Global Fixed Income Quarterly Review Composite Performance Periods ending June 30, 2015 Annualized Returns Performance Highlights Our underweight duration position aided performance. Return % 5 4 3 2 1 0-1 -2-3 -4-2.5-2.7 Qtr -2.2-0.5-0.9-0.4 YTD 3.1 2.1 1 Year 3.6 3.0 2.5 3 Year 3.3 4.5 3.6 4.1 Since Inception 2/1/2011 FX positioning was a strong contributor to performance. Our overweight to credit sectors detracted from performance. Global Fixed Income Gross of Fees Global Fixed Income Net of Fees Barclays Global Aggregate (USD Hedged) Sources:, Barclays POINT Returns shown in USD. The value of investments can fluctuate. Data reflects past performance. Data assumes reinvestment of dividends and capital gains. Past performance does not guarantee future results. Attribution Analysis One year ending June 30, 2015 Cumulative Excess Return %T 0.4 0.3 0.2 0.1-0.0-0.1-0.2-0.3-0.23-0.02-0.05 0.21 0.30 At A Glance Inception: February 1, 2011 Benchmark: Barclays Global Aggregate (USD Hedged) AUM: $1.2 billion Duration & Yield Curve Sector Allocation Country Allocation Currency Selection Total Effect Source: Barclays POINT Supplemental Information Total Effect includes residual securities not reflected in the categories shown above. FOR INSTITUTIONAL USE ONLY
Credit Quality Sector Allocation -6.22-4.86-6.10-5.43 Portfolio Weight vs. Benchmark -3.31 Portfolio Weight vs. Benchmark -3.03-0.20-0.35-0.81 0.15 1.39 5.35 7.73-10 -8-6 -4-2 0 2 4 6 8 10 % 7.92 7.78-10 -8-6 -4-2 0 2 4 6 8 10 % Quality Rating Sector Portfolio (%) Portfolio (%) Benchmark (%) AAA 37.43 40.74 AA 12.49 17.35 A 20.08 26.18 BBB 17.12 15.73 BB 7.73 0.00 B & Below* 5.35 0.00 Cash Equivalents -0.20 0.00 *Includes unrated bonds Benchmark (%) Securitized 23.39 15.47 High Yield Credit 7.78 0.00 FX Forwards 0.15 0.00 Cash & Equivalents -0.35 0.00 Sovereign 0.51 1.32 Agency 0.96 3.99 Inv Grade Credit 20.03 25.46 Treasury 47.54 53.76 Portfolio Positioning We maintain a bias to lower-rated, higher-spread credit securities. Our sovereigns and agency bond underweight funds our allocation to credit-related sectors. The underweight investment grade credit position reflects our underweight to supranational and low spread government related bonds. Within IG credit, we are overweight European banks. Top/Bottom Currency Allocation Portfolio Weight 0.82 0.53 0.25 0.24 0.22 Currency United States Dollar Pounds Sterling Swedish Krona Canadian Dollar Korean Won We maintain an overweight in U.S. dollar. We are underweight Yen on the economic outlook for Japan and underweight Euro given QE actions. Our NZD underweight reflects their exposure to Chinese demand. -0.84-0.93-0.65-0.01-0.03 New Turkish Lira Australian Dollar New Zealand Dollar European Euro Japanese Yen -1.5-1.0-0.5 0.0 0.5 1.0 1.5 % Source: Barclays Capital Indices/POINT Supplemental information FOR INSTITUTIONAL USE ONLY 2
Portfolio Characteristics Characteristics Global Fixed Income Barclays Capital Global Aggregate Bond Portfolio Weight vs. Benchmark Weighted Average Maturity 8.27 years 8.29 years -0.02 years Weighted Average Coupon 3.25% 3.15% 0.10% Yield to Maturity 2.14% 1.75% 0.39% Effective Duration 6.32 years 6.46 years -0.14 years Source: Barclays Capital Indices/POINT Yield Curve Over/Underweights Total Portfolio Partial Years of Duration 0.15 0.10 0.05-0.00-0.05-0.10-0.15 0.00 0.07 0.07 0.01-0.04-0.01 Portfolio Positioning Overall, we are -0.02 year duration versus the benchmark. Our most significant corporate bond overweight positions are U.S. high yield and European bank subordinated bonds. The portfolio is overweight U.S. nonagency mortgages. In FX, our main positions are long USD and GBP and short YEN, Euro, and NZD. -0.20-0.20-0.25 6 Months 2 Source: Barclays Capital Indices/POINT 5 7 Years 10 20 30 Yield Curve Over/Underweights By Currency 0.20 0.15 0.10 0.05 0.00-0.05-0.10-0.15-0.20 6 Months 2 5 7 10 20 30 Years USD EUR Yen Other 6 month 2 year 5 year 7 year 10 year 20 year 30 year Total USD 0.14-0.02-0.07 0.00 0.14-0.15-0.09-0.05 EUR -0.06-0.07 0.15 0.00 0.00-0.02 0.15 0.15 Yen -0.04-0.06-0.03 0.07-0.12 0.17-0.05-0.06 Other -0.03-0.04 0.04 0.00 0.00-0.04-0.02-0.09 Source: Barclays Capital Indices/POINT Supplemental information FOR INSTITUTIONAL USE ONLY 3
