Henderson global investors newcits 1110

\\HDS.Int\Data\Distribution\Global\Business Support\Presentations\Fixed Interest\Credit\Credit Alpha\2010\Nov 10\Credit Alpha 1110 £.ppt

November 2010

Managing Absolute Return in the Fixed Income Space

Stephen ThariyanHead of Credit

2\\HDS.Int\Data\Distribution\Global\Business Support\Presentations\Fixed Interest\Credit\Credit Alpha\2010\Nov 10\Credit Alpha 1110 £.ppt

Making money in credit – the story so far

Part 1 Dramatic re-pricing of the asset class Low interest rates stimulate the economy and lead to a “grab for yield” Corporate bonds prices rally on strong demand – relatively fairly priced? Government bond rally has driven a lot of credit’s total return

Part 2 Volatility predominates as micro, macro and technical factors impact liquidity Volatility invariably leads to mispricing Credit funds should exploit volatility arising from macro, corporate and liquidity

concerns


0

2

4

6

8

10

12

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

FinancialsIndustrialsUtilitiesTelecoms

Source: Merrill Lynch, as at 31 October 2010

%

Now, more than ever, active management is essential

The opportunity

An unprecedented re-pricing of credit

Historical sector spreads Opportunity Vehicle

Where we expect spreads to go

Security selection Security selectionSector selection

Security selection

Asset allocationSector selection

Security selections

Core credit index funds

Absolute return

credit funds

Core plus credit Fund


Volatility in credit markets will provide good alpha generating opportunity for Credit Alpha Fund

Choice of manager and strategy is key

iTraxx main weekly range

0

10

20

30

40

50

60

70

80

Jun

-04

Se

p-0

4

De

c-0

4

Ma

r-0

5

Jun

-05

Se

p-0

5

De

c-0

5

Ma

r-0

6

Jun

-06

Se

p-0

6

De

c-0

6

Ma

r-0

7

Jun

-07

Se

p-0

7

De

c-0

7

Ma

r-0

8

Jun

-08

Se

p-0

8

De

c-0

8

Ma

r-0

9

Jun

-09

Se

p-0

9

De

c-0

9

Ma

r-1

0

Jun

-10

Se

p-1

0

bp

Looking aheadExpect trend of recent volatility to continue (5-20bps per week)

An exception as opposed to the norm.Low volatility (average 1.5bp weekly range in iTraxx Main). Few opportunities in credit led to excessive leverage and strategies which strayed from the path

Volatility is here to stay

The opportunity

Source: Bloomberg, as at 30 September 2010


Source: Henderson Global Investors, as at 16 November 2010 (* includes tenure at New Star)** Includes ABS team

Yrs credit experience, yrs with

HendersonResponsibility Background

Core Credit Team

Stephen Thariyan (19,3) Head of Credit Asset Management

Chris Bullock (8,7) Portfolio Manager Asset Management

Tom Ross (8,8) Portfolio Manager Asset Management - credit dealer

Philip Payne (10,10) Portfolio manager Asset management - credit dealer

James Briggs (13,5) Consumer products, tobacco, transport, travel and leisure, healthcare, support services Asset management, accountancy

Marc Dallon (11,5) Telecoms, media, technology, gaming Asset management

Andrew Griffiths (15,1) Metals & mining, building materials, paper, packaging

Aman Mahal (3,1) Retail Asset management, business restructuring

Kalvi Nadarajah (4,4) Utilities, energy, steel Asset management

Richard Thomson (12,7) Financials, insurance Asset management – credit analyst, accountancy

Joanne Tuitt-Persaud (7,2) Capital goods, aerospace and defence, building and construction, paper, packaging Asset management – credit analyst

Natalie Wilson (7,2) Financials, insurance Credit analyst

Retail Credit Team

John Pattullo (17,13) Head of Retail, portfolio manager Asset management - credit, accountancy

