Fund & Asset Manager Rating Group

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1 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Fund & Asset Manager Rating Group Managed by Standard Life Investments Limited Full Rating Report Fixed Income Funds / Luxembourg Key Rating Drivers Yield Curve Investing: The (ARGBF) seeks to deliver positive returns on a 12-month rolling basis from active long/short trading of global government bonds and currencies with a volatility of between 3% and 6% a year and maximum 10x leverage. Fund Features Portfolio managers Shayne Dunlap, Richard Marshall, Stuart Thomson, Ross Crawford Inception date 31 Mar 2011 Strategy Reference index Legal form Global Macro (Government Bond) absolute return EONIA Luxembourg SICAV Rating Category Scores Operational assessment Qualitative assessment Investment process Resources Company Track record Pass /No adjustment Forward-Rate Analysis: The research process aims to identify macroeconomic themes, which are expressed in forward-rate terms over a three- to six-month investment horizon. A proprietary system, ClearCurve, deconstructs yield curves and pinpoints desired exposures. The focus on forward-rate analysis supported by proprietary analytics differentiates the fund. Separate Risk Buckets: The fund actively trades seven separate, lowly correlated risk buckets (such as rates, FX and volatility) on the basis of the team s macroeconomic views and shortterm conviction. Stop-losses were implemented in 2015 to limit drawdowns. Decision-making is collegiate. Each PM has a specific market focus but no PM owns a given risk bucket. Renewed Investment Team: The team consists of four PMs, including two senior hires in September 2015, who brought deep derivatives trading experience. The core ARGBF investment team was renewed in , following the departure of three main portfolio managers (PMs) in October 2014, which, coupled with drawdowns, triggered outflows. SLI Integration Completed: Standard Life Investments Limited (SLI), with GBP253bn assets under management (AUM) at end-december 2015, acquired Ignis Asset Management Limited in July The ARGBF investment team has been integrated with SLI s multi-asset division and the wider SLI infrastructure, while retaining its investment autonomy. The fund will move to SLI s SICAV and will be rebranded in 4Q16. Track Record Improving Track Record: The fund delivered a top-quintile performance over the last year, driven by a low correlation of returns across risk buckets and with credit and rates markets, and better drawdown management. The fund has returned a cumulative 15% performance since launch, with six of the seven risk buckets having a positive performance. However, the fund has delivered negative 12-month rolling returns since 3Q14, suffering from drawdowns in 2014 (significant short position on US rates) and, to a lesser extent, 2015 (higher bond correlation). Analysts Manuel Arrivé, CFA [email protected] Figure 1 Fund Performance and Assets (Base = 100) Assets (RHS) Ignis Absolute Ret Gov Bond EUR I2 Acc Hdgd (LHS) EONIA (LHS) Lipper Global Absolute Return EUR Medium (LHS) (EURm) 6,000 5,000 4,000 3,000 2,000 1,000 0 Alastair.Sewell, CFA [email protected] Source: Lipper, net of fees 31

2 Figure 2 Fund Statistics At end-february 2016 Year Fund Ref. index a Lipper category Calendar returns (%) n.a n.a. Statistics (1 year) Volatility 2.3 Sharpe ratio -0.8 Max drawdown -4.3 a Reference index is EONIA Source: Lipper Figure 3 Key Investment Features Performance Objective: Positive 12 month rolling return Risk Objective: 3%-6% a year. Sources of return: Forward rates, FX, inflation, swap spreads, volatility Investment Universe: Primarily in G10 government bonds - no corporate or EM bonds. Instruments: Govies, repos, G10 CDS, interest rates and inflation swaps, FX options and forwards, listed derivatives. Exposure limits: No limits in terms of holdings or theme sizing 10% Absolute VaR limit. FX Risk: Max 25%, G10 only. Derivatives: Active use. Leverage: Max 10x (gross) targeted at 8x; 10% VaR limit. Positions: Annual Turnover a : 441% (2015). a ((Purchases + sales)- (subscriptions + redemptions))/average NAV Source: SLI, Fitch Investment Process Investment Philosophy Overview: The fund s philosophy is based on the use of forward-rate analysis to express global macroeconomic views. It seeks to diversify risk and return drivers through multiple strategies, with a key focus on capital protection. The fund implements strategies to express four to five investment themes. The unconstrained investment approach has not changed since inception of the fund. It favours relative value positions between different forward rates, directional positions on interest rates and FX positions and avoids carry strategies. The fund is actively traded, implementing long and short positions and dynamic hedges, as evidenced by high turnover (see Figure 3). Investment Edge: The fund s investment edge comes from the combination of fundamental macroeconomic research and forward-rate analysis, using its proprietary tool, ClearCurve (see Technology below). Investment ideas are expressed in forward-rate terms, across seven different, lowly correlated, risk buckets and multiple instrument types. Research Coverage and Inputs: The investment team and its dedicated economist form macroeconomic views using proprietary fundamental research and after intensive debate. The team is not bound by SLI s macro views but considers them when forming its own. The team also receives sell-side research, macroeconomic data and research produced by think-tanks. Research Process: The team uses ClearCurve as its primary tool for understanding where pricing differs from its macro view by looking at forward rates. ClearCurve allows the investment team to visualise portfolio exposures in forward-rate terms. Based on this view, the system can calculate with precision the profit and loss impact of movements in individual forward rates. ClearCurve also translates the desired forward-rate exposure into investible instruments to match both the macro drivers and short-term convictions. It provides historical and sensitivity analysis to inform position sizing and overall portfolio positioning. Output and Communication: The expression of macroeconomic views and related themes in forward-rate terms using ClearCurve is the main research output. Research outputs are not formalised beyond their representation in ClearCurve. Decision Making and Portfolio Construction Responsibilities: Decision-making is collegiate, with all members of the team providing input on all strategies and no PM being responsible for a given profit and loss account. Following the hiring of two senior PMs in 2015, the ownership and responsibilities of decision-making may become more formalised in the near future. Portfolio Construction: Portfolio construction aims to incorporate the key macroeconomic themes identified as part of the research process. Each view is expressed through multiple different positions to achieve a specific forward-rate exposure in a diversified portfolio. Risk taking is a function of past trade volatility and level of conviction, rather than the result of a formal top-down risk budgeting process. Portfolio Monitoring Investment Risk Monitoring Portfolio monitoring and risk discipline is embedded in the allocation between risk buckets and mitigated by portfolio diversification. Risk can be adjusted quickly to reflect market movements. Since 2015, the fund has had formal risk limits and stop losses, which Fitch expects to improve drawdown management, an area of weakness in the past. Related Criteria Fund Quality Rating Criteria (September 2014) Profit and loss is monitored intraday for each individual position, strategy, risk bucket and fund level on Bloomberg Asset and Investment Manager (Bloomberg AIM). ClearCurve is used as 2