Quarterly Commentary The quarter at a glance. Global bond yields rise Sharp steepening of the German yield curve U.S. Fed tightening seen to be closer Italian and Spanish 10-year yields rise more than 100 bps Commodity prices resume downward trend Oil price remains low Iron ore and metal prices stay low on weak demand from China Credit spread performance volatile Very weak end to the quarter for credit spreads Spread reaction to threat of Greek default relatively modest Threat of a Greek bond default and exit from Euro rise in the quarter Sharp rise and fall in Chinese equity markets U.S. dollar exchange rate rises U.S. dollar rally sustains Commodity related currencies were more volatile EUR/USD exchange rate stabilizes after EUR depreciation in 1Q15 10yr Govt yields 31st Mar 30th June U.S. 1.95% 2.34% +0.39 Germany 0.18% 0.84% +0.66 Japan 0.41% 0.46% +0.05 U.K. 1.61% 2.10% +0.49 Spain 1.28% 2.40% +1.12 Italy 1.36% 2.56% +1.20 Source: Barclays Live - Constant maturity yields Global Spread market excess returns (bps) Apr May June U.S. Securitized +23 +2-22 U.S. Corporates +9-36 -61 EUR Securitized +37-20 -39 EUR Corporates +23-13 -104 Source: Barclays Live Market and Economic Overview In the second quarter, we saw indications of improving economic data in the U.S. and the first potential signs of QE working, or at least reducing, deflationary fears in Europe. U.S. payroll numbers remain strong, unemployment continues to fall, and consumer confidence indicators of vehicle and home sales have lifted. In Europe, the picture also improved with sustained PMI numbers and slightly better employment data. The U.S. Fed has signaled a rate rise is now more probable in 2H15 subject to data reports and bond markets reacted accordingly. In Europe, where yields had fallen to unprecedented levels, the yield rise was more pronounced, especially in longer maturities. In Germany, where negative yields had reached out to eight years along the curve, the five-year yield rose 22 bps in the quarter, whereas 30-year yields rose nearly 100 bps. The resolution of the situation in Greece may also boost sentiment in Europe. While these domestic indicators in the U.S. and Europe have improved, concerns surrounding emerging markets, especially demand from China, have increased. We have had a sustained period of risk asset stimulus that has pushed investors into less liquid markets, which could create higher than expected volatility if there is a concerted investment withdrawal as U.S. rates rise. In currency markets, the Euro stabilized against the U.S. dollar during the second quarter, and some export-led Asian currencies weakened on concerns surrounding China. Commodity-related currencies also weakened on sustained low commodity prices apart from Russia, which continued to rebound. Credit spread markets underperformed in the quarter. Significant supply in the U.S. has weighed on valuations despite credit fundamentals remaining satisfactory. Energy and metal/mining companies were particular underperformers. In Europe, the reaction to the threat of a Greek default was muted but did create negative excess returns. Spread valuations remain fairly attractive in our view, but central bank policy remains a driver of shorter-term trends on technical/flows. Performance, Positioning and Outlook Global Fixed Income declined by 2.50% in the second quarter, underperforming the benchmark by 0.30%. The three-year annualized returns for Global Fixed Income now stand at 3.10% against 2.96% for the benchmark. Rates Bond yields generally rose around the globe in the second quarter. Signs of improving economic growth, particularly in the U.S. and Europe, pushed bond yields higher. In the U.S., the economy contracted slightly in the first quarter, but economic data in the second quarter was notably better. Economic growth in Europe, while still muted overall, continued to move in a positive direction. While yields rose sharply in the U.S. and Europe, yield movements were more subdued in Asia as uncertainty about economic growth in the region kept yields in check. Volatility in the global fixed income markets increased late in the quarter amid escalating government debt issues in Greece. The portfolio s duration positioning aided performance relative to the benchmark. Duration (a measure of interest-rate sensitivity) was shorter than that of its benchmark throughout the quarter, and this positioning added value as global bond yields rose. Toward the end of the quarter, the portfolio management team shifted back to a neutral duration versus the benchmark. The portfolio s country weightings contributed positively to relative results. An overweight position in Norway and a corresponding underweight position in the U.K. were favorable for performance, though the portfolio management team took profits near the end of the quarter, shifting back to a relatively neutral position in both FOR INSTITUTIONAL USE ONLY 4
