Kames Absolute Return Bond Fund

April 2013Colin Finlayson – Investment Manager Fixed IncomeColin Finlayson Investment Manager, Fixed Income

Introducing Kames Capital

• Specialist investment management business

• 267 employees, including 83 investment

g p

Our investment capabilities

267 employees, including 83 investment professionals in Edinburgh, London and the Netherlands

F nds nder management of €64 billion*

Fixed income Equities

Property Multi asset• Funds under management of €64 billion*

• Expertise in four principal areas: fixed income, equities, properties and multi-asset

Property Multi-asset

Our clients

• Clients in the UK, Europe and Asia

• Wholly-owned subsidiary of AEGON NV, one of

Our clients

• Corporate pension funds• Public funds

the world’s leading financial services businesses • Financial institutions• Charities/foundations• Wealth managers

Source: Kames Capital as at 31 March 2013. *As at 31 December 2012

• Financial advisers

2

Our investment capabilitiesp

Team*Total

client funds Retail

pooled funds Products and services

Fixed income 24 €35.1 billion €5.0 billion

• Credit• High-yield• Strategic bond

• Core plus• Absolute return• Ethical

Equities 23 €19.3 billion €1.3 billion• All companies• High dividend• Smaller companies

• Unconstrained• Absolute return• Ethical

Property 14 €1.2 billion -• Direct (pooled and segregated)• Indirect• Specialist e.g. healthcare

Multi-asset 11 €4.0 billion €0.5 billion• Asset Allocation Service• Inflation Linked• Strategic Assets

Source: *Kames Capital as at 31 March 2013. AUM as at 31 December 2012. In addition, Kames Capital manages €4.7 billion in cash and other assets in categories not attributable to the asset classes shown.

3

Kames Absolute Return Bond Fund

• We aim to generate returns while limiting downside volatility and preserving capital

• Performance target: 3 month GBP LIBOR +2-3% p.a. net of fees over rolling 3 yearsPerformance target: 3 month GBP LIBOR 2 3% p.a. net of fees over rolling 3 years

• Primary alpha sources:

– Rates – duration neutral cross market and yield curve relative value positioning

– Credit – market neutral stock and sector selection

• No alpha derived from currency risk

• Offers investors low risk NOT no risk

Positive returns + low volatility + uncorrelated to underlying marketsPositive returns low volatility uncorrelated to underlying markets

4

Performance since launch

4.0

4.5 Total since launch

Total return (net) 4.15%

2 5

3.0

3.5

wth

Benchmark total return 1.23%Difference (net) 2.92%Total return (gross) 5.17%

1.5

2.0

2.5

% g

row

Best month (Oct 2011) 0.60%Worst month (May 2012) -0.06%Up months 14/18

0.0

0.5

1.0 Down months 4/18

Maximum Drawdown -0.32%

Volatility 0.71%

Sep

11

Oct

11

Nov

11

Dec

11

Jan

12

Feb

12

Mar

12

Apr

12

May

12

Jun

12

Jul 1

2

Aug

12

Sep

12

Oct

12

Nov

12

Dec

12

Jan

13Fe

b 13

Mar

13

Kames Absolute Return Bond B GBP Acc LIBOR GBP 3 Months

Sharpe Ratio 2.71%

5

Source: Lipper as at 29 March 2013. NAV to NAV total return with income reinvested. Local currency B (Acc) GBP class. Launch 30 September 2011.For table – All Fund Returns based on Cumulative Noon Lipper data. Gross Returns based on Lipper data grossed up for AMC. Benchmark is at close. Risk Statistics based on Annualised Monthly returns. Maximum Drawdown period based on Monthly Returns

Kames Absolute Return Bond Fund - lower volatility opportunityy pp y

30%

Annualised Volatility

8%

Fixed Income Asset Classes -Annualised Volatility

15%

20%

25%

4%5%6%7%8%

0%

5%

10%

0%1%2%3%4%

0%

KA

RB

Glo

bal I

G

Glo

bal H

Y

Gov

ernm

ent

Gov

ernm

ent

GB

P IG

Gov

ernm

ent

FTS

E 1

00

DA

X

0%

KA

RB

Glo

bal I

G

Glo

bal H

Y

Gov

ernm

ent

Gov

ernm

ent

GB

P IG

Gov

ernm

ent

US

G

Eur

opea

n G

UK

G

US

G

Eur

opea

n G

UK

G

Source: Kames Capital, BoAML , Bloomberg. Based on annualised standard deviation of daily returns - 30 September 2011 – 31 March 2013.