3 Short dated forward rates Medium dated forward rates Long dated forward rates Swap Spread Inflation FX Volatility Fund & Asset Manager Rating Group Figure 4 Key Investment and Support Functions Team Nb Av. experience Portfolio 3 20 management a Macro economics b 3 12 Investment specialists 2 10 a Exluding S.Thomson b Including S.Thomson Source: SLI, as at February 2016 the primary portfolio risk analysis tool, allowing for detailed sensitivity analysis and scenario testing. Drawdown management is an integral part of the fund s approach, with active discretionary rather than systematic hedging strategies (selling bond futures). Counterparty Risk, Liquidity Risk: Counterparty risk management follows SLI s procedures via a dedicated counterparty risk committee. The fund is invested in liquid instruments and has a core holding in the Standard Life Investments Sterling and Euro Liquidity Funds (rated AAAmmf by Fitch), allowing it to meet daily redemption requests (like in October 2014, when the fund had to deleverage in a period of severe outflows). Risk Reporting and Oversight: Second-level risk control is provided by SLI s risk management function, which monitors the portfolio daily using Barclays POINT. Daily, weekly and monthly reports include metrics such as risk factor breakdowns and correlation, exante/ex-post risk measures (such as tracking error volatility and value at risk), and leverage (gross notional). Performance attribution and correlation between risk buckets is calculated on a monthly basis. Figure 5 Contribution by Strategy Since launch (bps) Source: SLI, as at end Jan 2016 There is a formal portfolio quarterly review, by Risk Management and PMs and chaired by SLI s Chief Investment Officer (CIO), with any issues escalated to the Risk and Exposures committee (REC). Risk Management does not have the ability to force PMs to cut positions, should excessive risk taking be identified. Operational Front-Office Workflows Trades are executed by four individuals in the investment team via Bloomberg, primarily. The use of SLI s central dealing resources is under consideration. Pre-trade compliance is provided by a compliance module within Bloomberg. Resources Staffing Investment Professionals: The teams that manage Ignis ARGBF are listed in Figure 4. The key decision makers are the four named PMs. The first three have a specific market focus while the fourth is the dedicated macro-economist. ARGBF team is part of the wider Multi Asset Investment team. Following staff turnover in October 2014 (see Stability), a senior SLI PM took over the management of the fund before moving in early 2016 to a senior fixed-income investment specialist role, working closely with the ARGBF team. Two PMs joined in 2015 from the proprietary trading desk of Mizuho Corporate Bank, bringing experience of deep derivatives, long and short trading and quantitative analysis skills. The team s dedicated economist is also involved in the management of ARGBF. Another PM was one of the original architects of ClearCurve and has a key role in quantitative analysis and portfolio construction. Risk and Support Staff: The risk-management team consists of seven members (three focused on fixed income) responsible for providing risk reporting, and effectively challenging PMs decisions. The team ultimately reports to SLI s CIO. Technology Front-Office and Core Systems: Bloomberg Asset and Investment Manager (Bloomberg AIM) is the core portfolio management system. The system handles performance attribution, profit and loss monitoring and compliance monitoring. Trading is also conducted via Bloomberg. Risk Analytics: Barclays POINT is used as the main risk management tool. ClearCurve is Ignis proprietary research and portfolio management tool. It is written in C# and has been validated by the team against longhand calculations, through daily comparison to duration data and by comparing risk outputs with POINT but has not been formally externally audited. 3