countries. The management team also took advantage of volatility in Spain, adjusting the portfolio s holdings of Spanish bonds when yields fluctuated significantly. At the end of the quarter, the portfolio held an overweight position in Spain. The portfolio management team expects global economic conditions to improve during the second half of the year. The U.S. is likely to remain one of the stronger economies in the world, but growth also appears to be firming in Europe. Given the likelihood of Fed liftoff and continued QE in Europe, we will continue to overweight European bond markets relative to U.S. treasuries. While the portfolio is currently neutral relative to benchmark, we would likely reduce duration if yields declined to levels seen in the first quarter. Currency Most currency markets made a substantial recovery in Q2, rallying from March and April lows gaining 2% to 5% over the quarter. They generally peaked in mid-may and June still down about 5% to 8% on the year. Much of the quarter s recovery was driven by the U.S. becoming slightly more dovish on their rate tightening schedule, along with some very early signs of QE stimulus helping to slow down disinflation in Europe and Japan. However, in Asia, China growth remained a growing question with Asia underperforming Europe. A few of the Asian currencies were down 2% to 4% on the quarter. In Europe, the recovery rally seemed to stall with the EUR at 1.15, when the ECB announced a summer QE acceleration program in June. That combined with growing concerns about the Greek debt resolution created a small downtrend in the closing weeks of the quarter. The Greek contagion concern was felt the most in Eastern Europe where Poland and Hungary saw their currencies give back most of the recovery. The British Pound remained the strongest currency, up 6% for the quarter based on stronger fundamentals and a relatively strong commitment to tighten rates in sync with the U.S. Our overweight in GBP helped U.S. in this region but underweights in EUR and some others left us with a loss. Our longer- term view remains relatively weak for Europe based on the relatively weak fundamentals and QE being out of sync with U.S. tightening. In the resource and Latin American regions, Russia was the strongest, continuing to recover from its extreme oil and Ukrainerelated sell off. Oil recovered very strongly early in the quarter from 42 to the 60 range, but remained in a very tight band for the second half of the quarter. Russia was the only resource currency to significantly appreciate. Several other oil and commodity exporters like Colombia, Chile and Malaysia ended the quarter slightly down. New Zealand finally started to feel the China growth slowdown, with the currency losing almost 10% in the quarter in reaction to their Central Bank being one of the last to ease rates. We were able to participate in that move later in the quarter with a significant underweight in NZD. Geopolitical issues remain a concern in some countries like Turkey, which otherwise could be benefitting from the lower commodity prices. In the resource and commodity sectors we remain relatively bearish until global growth creates some sustained demand for the exports from these countries. In Asia, the China slowdown was most felt in export-led countries of Thailand, Malaysia and Indonesia, which were all down 2% on the quarter. Japan remained in a fairly narrow range again for the quarter but failed to make much progress on improving inflation, so another potential round of QE seems to be keeping it near its highs of 126. Singapore and Taiwan bucked the regional trend, recovering about 2% on the quarter like the European developed markets. In Asia, the ongoing Japan QE and China slowdown keeps our regional view very bearish. One of the few exceptions could be India, which seems to have stabilized under the new political and financial leadership. Credit The corporate bond market continued to have varied performance through the second quarter of 2015. A recovery in spreads in April was followed by negative excess returns in May and especially June as concerns surrounding a potential Greek debt debacle in Europe, heavy primary issuance, low