RBC GAM Webcast Convertible Bonds – The Best of Both WorldsMay 14th, 2013
Mike Reed, Senior Portfolio Manager
For Advisor Use Only
2
Convertible Bonds – The Asset Class
• Convertibles are a hybrid security that combine the security of bond investment with the upside potential of equities
Equity-like upside, bond-like protection
DEBT EQUITYCONVERTIBLES• Unlimited equity upside• Fixed current income• Repayment of principal
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3
Convertible Bonds – The Asset Class
• Convertibles can be seen as an optimal alternative to direct equity exposure
Convertible Bond Payoff
• Balanced: The convertible is at its point of maximum convexity. As the underlying equity price increases the convertible bond price rises reflecting the increasing equity-like profile of the security
• Equity: The valuation of the convertible has a high correlation with the underlying equity price
• Bond: The equity value has fallen and the convertible now has little equity sensitivity. The convertible bond exhibits bond-like behaviour reacting mainly to movements in interest rates and credit spreads
Data source: UBS Convertibles Marketing / MACE
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Parity CB Price Bond Floor
Bond Balanced EquityConvertible Bond Payoff
Bond Like Equity Sensitive
Bon
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rice
Share Price
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Convertible Bonds – Index CharacteristicsUBS Global Focus Convertible Index Comparative Performance
50
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Perfo
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ebas
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MSCI World Equity IndexUBS Global Focus Convertible Bond IndexMerrill Lynch Global Corporate Bond Index
Comparative Index Performance (Rebased to 100)
Data source: UBS Convertibles Marketing / MACE, as at 31 March 2013
• Over the long-term convertibles have outperformed equities significantly• Volatility of the convertible bond index is less than half that of the MSCI World Equity Index
MSCEI UBS Convert Bond
Global Corp Bond
Return 2013 YTD 7.2% 1.8% -1.1%
Lifetime from 30 June 1998
Total Return 32.1% 88.7% 149.5%
Annualised Return SI 1.9% 4.4% 6.4%
Volatility 17.3% 8.2% 5.3%
Beta vs MSCI World 1.000 0.398 0.032
Sharpe Ratio -0.03 0.25 0.76
Statistical Metrics, as at 31 March 2013
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5
Convertible Bonds – Investment Case vs EquitiesConvertibles have offered similar returns with lower volatility
Total return Volatility Sharpe
Equities Converts Equities Converts Equities Converts
1 year 8.20% 4.84% 12.8% 5.6% 0.63 0.85
3 year 23.98% 17.80% 17.2% 7.8% 0.46 0.75
5 year -3.46% 9.14% 22.3% 9.3% -0.04 0.17
10 year 86.65% 82.94% 17.6% 7.8% 0.40 0.86
Convertibles have demonstrated an improved risk/reward profile
Data source: Bloomberg, as at 28 February 2013
• Convertible returns over 1, 3, 5 and 10 year periods are “equity-like”
• Volatility of convertible returns is consistently less than half of equity returns
• Over each period Sharpe ratio of convertibles is far superior to equities
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6
Convertible Bonds – Current Outlook & Investment CaseConvertible inclusion improves a portfolio‘s risk/return
• The inclusion of convertibles clearly expands the efficient frontier in a portfolio
• Replacing stock allocations with convertibles reduces volatility
• Adding convertibles improves the diversification of a portfolio
Efficient Frontier (data 1989 to 2011)
86% Bonds14% Converts
7% Stocks93% Bonds
100% Stocks
100% Converts
67% Stocks33% Bonds
57% Bonds43% Converts
36% Bonds64% Converts
34% Stocks66% Bonds
14% Bonds86% Converts
78% Bonds22% Converts
Data source: Merrill Lynch Convertible research, data calculated from 1989 to 2011 For Advisor Use Only
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Macro Overlay
Convertible Bonds Valuation Analysis
Fundamental Analysis
Credit / Equity
Portfolio Construction
Portfolio Construction
Investing in Convertibles at BlueBay
• BlueBay employs a unique 360 degree approach to convertible fund management
• Portfolio construction is performed by combining top down, bottom up and derivative valuation techniques
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8
BlueBay Convertible Bonds – The Team
Michael ReedSenior Portfolio Manager• Mike joined BlueBay in October 2007 from Pendragon, where, as
a Partner, he ran the company’s convertible arbitrage strategies. Prior to that, he was a Managing Director of Salomon Brothers, responsible for international convertible bond trading between 1994 and 2002. Michael joined the Japanese Warrant Arbitrage desk at Salomon in 1989 and spent 2 years trading Japanese Warrant Arbitrage in Tokyo. Michael holds a Bachelor of Engineering from Southampton University
Alessandro EspositoPortfolio Manager• Alessandro began his career in 1998 at JPM before moving to
Intesa in 2000. He began trading hybrids and equity derivatives at Morgan Stanley in 2003 and ran the convertible arbitrage strategy at Peloton Partners from 2006. He joined BlueBay in December 2007 as a portfolio manager on the convertible arbitrage team. He has MSc in Mathematical Trading and Finance and is a CFA charter holder
