTD 1.33% 2/27/2012 AAA 0.98% Finance 0.18% GBP-MERRILL LYNCH FRN 1.05% 2/21/2012 A Baa1 5.45% Brokerage 0.18% GBP-MONUMENTAL GLOBAL 4.63% 1/18/2013 AA- A1 2.61% Insurance 0.15% GBP-TOYOTA CREDIT CANADA 5.13% 1/17/2012 AA- Aa3 1.36% Finance 0.15% GBP-TOTAL CAPITAL 4.63% 03/07/2012 AA- Aa1 1.23% Oil 0.13% GBP-MONUMENT GLOBAL 6.00% 1/30/2014 AA- A1 2.77% Insurance 0.12% GBP-HARTFORD LIFE INST FUNDING 5.38% 1/17/2012 A A3 4.02% Special Purpose 0.11% GBP-TOYOTA CREDIT CANADA 5.13% 1/17/2012 AA- Aa3 1.36% Finance 0.09%

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