commodity prices, the rising specter of U.S. Fed tightening and volatility in Chinese equity markets all weighed on risk assets. The market reaction to the Greek debt crisis was at least reasonably muted due to the small size of the Greek economy and debt exposures mainly being to government-related entities. The greater uncertainty appears to be how the market will react to Fed tightening and the withdrawal of risk asset stimulating central bank policy. The now more prolonged slump in metal and energy commodity prices is also a concern, especially to companies in those sectors. The related signal of demand slowing in China also poses questions on global economic growth. On the positive side, underlying economic data for the U.S. and European developed markets has turned more optimistic and should favor corporate credit quality. Demand for credit assets also remains high in the primary market in spite of significant supply. Corporate bond valuations have cheapened somewhat since the year to date tights in early March. In the U.S. the option adjusted spread (OAS) for corporate bonds tightened to 120 bps and softened to 145 bps at the end of the quarter. A similar pattern in Europe saw tights of 77 bps and ending the quarter at 122 bps, with Europe more afflicted by the debt crisis in Greece. Bearing in mind very low government yields, the carry value of the credit spread has helped offset the impact of wider spreads. Some of the spread underperformance has also been more specific to energy and commodity price related securities where our exposure is low. We have made moderate additions to our credit exposure on the weaker spread levels seen in May and June, but valuations failed to cheapen to levels where we felt we would use more of our capacity to add to credit. We believe secondary market pricing remains vulnerable to a sharp rise in outflows if central bank tightening triggers sellers. We continue to position the portfolio moderately overweight credit risk through U.S. high yield and lower-rated investment grade U.S. corporates. In Europe, we still see the supportive ECB backdrop as positive for valuations. We see significantly more value in financial sector subordinated bonds than in more economically sensitive industrial sectors. The European Banking Authority is now in place to maintain momentum in enforcing higher bank capital and solvency ratios in the region improving bank credit profiles. We hold a small overweight position in credit within Europe with a significant overweight in financials balanced by an underweight to industrial companies and government related securities. FOR INSTITUTIONAL USE ONLY 5
Management Team Teams Professionals Education Started in Industry* Started at ACI Global Macro Strategy Dave MacEwen, Co-CIO & CIO, Fixed Income Bob Gahagan, SVP & Sr. Portfolio Manager Steven Permut, SVP & Sr. Portfolio Manager Brian Howell, VP & Sr. Portfolio Manager John Lovito, SVP & Sr. Portfolio Manager Kevin Akioka, CFA, VP & Sr. Portfolio Manager Margé Karner, VP & Sr. Portfolio Manager MBA, University of Delaware MBA, University of Missouri, Kansas City MBA, Golden Gate University MBA, University of California-Berkeley MBA, Fordham University MBA, New York University MA, Johns Hopkins University 1982 1982 1992 1991 2009 2010 2014 Corporate Markets Kevin Akioka, CFA, VP & Sr. Portfolio Manager Margé Karner, VP & Sr. Portfolio Manager Jeffrey Houston, CFA, VP & Sr. Portfolio Manager John Walsh, VP & Portfolio Manager Simon Chester, VP & Portfolio Manager Gavin Fleischman, VP & Portfolio Manager Gregory Afiesh, VP & Director of Corp Credit Research Pierson Cheng, VP & Sr. Corporate Analyst Sudha Mani, VP & Sr. Corporate Analyst Kevin Sid, Sr. Corporate Analyst Jill Sakol Snow, Sr. Corporate Analyst Chris Brown, Sr. Corporate Analyst Tommy Youn, Sr. Corporate Analyst Cecile Rihouey, CFA, CIIA, Corporate Analyst Jessica Raymond, Corporate Analyst MBA, New York University MA, Johns Hopkins University MBA, Syracuse University MBA, Creighton University BCom, University of South Africa MBA, Fordham University BS, California Polytechnic State University MBA, University of Southern California MBA, San Jose State University BS, University of San Francisco MBA, New York University MBA, University of Chicago MBA, University of Chicago MS, SKEMA Business School BS, Stanford University 1992 1989 1989 2000 1984 2000 2010 2014 2010 2008 2014 2014 2015 Rates and Currency Markets John