Jenna Barnard (8,8) Portfolio manager Asset management

James Gledhill (18,8*) Portfolio manager Asset management – credit, equities

Ben Pakenham (5,6*) Portfolio manager Asset management

Leveraged Loans Team

David Milward (19,9) Building materials, TMT (loans) Corporate credit and structured credit

Stef Abelli (17,1) Retail, healthcare (loans) Banking, consultancy

Elissa Johnson (16,1) General industrials, auto, consumer products (loans) Hedge fund, investment banking, buy-side

Sally Tankard (20,6) Publishing, gaming + leisure, utilities (loans) Investment Banking, buy-side

Nicholas Ware Frederickson

(10,1) Chemicals, paper & packaging, business services (loans) Hedge fund, banking, private equity

Diverse and experienced team of credit specialists

Portfolio managers supported by 24 credit specialists**


Credit Alpha

Longs

Shorts

Thematic

Pair Trades

Tactical

Thematic

Pair Trades

Tactical

Source: Henderson Global Investors, as at 31 October 2010

ProductPooled (UCITS III OEIC)

LiquidityDaily dealing, daily notice

Performance target3-month Libor +5% (gross)

Typical Vol 3% - 6%

Typical exposure (Net/Gross)

+/- 0.5x / 2-3x

Typical number of positions

70-100

AUM £380m

ManagerStephen Thariyan / Tom Ross / Chris Bullock

Inception July 2007

Fees

Annual management fee: 1.5%Performance fee: 20% of net performance over Libor (with high water mark)

Share classes available

sterling, euro, US dollar

Strategies InstrumentsFund details

Investment grade bonds

High yield bonds

Credit Default Swaps

Credit Default Swap indices

Credit Default Swaps

Credit Default Swap indices


‘Pair trades’. Going long a credit that the fund favours versus short a credit it does not. Typically pairs are either in the same or similar sectors.

Comprises both long and short positions Will also express ‘relative value’ betweensectors

Thematic

Pair Trades

Short timehorizon

Long timehorizon

Credit Alpha

Multi strategy credit - the three strategies

Short term positions in liquid securities that exploit technical imbalances in the market

Tactical


0 200

0 200

0 200

Gross exposure by strategy


Pair trades example

Source: Bloomberg, as at 31 August 2010

Long BMW vs short Tomkin

Pair trade example:

A 4% position which has contributed 29bps to fund performance

Position currently 2.8% following partial close out on 20/07/10

0

100

200

300

400

500

600

700

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9

Ma

y-0

9

Jun

-09

Jul-

09

Au

g-0

9

Se

p-0

9

Oct

-09

No

v-0

9

De

c-0

9

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

BMWGR CDS EUR SR 5Y Corp TOMKLN CDS EUR SR 5Y Corp Long risk BMW tradesShort risk TOMKLN tradesBMW closeTOMKLN close

Long BMW vs Tomkin

Sp

rea

d (

bp

)


Pair trades example


Long Iron Mountain vs short Stena

Pair trade example:

A 2% - 3.5% position which has contributed 20bps to fund performance

Long non-cyclical vs short cyclical

Position remains open but is close to target of -100 spread

-300

-200

-100

0

100

200

300

400

500

600

Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10

IRM 5yr CDSIRM open tradeStena 5yr CDSStena open tradeIRM - Stena spreadSpread trade level

Long Iron Mountain vs short Stena

Sp

rea

d (

bp

)


Long risk BP – Intra day chart

Sp

rea

d (

bp

)

Thematic example


0

100

200

300

400

500

600

700

800

May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10

0

100

200

300

400

500

600

700

800Bought protection

Sold protection

Credit Alpha

Risk reduced as volatility of trade increased

Thematic trade example: A 2% - 3% position which has contributed 11bps to fund performance


96

98

100

102

104

106

108

Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10

96

98

100

102

104

106

108High

Low

Bought

Sold

Heidelberg

Tactical example:

Heidelberg A 1% position which has contributed 10bps to fund performance Combination of analysts positive view on Heidelberg flow and positioning information, we were able to

make a number of trades in the liquid Heidelberg 2017 issue Rationale: Taking a contrarian position to market maker positioning over a period of time. Information

gathered by Tom Ross and the 2 credit dealers.