• Experience: The Portfolio Managers have a combined 39 years of investment experience
• Participation at Investment Committee: Senior investment professionals across all product areas are members of the Investment Committee, chaired by the CIO
• Proprietary research: Working with the dedicated credit analysts within BlueBay covering Investment Grade, High Yield, and Emerging Markets
A dedicated team of investment professionals
Investment Grade Analysts
Robert LambertNesche YazganRussell Vincett
James MacDonald Arun Konkoth
John GuarneraHigh Yield Analysts
Thomas KreuzerClaire BonyngeCaroline Brown
Oliver GraceFred Kooij
Praveen Pillai
Charles WhineryJorge Lazaro Soler
Tim Horan Rajat MittalJeff Jablons
Emerging Market Analysts
Jo MorrisStanislav GelferShikeb Farooqui
Alan SiowMagashlin Chetty
Kaushik RambhiyaAmanda GraySven Scholze
Risk Management, Compliance & Legal
Investment Committee
Mark Poole (CIO) Alex Khein (COO)Senior investment
professionals
Trade ExecutionJohn Orrock
(Senior Trader & Trade Operations Lead)
Philip Steel (Exec. Trader – CB) Convertible Bonds
Investment Team
Portfolio ManagersMichael Reed (Senior PM & Partner)
Alessandro Esposito
Junior Portfolio ManagerDavid Watling
Dedicated Credit & Equity AnalystsEsther KrukowskiKirsten Macaulay
Vanessa Scarbonchi
Note: As at 31 March 2013 For Advisor Use Only
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Sector Breakdown
Broad Range of Credits**Country Breakdown
Global MarketCanadian Market
Sector Breakdown
Data source: Bloomberg, UBS Convertibles Marketing / MACE. Canadian market data as of July 19, 2012; Global market data as of February 29, 2012 * Based on active issues trading between $50-$150 ** Where no official rating is available, BlueBay assigns an effective rating using internal processes
Relatively Small• Represents only 5% of the global marketConcentrated• Approximately 80% of all issues are in Financial, Energy,
and Industrial sectorsNarrow• Approximately 50% of market capitalization is in 39 issues
from 28 different companies
80% of issues are in financial, energy, and industrial sectors
Global market is diversified across sectors
Convertible Bond Market OverviewAdvantages of access to global convertible bond market
10.1%6.8%
21.6%2.2%
6.5%9.7%
4.2%17.7%
12.7%5.6%
2.8%
0% 5% 10% 15% 20% 25% 30% 35%
FinancialEnergy
IndustrialsUtilities
MaterialsHealthcare
Consumer StaplesConsumer Discretionary
TelecomIT
Other
Market Statistics
Market Capitalization CAD$20.5bn
Average issue Size* CAD$77m
Market Statistics
Market Capitalization US$475bn
Average issue Size* US$888m
US38.5%
Asia ex japan17.6%
Europe31.4%
Japan12.5%
AAA -AA
7.1%
AAA -AA
39.0%
BBB23.0%
BBB19.5%
BBB10.6%
CCC0.8%
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Convertible Bonds – Current Outlook & Investment CaseCredit markets remain attractive
Data source: Bloomberg US HY default rates – source JP Morgan
• Current credit spreads imply annual default rates of over 2.0% for investment grade and over 4.5% for high yield credits
• Default rates are expected to remain low for 2013
• Current credit spreads are too wide for bottom-up anticipated default rates
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High Yield
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Investment G
rade (bps)
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ps)
Crossover
Investment Grade
Credit spreads – Implying high rates of defaults, to 31 March 2013 Default rates – Expected to stay low 2013
Long-term average default rate
4.3%
2013E 2.0%
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Convertible Bonds – Current Outlook & Investment CaseEquities supported by valuation arguments
• Equity yields are attractive relative to bond yields on an historic basis
• Given current corporate profitability dividend payout ratios have room to increase
Data source: Goldman Sachs and BloombergData source: JP Morgan as at 31 March 2013
Dividend yield gap - Equity yields compelling S&P dividend payouts - Low by historic ratios. As at 31 March 2013
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Convertible Bonds – Current Outlook & Investment CaseEmerging Markets – Credit and Equity Opportunities
• Strong GDP growth and healthy banking systems are supporting EM credit
• Equivalent grade credits trade at a discount in EM
• Healthy asset inflows are supportive of both EM credit and equity markets
• EM equities trading near cyclical lows on forward P/E
Emerging markets forward P/E earnings ratio
Data source: BNP Paribas as at 1 February 2013
Spread of emerging market IG corporates vs developed market IG corporates
Data source: Bloomberg, BlueBay Asset Management, Bloomberg, as at 31 March 2013
-150
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EM IG less DM IG Spread
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Convertibles perform well in rising rate environments
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1994 1999 2009
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Equities CBs USTs
• We believe that in periods of rising rates the equity component of convertibles normally compensates for falling bond floors• Over last 20 years, in each annual period that government bonds have posted significant losses convertibles have posted
positive returns.