6

Delivering returns uncorrelated to the underlying marketg y g

1.30%

4 00%

4.50%

KARB Total Return vs 10yr US Treasury Yields140

4 00%

4.50%

KARB returns vs Credit market spreads

1.50%

1.70%3.00%

3.50%

4.00%

%)

160

1803.00%

3.50%

4.00%

%)

1.90%

2.10%1.50%

2.00%

2.50%

Tota

l ret

urn

(%

Yield (%

)

200

220

1 50%

2.00%

2.50% bps

Tota

l ret

urn

(%

2.30%0.50%

1.00%240

2600.50%

1.00%

1.50%

2.50%0.00%

Oct

11

Nov

11

Dec

11

Jan

12Fe

b 12

Mar

12

Apr

12

May

12

Jun

12Ju

l 12

Aug

12

Sep

12

Oct

12

Nov

12

Dec

12

Jan

13Fe

b 13

Mar

13

KARB Total Return % UST 10yr Yields %

2800.00%

Oct

11

Nov

11

Dec

11

Jan

12Fe

b 12

Mar

12

Apr

12

May

12

Jun

12Ju

l 12

Aug

12

Sep

12

Oct

12

Nov

12

Dec

12

Jan

13Fe

b 13

Mar

13

KARB IG OAS (RHS)

Source: Kames Capital, Bloomberg and BoAML as at 31 March 2013

7

( )

Three key components

Carry module

y p

Credit Rates d lmodule module

Kames Absolute

Return BondReturn Bond Fund

8

Three investment modules

• Carry Module

– Minimum weighting of +20% within the overall fund

– Diversified range of investment grade quality bonds - maximum 2 years to maturity only

Credit Module• Credit Module

– Primary alpha focus on credit neutral relative value positions

– Net exposure limited to +/-50% within the overall fund

• Rates Module

Primary alpha focus is on duration neutral relative value positions– Primary alpha focus is on duration neutral relative value positions

– Duration range: -2.5 to +2.5 years – neutral position of 0 years’ duration

9

Carry module

• Diversified range of investment grade quality bonds

• Maximum 2 years to final legal maturity only

y

Maximum 2 years to final legal maturity only

• Minimum weighting of +20% within the overall fund

Net exposure 48%Net exposure 48%

Holdings 42

Credit module

Carry module

Rates module

Average credit rating A

Modified duration 0.7 years

Kames Absolute Return

Bond Fund

Activity since launch 28 bonds have matured2 positions sold1 RV trade

Source: Kames Capital as at 31 March 2013

10

Bond Fund

Credit module – long non-financials/short financials – via CDS

• ECB's OMT Program fuels risk rally

• Financials outperform non-financials

g

80

iTraxx Main vs. iTraxx Senior Financials - 5yr CDS

Financials outperform non financials

• Good news looks to be "priced in“

• Action - October 201240

60

spre

ad (b

ps)

Entered trade @ +27bps

– Long risk non-financials (iTraxx Main)

– Short risk financials (iTraxx Snr Fins)0

20

enio

r Fin

anci

als

• Result

– Spread widens and position reviewed

– Financials weaken post Italy/Cyprus60

-40

-20

Trax

x M

ain

-Se

Closed trade at -12bps

p y yp

– Target hit and position closed

– Low risk alpha generated for fund-80

-60

ay 1

2

un 1

2

Jul 1

2

Aug

12

ep 1

2

Oct

12

ov 1

2

Dec

12

an 1

3

eb 1

3

Mar

13

Apr

13

i T

Source: Bloomberg and Kames Capital as at 2 April 2013

11

M J J A S O N D J F M A

Credit module – long Intesa Sanpaolo/short Banco Popolare – via CDSg p p

• Italian banks mired in Euro Crisis

• Spread between stronger and weaker325

350

Intesa Sanpaolo vs Banco Popolare - 5yr CDS

Spread between stronger and weaker banks is too narrow given mounting risks

Market has mispriced relati e credit risk275

300

325

221bps of spread tightening

• Market has mispriced relative credit risk

• Action – via 5yr CDS

– Long Intesa Sanpaolo risk200

225

250

Spr

ead

(bps

)

Long Intesa Sanpaolo risk

– Short Banco Popolare risk

• Result150

175

200 Closed Trade @ 215bps

– Spread widened 95bps

– Value of Banco Popolare protection fell 2.9% relative to Intesa Sanpaolo

100

125

n 12

b 12 r 1

2

r 12

y 12

n 12

Entered Trade @ 120bps

– Alpha added without taking explicit view on market directionSource: Kames Capital and Bloomberg as at 21 June 2012. For illustrative purposes only.