Pric

e (p

)

Tactical example

Source: Bloomberg, as at 31 March 2010

Credit Alpha


Credit Alpha

Current structure of portfolio

Thematic 75%

Pair Trades 50%

Tactical 9%

EUR 104%

GBP 5%

USD 24%


Gross exposure by strategy Gross exposure by currency

Corporate bonds26%

CDS 89%

CDS index 18%

Gross exposure by investment type

Current net = -8%, current gross = 132%

Investment grade = 99% High yield = 33%


Monthly NAV performance

Historic performance since inception

Source: Morningstar, Datastream, Henderson Global Investors, as at 31 October 2010Note: Performance is based on close of business pricing. Official A share class performance after the deduction

of AMC and performance fees is shown after March 2010.

-4

-2

0

2

4

6

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

Credit Alpha Fund

%

% Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Total

2007 N/A N/A N/A N/A N/A N/A -0.13 0.22 0.66 0.45 -0.34 0.06 0.92

2008 -0.64 0.85 0.25 1.04 0.93 0.05 -0.23 0.44 -3.74 -1.57 -0.01 -0.23 -2.92

2009 1.33 -0.84 -0.63 3.28 4.96 3.51 3.65 1.79 2.35 1.13 0.65 0.42 23.66

2010 2.23 1.16 1.57 1.66 -1.89 -1.25 1.89 0.74 1.28 0.26 N/A N/A 7.81

Credit Alpha


Credit Alpha attribution by trade type

Source: Henderson Global Investors, 31 October 2010Note: Attribution uses desk estimates which have been calculated arithmetically

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Jan

-09

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9

Ma

y-0

9

Jun

-09

Jul-

09

Au

g-0

9

Se

p-0

9

Oct

-09

No

v-0

9

De

c-0

9

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

LongMarket NeutralShort

Credit Alpha

Attribution: Long / Market Neutral / Short

Spreads widened on month


0

1

2

3

4

5

6

7

-50

0 >

-4

75

-47

5 >

-4

50

-45

0 >

-4

25

-42

5 >

-4

00

-40

0 >

-3

75

-37

5 >

-3

50

-35

0 >

-3

25

-32

5 >

-3

00

-30

0 >

-2

75

-27

5 >

-2

50

-25

0 >

-2

25

-22

5 >

-2

00

-20

0 >

-1

75

-17

5 >

-1

50

-15

0 >

-1

25

-12

5 >

-1

00

-10

0 >

-7

5-7

5 >

-5

0-5

0 >

-2

5-2

5 >

00

> 2

52

5 >

50

50

> 7

57

5 >

10

01

00

> 1

25

12

5 >

15

01

50

> 1

75

17

5 >

20

02

00

> 2

25

22

5 >

25

02

50

> 2

75

27

5 >

30

03

00

> 3

25

32

5 >

35

03

50

> 3

75

37

5 >

40

04

00

> 4

25

42

5 >

45

04

50

> 4

75

47

5 >

50

05

.00

% >

25

> 5

0

Credit Alpha

Distribution of monthly returns

bp

Distribution of monthly returns

Source: Henderson Global Investors, as at 31 October 2010Note: Figures are produced by the desk, from the P&L attribution before the deduction of Annual Management Charges (AMC).

mean


Henderson Horizon Euro Corporate Bond Fund

Key features

Euro Corporate Bond Fund profile: Benchmark: iBoxx Euro Corporates Index

Target: Benchmark + 1% (net of fees)

Universe: At least 80% invested in investment grade bonds issued in EUR

UCITS III (Sophisticated)