Lovito, SVP & Sr. Portfolio Manager Bob Gahagan, SVP & Sr. Portfolio Manager Brian Howell, VP & Sr. Portfolio Manager Jim Platz, CFA, VP & Sr. Portfolio Manager Edward Boyle, VP & Portfolio Manager Miguel Castillo, Portfolio Manager Christine Sterling, Sr. Portfolio Trading Associate MBA, Fordham University MBA, University of Missouri, Kansas City MBA, University of California-Berkeley MBA, University of Southern California MS, Stanford University MBA, University of Minnesota BS, King s College 2002 2009 2013 2008 Securitized Markets Bob Gahagan, SVP & Sr. Portfolio Manager Alejandro Aguilar, CFA, VP & Sr. Portfolio Manager Dan Shiffman, CFA, VP & Sr. Portfolio Manager Jesse Singh, CFA, VP & Portfolio Manager Lydia Delos Santos, Sr. Portfolio Trading Associate MBA, University of Missouri, Kansas City MBA, University of Michigan MBA, Thunderbird School of Global Mgmt MBA, New York University BA, St. Paul University, Manila, Phillipines 1994 1995 1985 2010 Municipal Markets Steven Permut, SVP & Sr. Portfolio Manager Alan Kruss, VP & Portfolio Manager David Moore, CFA, VP & Director of Muni Bond Research Joseph Gotelli, VP & Portfolio Manager Brad Bode, VP & Sr. Municipal Credit Analyst Tim Benham, CFA, Sr. Municipal Credit Analyst Bill McClintock, Sr. Municipal Credit Analyst Tyler Sweany, Municipal Credit Analyst MBA, Golden Gate University BA, San Francisco State University MBA, Babson College MBA, Santa Clara University BS, Southeast Missouri State University BS, University of California at Santa Barbara BS, University of California at Santa Cruz MBA, Baker University 1982 1991 2002 1992 2006 2008 1992 Cash Management Dave MacEwen, Co-CIO & CIO, Fixed Income Denise Latchford, VP & Sr. Portfolio Manager Le Tran, Portfolio Manager Peter Hui, Sr. Portfolio Trading Associate Clifton Lim, Fixed Income Trader MBA, University of Delaware MBA, Golden Gate University BS, San Francisco State University BS, California State University-East Bay BA, University of California-Berkeley 1982 1988 2006 1991 1988 2013 Risk Management Brian Howell, VP & Sr. Portfolio Manager Lisa Quan, CFA, Sr. Risk Analyst Tei Chen, Sr. Risk Analyst Thuy Ngo, Associate Risk Analyst MBA, University of California-Berkeley BBA, University of Michigan BA, University of California-Berkeley MBA, San Jose State University 1993 Client Portfolio Managers Rich Taylor, VP Colleen Ambrose, CFA, VP MBA, Harvard University MBA, University of Chicago 2001 2008 * Includes professional experience in investment-related occupations such as accounting, financial, communications, commercial law or professional occupations relating to their industry or market area. FOR INSTITUTIONAL USE ONLY 6
Investment Philosophy We believe that significant areas of the bond market are inherently inefficient and mean reverting, and opportunities exist to exploit the bond market s inefficiencies and mean reversion tendencies. We do this by applying a relative value approach to identify a diverse collection of active positions across sectors, countries, currencies and yield curves encompassed within a risk-managed framework. Our objective is to construct well diversified portfolios in which correlations among alpha sources are low with no single alpha source dominating performance. Underlying Tenets: Proprietary Fundamental Research Active Risk Budgeting Diversified Sources of Returns Investment Process Duration and Yield Curve Global Macro Strategy team, with input from the Rates and Currencies team, conducts quantitative analysis of trends in economic growth and inflation and overlays results with qualitative assessments based on fundamental research. The team implements interest rate views primarily through yield curve positioning rather than through duration trades. Sector Allocation/Issue Selection The Global Macro Strategy team, with input from the sector teams, assesses relative value among sectors and determines portfolio overweights and underweights. Sector specialist teams make individual issue selection decisions. Country Allocation Rates and Currencies team, consistent with the Global Macro Strategy view, makes relative value decisions among countries based on economic analysis and determines each country s interest rate and yield curve structure in the portfolio. Excess Return Targets: 20% - 40% Excess Return Targets: 30% - 50% Excess Return Targets: 20% - 40% Objective Global Fixed Income seeks to generate an annualized information ratio of 0.5 versus the