Jan

Feb

Ma

Ap

May Ju

n

12

Rates module – long 10yr Australia /short 10yr US Treasuriesg y y

• Australia offers a “safe haven” alternative to core rates markets200

Australia vs US treasury - 10yr yield spread

• But the easy money has been made

• Discipline needed to add further al e

180

190

ld s

prea

d (b

ps)

value

• Action – July and August 2012

– Buy Australia Government 2022 Bonds160

170

AU

ST

vs U

ST

yiel

Entered trade @ 159bps

Entered trade @ 162bpsCheap

Buy Australia Government 2022 Bonds

– Sell 10yr US Bond Futures

• Result140

150

10yr

A

Fair

– Two trades successfully undertaken

– Cumulative excess total return of 3.56%

– Low risk alpha generated for portfolio120

130

12 12 12 12 12 12 12 12 12 12 12 12 12 12Closed trade @ 141bps

Closed trade @ 137bpsRich

p g p

Source: Bloomberg and Kames Capital as at 10 October 2012. For illustrative purposes only.

Apr

Apr

Apr

May

May

Jun

Jun

Jul

Jul

Aug

Aug

Sep

Sep

Oct

13

KARB investment modules – allocation since launch

200%

KARB Module Allocation - Gross exposure

90%100%

KARB module allocation - Net exposure

120%

140%

160%

180%

osur

e %

40%50%60%70%80%

sure

%

40%

60%

80%

100%

Gro

ss e

xpo

0%10%20%30%40%

Net

exp

os

0%

20%

40%

ct 1

1ov

11

ec 1

1an

12

eb 1

2ar

12

pr 1

2ay

12

un 1

2ul

12

ug 1

2ep

12

ct 1

2ov

12

ec 1

2an

13

eb 1

3ar

13

-30%-20%-10%

ct 1

1ov

11

ec 1

1an

12

eb 1

2ar

12

pr 1

2ay

12

un 1

2ul

12

ug 1

2ep

12

ct 1

2ov

12

ec 1

2an

13

eb 1

3ar

13

Carry Credit Rates Cash Total Carry Credit Rates Cash Total

Oc

No

De Ja Fe Ma

Ap

Ma Ju Ju Au

Se Oc

No

De Ja Fe Ma

Cash Carry Credit Rates

Oc

No

De Ja Fe Ma

Ap

Ma Ju Ju Au

Se Oc

No

De Ja Fe Ma

Rates Cash Carry Credit Net Exposure

Source: Kames Capital as at 31 March 2013

14

AVERAGE 41% 48% 50% 19% 158% AVERAGE 41% 24% -6% 19% 78%

Aggregate Fund positioninggg g p g

Gross exposure +166%

Net exposure +98%Net exposure 98%

Modified duration +0.8 years

Number of holdings 86

Unhedged currency exposure 1.38%

Average credit rating A+

VaR 0.40%

Spread duration 0.81 years (non-beta adjusted)

Correlation to Government yields 0 12Correlation to Government yields 0.12

Correlation to Credit spreads -0.07

Source: BoAML, Bloomberg and Kames Capital as at 31 March 2013. Correlation based on daily returns since launch using BoAML UK Gilt Index and BoAML Global Corporate Index. VaRcalculated at 95% over 1 month.

15

Balanced risk profilep

0.8%

Parallel Moves0.8%

Credit Spreads

0.2%

0.4%

0.6%

nd re

turn

0.2%

0.4%

0.6%

d re

turn

-0.4%

-0.2%

0.0%

Est

imat

ed fu

n

0 4%

-0.2%

0.0%

stim

ated

fund

-0.8%

-0.6%

bps

bps

bps

bps

1bp

1bp

bps

bps

bps

bps

E

-0.8%

-0.6%

-0.4%

Credit Credit Credit Credit CreditE

Prl

-100

b

Prl

-50b

Prl

-30b

Prl

-10b

Prl

-1

Prl

+1

Prl

+10b

Prl

+30b

Prl

+50b

Prl

+100

b Credit Spreads

Down 50%

Credit Spreads

Down 25%

Credit Spreads Up 25%

Credit Spreads Up 50%

Credit Spreads Up 100%

Source: Kames Capital as at 4 April 2013

16

Why invest in Kames Absolute Return Bond?