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APPENDIX
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APPENDIX: BlueBay Convertible Bonds – Our Track RecordLong Only Products – BlueBay Global Convertible Bond Fund
Data source: BlueBay Asset Management Fund Type: UCITS IV Fund (Part I SICAV) *Annualised return. Fund inception date: 9 December 2008Please refer to the Disclaimer located at the back of this presentation for important information regarding the performance shown above
Risk/Return CharacteristicsCumulative Gross Relative Performance (to 30 April 2013)
1M 3M YTD 2012 2011 2010 2009 Ann. SI*
BlueBay Funds -
BlueBay Global Convertible Bond Fund 2.73% 2.09% 5.07% 14.43% -3.55% 13.83% 36.70% 15.54%
UBS Global Convertible Focus Index USD 2.37% 2.08% 4.26% 10.56% -4.58% 9.73% 24.42% 11.08%
Alpha 0.36% 0.01% 0.81% 3.88% 1.03% 4.10% 12.28% 4.46%
UBS Global Convertible Focus Index USD
BlueBay Funds - BlueBay Global Convertible Bond Fund
Performance (US$ gross of fees to 30 April 2013)
Fund Type: UCITS IV Fund (Part I SICAV) This Fund is not available to Canadian investors.
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Return (% p.a.)
Standard Deviation (% p.a.)
Reward to Risk
Tracking Error (% p.a.)
Information Ratio
APPENDIX: Convertible Bonds at BlueBay – Our Track Record Performance characteristics vs UBS Global Convertible Index
Data source: Mercer. Universe of 13 Funds.
95th Percentile
Lower Quartile
Upper Quartile
5th Percentile
Median
BlueBay Global Convertible Bond Fund
Comparison with the UBS Global Convertible Index (US$ net) over 3 years to December 2012
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
17.0
15.0
13.0
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-0.4
-0.8
-1.2
Fund Type: UCITS IV Fund (Part I SICAV) This Fund is not available to Canadian investors.
For Advisor Use Only
17
APPENDIX: About BlueBayKey facts
Data Source: BlueBay Asset Management *As at 31 March 2013 **As at 31 March 2013. Investment professionals defined as staff members directly involved in the investment process
• Founded in 2001, BlueBay is a leading European credit specialist with long-only and alternative capabilities with assets under management of over US$55.7 billion*
• Absolute return-style products across investment grade, high yield debt, loans, distressed debt, convertible bonds, and emerging markets
• Operational and control infrastructure of a mainstream asset manager with the mindset of a boutique
• Based in London with offices in Hong Kong, Japan, Luxembourg and the US, BlueBay has 328 employees including 84 investment professionals**
• BlueBay Asset Management is a wholly-owned subsidiary of Royal Bank of Canada (RBC) and part of the RBC asset management division, RBC Global Asset Management group of companies
2001
March 2002 Launch of first
long / short fund
June 2004 BlueBay reaches US$1bn of AUM
April 2007 Launch of first long/short
multi strategy fund
July 2001 BlueBay is established with
institutional backing of Barclays Bank and Shinsei Bank
September 2002 Launch of first long-only fund
2002 2003 2004 2005 2006 2007 2008 2009
December 2010 BlueBay acquired
by Royal Bank of Canada
2010
December 2009 Launch of the first
long-only active asset allocation product
2005 Office opened
in Japan
2006 Office opened
in the US
2011
April 2011 Office opened in Hong Kong
2012
April 2012 BlueBay becomes a
Limited Liability Partnership
March 2013 AUM
US$55.7bn
November 2006 BlueBay lists shares on London Stock Exchange
2013
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Disclaimer
For Advisor Use Only
The full name of the Canadian-domiciled fund is BlueBay Global Convertible Bond Fund (Canada) (“Fund”). RBC Global Asset Management Inc. (“GAM”), an indirect wholly-owned subsidiary of Royal Bank of Canada, is the manager of the Fund. BlueBay Asset Management LLP, a wholly-owned subsidiary of Royal Bank of Canada and an affiliate of GAM, is the sub-advisor of the Fund.
This document may contain information collected from independent third party sources. For purposes of providing these materials to you, neither GAM nor any of its affiliates, subsidiaries, directors, officers, or employees, has independently verified the accuracy of the third-party information contained herein. The information set forth herein is subject to change without prior notification. GAM and its affiliates make no
express or implied warranties concerning these materials.
®/TM Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2013