Non-Euro bond holding: up to 20%

Cash holding: Max 10% - average 2 – 5%

Duration range (relative): +/- 2 years

Ability to use credit derivatives

Tracking error range: typically 2-3%

Base currency: EUR

Launch date: 18 December 2009

Structure: Horizon SICAV fund

Domicile: Luxembourg


Security selection

Current fund positioning

Emphasis on improving credit stories

Focus on positive event risk and attractive bond structures

Senior Irish bank paper is main “peripheral” risk

Top 10 overweight exposures

Ticker % relative

Bank of Ireland BKIR 2.02

Allied Irish Bank AIB 1.88

3i Group IIILN 1.78

European Investment Bank EIB 1.59

Nationwide Building Society NWIDE 1.52

Symrise SYMRIS 1.51

BAA Airports BAA 1.43

Lloyds Banking Group LLOYDS 1.39

Scottish & Southern SSELN 1.37

RCI Banque RENAUL 1.33

Bottom 10 underweight exposures

Ticker % relative

Deutsche Bank DB -3.11

Rabobank RABOBK -2.42

BNP Paribas BNP -1.74

Volkswagen VW -1.72

Societe Generale SOCGEN -1.46

Rexam REXLN -1.42

RWE RWE -1.29

Allianz ALVGR -1.26

ENI ENIIM -1.18

Credit Agricole ACAFP -1.15

Source: Henderson Global Investors, as at 31 October 2010Note: Horizon European Corporate Bond Fund. Weights are shown relative to the iBoxx € Corporates index

Securityselection

Focus on M&A and shareholder friendly strategy

Cautious of companies exposed to political and regulatory risk

No credit value in many large-cap domestic issuers


Relative performance

Horizon Euro Corporate Bond Fund

Horizon Euro Corporate Bond Fund

%

% 3-month YTD Since inception (18/12/09)

Fund 5.03 11.57 10.54

Benchmark 2.86 6.55 5.82

Source: Morningstar, Henderson Global Investors, as at 30 September 2010Note: The benchmark is iBoxx € Corporates Index. Performance is based on net of fees, gross income reinvested. Since inception figures are annualised.

5.82

2.17

5.02

0

2

4

6

8

3-month YTD Since inception (18/12/09)

Relative performance


Absolute return YTD 2010 relative to peer group

-5

0

5

10

15

20

25

Spar

inves

t SIC

AV In

v Gr

d Va

l EUR

RDK

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Bon

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Eur

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Bon

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Cred

it Pl

us A

C EU

ROy

ster

Eur

opea

n Co

rpor

ate

Bond

s EU

RSS

gA E

uro

Corp

orat

e Bo

nd In

dex

IPr

em P

ortf

Sica

v II

Unte

rneh

men

sanl

eihen

Fideu

ram

Eur

o Co

rpor

ate

Bond

AMBD

SIC

AV D

ynam

ic Di

vers

Bon

ds A

Acc

Indo

lux P

rivat

e Po

rtf B

onds

Plu

s P

iSha

res

Barc

lays

Cap

Euro

Corp

xFin

1-5

CS B

F (L

ux)