4 Asset Manager Ownership and Financial Conditions SLI Limited (GBP253bn AUM at end-december 2015) acquired Ignis Asset Management Limited for GBP60bn in July Headquartered in Edinburgh, Standard Life Investments was launched as an investment management company in It is an indirectly wholly owned subsidiary of Standard Life plc. Institutional Experience & Market Presence Prior to acquisition, Ignis was a diversified asset manager, with a core fixed-income franchise. Ignis ARGBF complements SLI s strong absolute return multi-asset franchise. Figure 6 SLI Fixed Income AUM As at December 2015 Govies 25% Global credit 35% Source: SLI EM debt 1% Alternative rates strategies 1% Money market/fx 38% Stability Fitch s view is that staff turnover in the ARGBF team in 2014 resulted in a temporary loss of expertise but the hiring of Shayne Dunlap and Richard Marshall in 2015 strengthen derivatives trading strategies and daily risk controls, two previous areas of weakness of the fund. In October 2014, three of the core members of ARGBF team left, along with two others (see Fitch s Rating Action Commentary 16 October 2014). Ignis Chief Investment Officer, left later in Fund Behaviour Fund Biases and Sensitivities: The fund shows a correlation close to zero with other asset classes (e.g. correlation with Citi WGBI is zero since inception), as expected from an absolute return fund. Similarly, the average correlation of risk buckets is low, resulting in diversification that reduces volatility (e.g. by 52% in 2015 and up to 9.2% in 2013). Market Regime Dependency: The fund s ability to diversify and quickly adjust risk supports the objective of positive returns in all market conditions. However, the losses made in 2014 (directional trade on US rates) and to a lesser extent in 2015 (higher bond correlation and bund sell-off) show that the fund has not been agnostic to credit and interest market movements. The fund has shown a low leverage in 2015 (average of 6x relative to a limit of 10X), but the PMs intend to use leverage more efficiently going forward. 4

5 Figure 7 Operational Assessment Pass Attention required x Fail Service providers The Bank of New York Mellon (Luxembourg) S.A. AA /Stable/F1+ Assets are segregated as per regulation. Administrator: The Bank of New York Mellon (Luxembourg) S.A. Auditors: Ernst & Young S.A. Service providers Unchanged since inception of the fund in March 2011 Regulation and governance Regulated vehicle: Luxembourg SICAV UCITS IV compliant. In Q42016, the legal entity will change (i.e. the fund will move from the Ignis Global Fund SICAV to a SLI Luxembourg SICAV. There will be no change of administrator or custodian. Board: Fund board of four includes two independent directors Controls: Internal control, compliance, risk management functions exist. Risk Management reports to CIO and therefore is not fully independent from Front Office. Valuation Pricing responsibility: Undertaken by The Bank of New York Mellon (Luxembourg), as per regulation Pricing policy: Independent market data providers and external brokers (Level 2 assets). Independent price verification from a dedicated market data and valuations team. Back-office reconciliations Holdings and cash reconciled daily between the manager and the administrator Fund terms Liquidity: Daily subscription and redemptions with 12 noon Luxembourg cut-off time. T+3 settlement. A dilution levy of up to 2% may be applied if more than 5% of the fund is subscribed or redeemed on any day. Maximum 5% illiquid instruments. Cash invested in Ignis Asset Management Sterling and Euro Liquidity Fund (rated AAAmmf by Fitch) Fees: Management fees of 1.0% for class A and 0.4% for class I. Performance fee of 10% above cash rate. High watermark are absolute and calculated each 31 December. Hurdle rates depend on share class. Investor base Investor concentration: Five largest investors represent around 37% of the fund. The largest investor represented 15% of the fund at end-december Investor types: 80% institutions Alignment of interest Independence: Completely independent asset manager - no other activities than third party investment management Compensation: cash bonus. SLI compensation program is composed of market related pay and performance base incentive plan. Bonus can be up to 100% of base salary in some cases. SLI has a long term incentive plan. Transparency and reporting Strategy representation: Eligible instruments and investment strategy are clearly described in documentation Level of disclosure: High level of transparency in the form of monthly factsheets, performance commentaries and process presentations. Source: Fitch Rating Sensitivities The rating may be sensitive to material changes in the investment or operational processes or resources dedicated to the fund. A material adverse deviation from Fitch's guidelines for any key rating driver could result in a downgrade. For example, this may be manifested in significant structural deterioration in the fund's performance or excessive risk-taking. Conversely, Fitch may consider an upgrade if the fund's new team remains stable and demonstrates it can operate effectively, and if investment and risk management processes are strengthened, ultimately leading to a longer-term performance that is in line with or above absolute return and risk objectives. Important Notice A report providing a Fitch Rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the fund advisor and its agents in connection with the distribution of the fund. Investors should review the prospectus and/or legal information, which Fitch understands includes, inter alia, the jurisdictions in which the fund is registered for sale. 5

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