Fixed income is the answer…and the question?

October 2011

Stephen Snowden – Investment Manager, Fixed Income

• Our fixed income range of funds are all rated by OBSR:– Investment Grade Bond Fund – AA – Investment Grade Global Bond Fund – A – High Yield Bond Fund – AA – High Yield Global Bond Fund – AA

• Awards include:– Investment Week Fund Manager of the Year Awards 2011, Sterling High Yield Bond category– UK Lipper Fund Awards 2011, Best High Yield Bond Fund (GBP)– Kames High Yield Bond Fund, highly commended at the Portfolio Adviser Awards 2011– Citywire Team All Stars, Asset Group Winner (Bonds) 2007 and 2008– Citywire Team All Stars 2007, Sector Winner (UK Corporate Bonds)

Key personnel

Stephen SnowdenDavid Roberts Euan McNeil Iain BuckleMelanie MitchellPhilip Milburn Colin Finlayson

– Sterling Corporate Bond Fund – AA – Strategic Bond Fund – AA – Strategic Global Bond Fund – A– Ethical Corporate Bond Fund – A

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Absolute Return Bond Strategic Bond

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%

Absolute Return Bond Fund vs. Strategic Bond Fund

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• Fund aims to generate capital returns whilst limiting downside volatility and preserving capital

– Flexibility to access the complete range of fixed income securities– … and only in fixed income assets and risks– Performance target: 3 month GBP LIBOR + 2%-3% net of fees– Controlled investment and within risk parameters– No alpha derived from currency risk– Offers investors low risk NOT no risk

Kames Absolute Return Bond Fund

Kames Absolute Return Bond is subject to FSA Approval.

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Three key components

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• Minimum weighting of +20% within the overall fund• Bonds of maximum 2 years maturity only• Low interest rate volatility • “Pull-to-par” should dominate mark-to-market impact

• Examples of positions– Telefonica 5.58% 12/06/2013 – yield = 3.7%– RBS (Senior) 5.25% 15/05/2013 – yield = 5.3%

Three key components – Carry module

Source: iBoxx and Bloomberg as at 30 September 2011

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• Exposure limited to +/-50% within the overall fund• Invests across the full corporate bond spectrum – cash bonds + derivatives• High Yield and Emerging Market combined limit of +/- 20%• Aggregate issuer exposure: IG +/- 2% ; HY/EM+/- 1%• Duration and currency risks hedged out

• Examples of positions:– ANZ 6.54% 2012/49 – 8.1% Yield-to-call in June 2012– Sprint 8.375% 15/03/2012 = 8.3%*

Three key components – Credit module

Source: iBoxx and Bloomberg as at 30 September 2011. * as at 4 October 2011

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• Captures all rates market positions and strategies • Duration range: -2.5 to +2.5 years - neutral position of 0 years duration• Yield curve exposure: +/- 2yrs active duration per maturity bucket• Currency risks are hedged out

• Examples of positions– Long 10yr Australian Government Bonds Short 10yr US bond futures– Long 10yr Canadian Government Bonds Short 5yr German bond futures

Three key components – Rates module

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• What Kames Absolute Return is…– Fund offering returns in line with risk budget– Targeting a positive total return for investors – Making use of six sources of alpha– Focusing on alpha to generate performance– Only permits risk controlled investments– Sticking to what we know and are good at

Know what fund you are not buying

• And what it is not…– Offering unrealistic returns given the risk limits– Guaranteeing a given return for investors– Focusing on (leveraged) single asset classes– Relying on beta to achieve performance– Broad “limits” that permit excessive risk taking– Taking currency risk to generate performance

Kames Absolute Return Bond is subject to FSA Approval.

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• Part of award winning fixed income team• Building on a proven and tested fixed income investment process• Three module investment approach• Ability to take long and short positions – maintaining market neutrality• Robust risk control framework• A core investment, targeting cash plus returns

Why invest in Kames Absolute Return Bond?

Kames Absolute Return Bond is subject to FSA Approval.