TOPS

EUR

BLlo

yds

TSB

Intl P

ort

Euro

Cor

p Bd

Sella

Cap

Mgm

t Eur

o Co

rpor

ate

Bond

ICS

SIC

AV II

(Lu

x) C

S TO

PS E

UR B

AXA

WF E

uro

Cred

it IG

AC

EUR

E. R

oths

child

Eur

o Co

rp B

ds M

id T

erm

ACB

R St

rate

gy C

onst

ant E

URNe

w Mi

llenn

ium

Lar

ge E

urop

e Co

rp A

PPF

Corp

orat

e Bo

nds

Euro

AXA

WF E

uro

Cred

it Sh

ort

Dura

tion

IC E

URIN

IK F

onds

Gene

rali

IS S

hort

Ter

m E

ur C

orp

Bond

s AX

Pion

eer

Fds

Euro

Cor

p ST

E E

UR N

DEu

rizon

Eas

yFun

d Bo

nd C

orp

EUR

ShT

RPi

onee

r Fd

s Eu

ro C

ash

Plus

E EU

R ND

Baye

rnInv

est T

R Co

rpor

ate

Bd F

ds A

LAB

Stra

tegie

s Gl

bl Cr

dt O

pps

ID E

UR H

Euro

pean

Cre

dit II

Eur

p Co

rp In

stl A

ccCr

ediin

vest

Sic

av F

ixed

Inc

EUR

I1 A

ccBa

lance

d Op

portu

nity

Fund

OP

-I-

Telem

aque

Bon

d Fu

ndAp

erta

Sica

v Eu

ro C

orpo

rate

Bon

ds B

Astra

Sic

av S

IF B

ond

Oppo

rtun

ities

AAm

undi

Fun

ds E

uro

Sele

ct B

ond

C C

Athe

na C

orpo

rate

Bon

ds C

ap A

ccEa

syET

F iTr

axx

Euro

pe H

iVol

E. R

oths

child

Eur

o Co

rp B

ds S

hort

Term

AFr

ance

Lux

Eur

ope

Flex

Rat

eBe

renb

erg

Fund

s Eu

ro C

orp

Bd S

el B

Absolute return relative to peer group

Competitor performance

Source: Morningstar Workstation, comparison with the Morningstar Fixed Income EUR-Corporate Universe, as at 31 October 2010.Note: 2010 YTD % Total return (Net of AMC)

Henderson Horizon Euro Corp Bond Fund (Class A Acc)

iBoxx Eur Corp Index


Appendix


Henderson Credit team

A successful credit fund management team

Stephen ThariyanHead of Credit

Stephen Thariyan joined Henderson in 2007 as Head of Credit, from Rogge Global Partners where he was a Portfolio Manager of Global Credit and its Absolute Return fund. Stephen started his career in 1988 at Ernst & Young as a Trainee Accountant and then moved to Chevron Corporation as a Senior Auditor. He moved to Gulf Oil in 1994 as a Business and Economic Adviser and then to NatWest Markets as a Director and Senior Credit Analyst.

Stephen graduated from the University of Newcastle-Upon-Tyne with a BA (Hons) in Accountancy and Financial Analysis.

Thomas RossPortfolio Manager, Absolute Return Credit

Tom has been co-managing Henderson's absolute return credit funds since 2006. Prior to this he specialised in credit trading on Henderson's centralised dealing desk. Here he was able to build strong relationships with market participants in order to gain flow and positioning information to supplement credit views. He joined Henderson in 2002.

Tom graduated from Nottingham University with a BSc (Hons) in Biology and is a CFA charterholder.

Christopher BullockPortfolio Manager, Absolute Return Credit and European Corporate Bond

Chris joined Henderson Global Investors in 2003 as Credit Analyst, focusing on the investment grade and high yield industrial sectors. He has been co-manager on the absolute return credit funds since 2006 and launched the Euro Corporate Bond fund in late 2009. He continues to provide analytical coverage for the Chemical sector. Chris trained as a management accountant with Zeneca and Accenture, before joining Insight Investment as a credit analyst.

Chris graduated with a BEng (Hons) in Chemical Engineering from Aston University and is both a CFA charterholder and member of the Chartered Institute of Management Accountants.

Significant combined experience


Henderson Global Investors

Credit capabilities

Core credit Absolute Return Credit

Global corporate bond coverage

€3218.3m €632.2m €3793.0m €436.8m €7.2m

Source: Henderson Global Investors, as at 31 October 2010* As at 30 June 2010

Core plus credit Retail credit

€4,692.2m*

Segregated mandates

Credit AlphaFund (UCITS III)

3-monthLibor +5%

Investment grade credit

iBoxx Index +1%

High Alpha Credit Fund

iBoxx Index +2%

Variety of strategies

Variety of % targets

Retail Credit

Outperform peergroup

Credit Long Short Fund

+10-12%


Gross & net credit exposure

-50%

0%

50%

100%

150%

200%

250%

300%

350%

Jul-

07

Se

p-0

7

No

v-0

7

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

Se

p-0

8

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

Se

p-0

9

No

v-0

9

Jan

-10

Ma

r-1

0

Ma

y-1

0

Jul-

10

Se

p-1

0

Net exposure

Gross exposure

Source: Henderson Global Investors, as at 31 October 2010Note: Exposure figures are produced by the desk