• Award winning fixed income team

Proven fixed income investment process

y

• Proven fixed income investment process

• Three module investment approach

• A core investment, targeting low risk cash plus returns

17

Appendicespp

18

Kames Absolute Return Bond FundLaunch date 30 September 2011Fund manager Stephen Snowden and Colin FinlaysonInvestment policies Invest in diversified portfolio of fixed interest investmentsPrimary performance target Performance target 3 month GBP LIBOR + 2%-3% net of feesExpected volatility < 5% VaR – (99% 1 month VaR)

Government 0-95%Investment Grade Corporate 0-95%

Asset allocation ranges: Bonds High Yield 0-20%Emerging Market 0-20%Cash >5%Government -75%-95%I t t G d C dit 50% 95%

Asset allocation ranges: Bonds + DerivativesInvestment Grade Credit -50%-95%High Yield Credit -20%-20%Emerging Market Credit -20%-20%Carry Module > 20%; Minimum BBB- & <2yrs maturityC dit M d l / 50% HY EM / 20%

Fund restrictionsCredit Module +/-50%; HY+EM = +/-20%Rates Module +/-75%; Duration range -2.5 to +2.5yrs Unhedged currency 0-5%Cash > 5%

B UK St li

19

Base currency UK SterlingHedged share classes Sterling, Euro, US Dollar

Know what fund you are not buying

• What Kames Absolute Return Bond is…

– Fund offering returns in line with risk budget

y y g

• And what it is not…

– Offering unrealistic returns given the risk limitsFund offering returns in line with risk budget

– Targeting a positive total return for investors

– Making use of six sources of alpha

Offering unrealistic returns given the risk limits

– Guaranteeing a given return for investors

– Focusing on a single asset class

– Sticking to what we know and are good at – Taking currency risk to generate performance

20

Absolute Return Bond Fund vs. Strategic Bond Fund

Absolute Return Bond Strategic Bond

g

Performance source Alpha + Beta Beta + Alpha

Management focus Absolute returns Total returns

Return measurement Actual return Peer group relative

Default duration Zero Positive

Credit risk Limited Unlimited

High yield limit Max 20% Up to 100%

21

Kames Absolute Return Bond fund – monthly returns since launchy

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

20112011 0.60% 0.30% 0.49%

2012 0.20% -0.01% 0.37% -0.02% -0.06% 0.26% 0.44% 0.32% 0.09% 0.50% 0.02% -0.03%

2013 0 12% 0 24% 0 28%0.12% 0.24% 0.28%

Source: Bloomberg and Kames Capital as at 29 March 2013. Fund launched 30 September 2011

22

Credit module – long Veolia/ short Casino– via CDSg

• Both French companies70

s)

Credit Module - long Veolia / short Casino - via CDS

• Both defensive industries

• No material reason for divergence40

50

60

S s

prea

d (b

ps

Entered trade @ +46 bps

• Mean reversion trade20

30

sion

5yr

CD

S

-10

0

10

Veol

ia v

s C

as closed trade @ +15 bps

-20

Dec

11

Feb

12

Apr

12

Jun

12

Aug

12

Oct

12

Dec

12

V

Source: Bloomberg, Markit & Kames Capital as at 31 December 2012. For illustrative purposes only.

23

Rates module – long UK 10yr Index Linked Gilts /short 10yr UK Gilts

• Sharp underperformance of Index Linked Gilts vs. Conventional Gilts

g y y

285bps)

UK Index Linked vs. Conventional Gilt - 10yr Spread

• Risk-off and CPAC fears the main drivers

Market nder al ing inflation protection

275

d yi

eld

spre

ad (b

• Market undervaluing inflation protection

• Action - July 2012

– Buy UK Index Linked Gilt 2022 Bonds255

265

KT

Inde

x Li

nked

Closed trade @ 252bps

Buy UK Index Linked Gilt 2022 Bonds

– Sell 10yr UK Bond Futures

• Result235

245

T yi

eld

-10y

r UK

– Spread rewidens – reversing underperformance

– Index Linked bond excess return of 1% 225

235

v 11

c 11

n 12

b 12

ar 1

2

pr 1

2

y 12

n 12

ul 1

2

g 12

p 12

10yr

UK

T

Entered trade @ 239bps

– Low risk alpha generated for portfolioSource: Bloomberg and Kames Capital as at 11 September 2012. For illustrative purposes only.