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Market outlook

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Appendices

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Kames Absolute Return Bond Fund

Launch date 30 September 2011

Fund manager Stephen Snowden and Colin Finlayson

Fund structure Irish domiciled VCIC under UCITS III

Investment policies Invest in diversified portfolio of fixed interest investments

Performance target Performance target 3 month GBP LIBOR + 2%-3% net of fees

Expected volatility < 5% VaR – (99% 1 month VaR)

Asset allocation ranges

Government Investment Grade CreditHigh Yield CreditEmerging Market CreditCash

-75%-95%-50%-95%-20%-20%-20%-20%>5%

Fund Restrictions

Carry Module:Credit Module:Rates Module:Cash:

> 20%; Minimum BBB- & <2yrs maturity+/-50%; HY+EM = +/-20%+/-75%; Duration range -2.5 to +2.5yrs > 5%

Base Currency UK Sterling

Hedged share classes Sterling, Euro, USD

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• Our fixed income specialists are guided in their research and fund-management duties by a three-pronged philosophy

– Markets are inefficient. We exploit this through robust research and active management– It is vital to identify, analyse and manage risk– Investment strategies should be transparent and easily communicated

Investment philosophy

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Strategy process – top down into bottom up

Duration, yield curve and asset allocation

Credit rating and sector preferences

Issuer and issue selection

Macro positioning

Top down credit strategy

Bottom up credit strategy

Analysis, challenge and decision

Team focus Portfolio

MA

CR

O t

o M

ICR

O b

len

d Top down strategy group

Credit specialists

Whole team

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Kames Capital fixed income idea cycle

Quadrant analysis

Specialist

Recommendation

Specialist, following peer review

Challenge

Team debateStrategic decision

Team leaders and specialist

Implementation

Fund manager and specialist

Monitor

Fund manager and specialist

AssetAllocation

Ratings selection

Sector selection

Curve

Stockselection

Duration

PERFORMANCEDRIVERS

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Kames Capital quadrant analysis approach

• Common research framework applied to:

– Interest rate and credit markets– Credit sectors and companies

• Quadrant analysis– Fundamentals– Valuations– Technicals– Sentiment

• Each scored from -2 to +2 to give overall score

• Template approach ensure consistency, ease of use and record keeping

Fundamentals

Sentiment Technicals

Valuations

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Ability to short

• UCITS powers enable us to mitigate losses or benefit from circumstances generally seen as poor for bonds

– Duration management– Pair trades– Cross-market interest rates– Playing the curve – Adding value from being short – … but awareness of the cost of shorting is

essential

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• Credit risk management – CDS indices used to manage credit beta– Single name CDS used to manage individual credit exposures

• Currency risk management– Currency forwards used to manage exposure; 100% hedged is default position

• Head of Portfolio Derivatives responsible for derivative usage oversight– Derivative Operations responsible for day to day valuation and collateral management– Specific derivative trading authorisation required, within overall risk control framework

Use of derivatives – EPM and Risk Control

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Philosophy• Identification, analysis and understanding of

risk is essential• Utilise multiple sources of alpha, none to dominate• Fund manager responsibility with independent

oversight• Review discipline

Analytics• On desk resource to aid idea generation,

testing and sizing• UBS Delta quantitative risk analysis system• Independent Risk Management Team

monitors risks taken• Daily VaR reporting

Controls• Portfolio limits set in thinkFolio front office system• Trades require separate fund manager authorisation• Centralised independent dealing team• Independent Risk Control Team monitors positions

taken

Governance• Monthly meeting with CIO assessing performance

and risks• Regular off-desk fund reviews with peer challenge• Investment Management Portfolio Risk &

Control Committee

Risk control framework – client protections

On

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kO

ff desk

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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. The information in this document is based on our understanding of the current and historical positions of the markets. The views expressed should not be interpreted as recommendations 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.

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.

Kames Capital is an AEGON Asset Management company and includes Kames Capital plc (no: SC113505) and Kames Capital Management Ltd (no: SC212159). Both are registered in Scotland and have their registered office at 3 Lochside Avenue, Edinburgh Park, Edinburgh, EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Services Authority (FSA reference no: 144267). Kames Capital plc provides segregated and retail funds and is the Authorised Corporate Director of Kames Capital ICVC, an Open Ended Investment Company. Kames Capital Management Ltd provides investment management services to AEGON, which provides pooled funds, life and pension contracts. Kames Capital Management Ltd is an appointed representative of Scottish Equitable plc, an AEGON company, whose registered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (FSA reference no: 165548).

AEGON Asset Management UK rebranded to Kames Capital on 1 September 2011.

Kames Absolute Return Bond Fund is subject to FSA Approval.

Important information

FP ID: 2011/12480

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