Credit Alpha

Gross & Net credit exposure

Net HG: Max 33%, Min -26%

Net HY: Max 19%, Min -13%

Gross HG: Max 270%, Min 37%

Gross HY: Max 51%, Min 12%


Relative gross exposure by strategy

0

50

100

150

200

250

300

350

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

Pair Trades Thematic Tactical Structural (old strategy)

Source: Henderson Global Investors, as at 31 October 2010Note: Figures are produced by the desk

Credit Alpha

Gross exposure by strategy

%


Attribution

Credit Alpha Fund attribution

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

Pair Trades Thematic Tactical Structural (old strategy)

%

Source: Henderson Global Investors, as at 31 October 2010Note: Shows relative return versus 3-month Libor, figures are produced by the desk, from the P&L attribution before the deduction of Annual Management Charges

(AMC). Due to the return on cash held and discrepancies between external and internal 3-month Libor figures, relative performance from the P&L differs from the performance produced from the close of business prices.

Credit Alpha


Cash vs Bonds invested

0102030405060708090

100

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

Invested (%) Cash (%)


Credit Alpha

%

Exposure to physical bonds


Average fund size (£’000)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10


Credit Alpha

£

Assets under management


Net performance and fund spread DV01

Net performance and fund spread DV01

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Net performance

Spread DV01 (RHS)

Source: Henderson Global Investors, as at 31 October 2010Note: Performance is based on close of business pricing. Performance prior to April 2010 was adjusted by the desk to reflect the deduction of Annual Management

Charges (AMC) and performance fees. Official A share class performance after the deduction of AMC and performance fees is shown after March 2010.The spread DV01 figures are produced by the desk, from the P&L

NAV, p bp

Credit Alpha


CDS Regulation and Standardisation

Standardisation CDS contracts are now standardised (maturities, coupons, restructuring, trade with

accrued), which allows netting of contracts without any hidden risks (eg. annuity streams)

Counterparty credit risk (CCR) The largest risk to the CDS market and its liquidity highlighted by September 2008. Since

then banks are more active at hedging their CCR via CVA (credit value adjustment) desks.

At Henderson all of our ISDA and CSA agreements with our counterparties include language of bilateral collateralisation (calculated and actioned on a daily basis).

Centralised counterparty (CCP) A panacea or simply moving the risk into one place? CDS has the propensity for jumps in

valuation unlike many other OTC derivatives (Lehman CDS traded 300bps just days before defaulting). Concentrating this risk into a single place seems counterintuitive.

Transparency Over 90% of all CDS trades are reported to Depository Trust & Clearing Corporation

(DTCC). This data is publically available - see overleaf for an example of a portion of the data available.


CDS Transparency

Analysis of DTCC CDS data

Source: JP Morgan, Depository Trust & Clearing Corporation 1 October 2010


96.0

98.0

100.0

102.0

104.0

106.0

108.0

110.0

112.0

114.0

116.0

118.0

20

-Au

g-0

8

03

-Se

p-0

8

17

-Se

p-0

8

01

-Oct

-08

15

-Oct

-08

29

-Oct

-08

12

-No

v-0

8

26

-No

v-0

8

10

-De

c-0

8

24

-De

c-0

8

07

-Ja

n-0

9

21

-Ja

n-0

9

04

-Fe

b-0

9

18

-Fe

b-0

9

04

-Ma

r-0

9

18

-Ma

r-0

9

01

-Ap

r-0

9

15

-Ap

r-0

9

29

-Ap

r-0

9

13

-Ma

y-0

9

27

-Ma

y-0

9

10

-Ju

n-0

9

24

-Ju

n-0

9

08

-Ju

l-0

9

22

-Ju

l-0

9

05

-Au

g-0

9

Net performance from August 2008 – August 2009

NAV performance from August 2008 – August 2009

Sep-Nov: -550bpLehman -185bpWamu -20bpBrafbi -35bpDresdner -60bpHY Chem 2Y CDS -95bpGeneral basis move -200bp