Barclays Global Aggregate Bond Index. Portfolio Guidelines Duration limits: +/- 20% of benchmark weight Maximum sector exposure: +/- 20% of benchmark weight Issuer limits: 5% per issuer at purchase, excluding government securities and government agencies Cash exposure: < 5% Active risk target: 1% to 2% versus benchmark Foreign currency exposure: limit to 30% of total assets (from non-u.s. dollar-denominated securities or currencies) Maximum 35% in high-yield or emerging market securities Portfolio will maintain diversified corporate sector and issuer exposures Currency Selection Rates and Currencies team uses relative value framework to identify and take advantage of inefficiencies in the currency market and uses quantitative models to determine active positions. Excess Return Targets: 20% - 40% Risk Management Dedicated Risk Management team identifies and monitors active portfolio risks using forward- and backward-looking analysis and informs teams throughout process. Tracking error risk budgeting approach allows portfolio managers to monitor overall portfolio risk as well as the contribution to risk from each alpha source. Global Fixed Income Portfolio FOR INSTITUTIONAL USE ONLY 7
Available Vehicles Separate Account Global Fixed Income Fund Institutional Share Class - AGBNX R6 Share Class - AGBDX Investor Share Class - AGBVX Available in U.S. and certain non-u.s. countries Available only in U.S. Available only in U.S. Available only in U.S. Composite returns reflected in supplemental information are gross of investment management fees. Sector weights, portfolio characteristics and holdings are of a representative account in the composite. Holdings are current as of the date indicated, are subject to change and may not reflect the portfolios current holdings. Portfolio construction guidelines document operational policies and not necessarily investment restrictions imposed on management of the strategy. Supplemental information complements a compliant composite presentation which can be found on our Web site. Material presented has been derived from industry sources considered to be reliable, but their accuracy and completeness cannot be guaranteed. Opinions expressed are those of the portfolio investment team and are no guarantee of the future performance of any portfolio. Nothing in this document should be construed as offering investment advice. Please note that this is for informational purposes only and does not take into account whether an investment is suitable or appropriate for a specific investor. For purposes of compliance with the Global Investment Performance Standards (GIPS ), the Firm is defined as American Century Investment Management, Inc. ( ACIM or the Firm ). American Century Investment Management, Inc. claims compliance with the Global Investment Performance Standards (GIPS ). The Global Fixed Income strategy uses a combination of fundamental research and bond and currency valuation models to invest in high-quality bonds or debt securities issued by corporations and governments with the expectation of the dollar-weighted average maturity to range from two to ten years. Index futures (and currency forwards and futures, where applicable or appropriate) are occasionally used to equitize cash and manage portfolio risk. Other derivative instruments may be used, as allowed, as part of the investment strategy. Returns are calculated and stated in U.S. dollars. The return may increase or decrease as a result of currency fluctuations. To receive a complete list of composites and/or a GIPS compliant presentation, contact : 4500 Main Street Kansas City, MO 64111-7709 Toll Free: 1-866-628-8826 Fax: 816-340-3931 www.americancentury.com/institutional 30 Haymarket London, SW1Y4EX United Kingdom +44 20 7024 7080 Fax: +44 20 7930 5480 www.americancentury-global.com 666 Third Avenue, 23rd Floor New York, NY 10017 Toll Free: 1-866-628-8826 Fax: 646-658-7771 www.americancentury.com/institutional Suite 3201 Citibank Tower 3 Garden Road, Central Hong Kong +852 3405 2600 Fax: +852 2878 7340 www.americancentury-global.com 1665 Charleston Road Mountain View, CA 94043 Toll Free: 1-866-628-8826 Fax: 650-961-5420 www.americancentury.com/institutional 2121 Rosecrans Avenue Suite 4345 El Segundo, CA 90245 Toll Free: 1-866-628-8826 Fax: 816-340-3931 www.americancentury.com/institutional 2015 American Century Proprietary Holdings, Inc. All rights reserved. IM-FLY-86637 1508 FOR INSTITUTIONAL USE ONLY