24

Nov

Dec Jan

Feb

Ma

Ap

May Jun

Ju Aug

Sep

Important informationThis presentation has been prepared solely for this Citywire Event. This document and information contained herein is confidential and has been prepared and is intended for use on a confidential basis. It may not be reproduced, redistributed or passed on to any other persons or published in whole or in any part for any purpose. It is strictly for private use by its holder and may not be passed on to any third parties or otherwise publicly distributed.

p

This document is not intended for retail distribution and is directed only at investment professionals. It should not be distributed to, or relied upon by, private investors. All data in this presentation is sourced to Kames Capital unless otherwise stated. The views expressed and information provided is accurate at the time of writing. The views expressed in this document represent our understanding of the current and historical positions of the market. They should not be interpreted as a recommendation or advice. Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed. g p g

While the investment objective of absolute return funds is to achieve a positive return in all market conditions, this is not guaranteed in any way.Investment professionals must ensure that they meet their obligations in relation to their understanding of this product and the risks involved, and the extent to which this product meets the needs of their clients. Please refer to the Full Prospectus.

This document is accurate at the time of writing but can be subject to change without notification. Kames Capital Investment Company (Ireland) plc, is an umbrella type open-ended investment company with variable capital registered in the Republic of Ireland (Company Number 442106), registered office at 25-28 North Wall Quay, International Financial Services Centre, Dublin 1. Board of Directors: Andrew Bell (UK), Mike Kirby (Ireland) and Bronwyn Wright (Ireland). Kames Capital Investment Company (Ireland) plc is regulated by the Central Bank of Ireland. Kames Capital is an Aegon Asset Management company and includes Kames Capital plc (Company Number SC113505) and Kames Capital ManagementKames Capital is an Aegon Asset Management company and includes Kames Capital plc (Company Number SC113505) and Kames Capital Management Limited (Company Number SC212159). Both are registered in Scotland and have their registered office at Kames House, 3 Lochside Crescent, Edinburgh, EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Conduct Authority, (FCA reference no: 144267). Kames Capital plc is the Investment Manager and Marketing Agent for Kames Capital Investment Company (Ireland) plc. Kames Capital Management Limited is an appointed representative of Scottish Equitable plc (Company Number SC144517), an Aegon company, whose registered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh EH12 9SE (PRA/FCA reference no: 165548)Edinburgh, EH12 9SE (PRA/FCA reference no: 165548).

25

Important informationThe Kames Absolute Return Bond Fund is registered in the UK, Channel Islands, Ireland, Netherlands, Switzerland, Luxembourg and Malta.

For Investors in Luxembourg - Kames Capital Investment Company (Ireland) plc is a UCITS collective investment scheme registered in Luxembourg by the Commission de Surveillance du Secteur Financier. The Prospectus, Supplement and Key Investor Information of Kames Capital Investment Company (Ireland)

p

plc are available from CACEIS Bank Luxembourg 5, allée Scheffer, L-2520 Luxembourg.

For Investors in the Netherlands - Kames Capital Investment Company (Ireland) plc is a UCITS collective investment scheme registered in the Netherlands by the Netherlands Authority for Financial Markets in Amsterdam. The Prospectus, Supplement and Key Investor Information of Kames Capital Investment Company (Ireland) plc are available free of charge from our website www.kamescapital.com (Dutch edition of the Key Investor Information only). p y ( ) p g p ( y y)

The Funds may not be offered directly or indirectly in the Republic of France. This presentation has not been submitted to the Autorité des marchés financiers, nor any offering material, Prospectus or information contained therein relating to the Funds, may be supplied in connection with any offer of the Funds in the Republic of France

The offering of this Fund has not been and will not be notified to the Belgian Financial Services and Markets Authority (Autoriteit voor Financiële Diensten en Markten/Autorité des Services et Marchés Financiers) nor has this document been, nor will it be, approved by the Financial Services and Markets Authority. The Fund may be offered in Belgium only to a maximum of 99 investors or to investors investing a minimum of €250,000 or to professional or institutional investors, in reliance on Article 5 of the Law of August 3, 2012. This document may be distributed in Belgium only to such investors for their personal use and exclusively for the purposes of this offering of this Fund Accordingly this document may not be used for any other purpose nor passed on to any other investor in Belgiumfor the purposes of this offering of this Fund. Accordingly, this document may not be used for any other purpose nor passed on to any other investor in Belgium.

FP ID: 2013/15622

26