Dec-Jan:

+200bpWinners:CDS - Chem, Insurance, SteelNew issues - Tobacco/TelcoLosers:Structural book

-165bp(ABS/Angiri/Suncorp)

Feb-Mar:

-230bpSub-bank debt sell-offAngiri/Dresdner/Lloyds/Friends ProvPair trade book:

+50bp contribution

End Mar-Aug: +1300bpThematic: ~450bp (long fins short cyclical)Pair Trades: ~200bpStructural: ~150bpTactical: ~500bp (new issues 518bp, short DSG 60bp)General basis move: ~500bp

Source: Henderson Global Investors, as at 12 August 2009Note: Shows net return, performance is after the deduction of AMC

NAV, p

Credit Alpha


Pro

cess

Exa

mp

leR

isk

Co

ntr

ols

Review fundamentals

Price action relative to market

Price / spread movement

‘Hit first bid’mentality

bp impact on fund

Screening tool

Instrument selection

Timeframe

Stop-loss / target

Liquidity of instrument

Exit objective / stop-loss

Recovery value

Specific name hedge (RV) trade

Index hedge

Sectoral balance

P&L

DV01

VaR

Trackingerror

Duration contribution

Scenario Analysis

Analyst Recommendation

Position sizing

Hedging consideration

Position monitoring

Ongoing RVPrice target

reached

Sell

1.25% No Risk metrics SellBuyPrice target

reached

Trading discipline and risk controls


Which companies do we favour/should we avoid?Security selection

Do corporate bonds look expensive/cheap?Asset

allocation

Sectorselection

Which sectors do we have a preference for?

Flexible process

change emphasis as

required

Top-down market view

Bottom-up stock selection

Corporate bond management – combine discipline and flexibility

Credit investment process


Economicenvironment

Corporate health Market dynamics Valuations

Is the overall outlook favourable for credit?

Assess economic, political and regulatory

risks

Where are we in the credit cycle?

Ratings up/down ratio Direction of earnings

and cash flow?

Are companies issuing?Fund flow direction

Who is buying and what is the appetite?

Market spreadExpected default

Macro environment an opportunity or threat?Key sector themes?

Regulatory and political impact

Fundamental outlookRatings trends

What stage in the leverage cycle?

Volume and purpose of debt issuance?

Investor positioningIs the sector in or out of

favour?

Sector spreadRelative volatility

Unique strengths or vulnerabilities?

Cyclical / non-cyclical

Management Balance sheet

Cashflow

Company liquidityRefinancing needsIs the company well

regarded by the market?

Company spreadRelative value across

curve and security type

Securityselection

Asset allocation

Sector selection

Corporate bond management – a decision framework

Credit investment process


MacroEnvironment

Corporatebalance sheet

Supply & demand

Valuation

+ Ultra low rates and quantitative easing- Western market recovery fragile, risk of further poor economic data in 2H10 - Structural unemployment and high fiscal deficits

+ Decisive action by management teams+ Priority on cost reduction, cash flow and liquidity+ Demand stabilised / earnings improving- Top-line growth elusive / M&A appetite increasing

+ Sustained demand for corporate bonds+ Issuance requirements relatively low, less so for senior financials- Positioning overweight and a lot of new entrants

+ Credit spreads remain elevated versus expected defaults+ Overall yield attractive versus cash or government bonds

Asset AllocationEuropean Credit outlook

Where we are in the credit cycle?


Important InformationThis document is solely for the use of professionals and is not for general public distribution.

This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Prospectus before investing. Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management plc (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), Henderson Alternative Investment Advisor Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no. 2606646) (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE and authorised and regulated by the Financial Services Authority) provide investment products and services. Telephone calls may be recorded and monitored.

Henderson Global Investors201 Bishopsgate, London EC2M 3AETel: 020 7818 1818 Fax: 020 7818 1819

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