Corporate Bonds: a one way bet?

Richard Hodges – Head of High Alpha Fixed Income

Investment Update Seminar, 11 March 2009

2

Compensation for default

Source: BarCap, Moody’s A free lunch?

%

0

1

2

3

4

5

6

7

74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

0

5

10

15

20

25

30

US IG corporate bond yield over Government yield (LHS)

US high yield default rate (RHS)

• The economy is still in recession

• Defaults will increase

• However, IG market priced like HY devastation

%

3

Bond price dispersion

Source: BarCap

0

5

10

15

20

25

30

35

20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100105110115120125130135140

Price (as % of notional value)

03-Feb-0903-Feb-08

% of sterling corporate bond market

• Bond prices generally cluster

• Currently very dispersed

• “Average” means little

Great care required

4

What can happen

3 Months 6 Months 9 Months I YearSince

30/04/07

£ Strategic Bond -2.07 -13.93 -5.70 -14.29 -16.89

£ Corporate Bond -0.68 -9.32 -10.62 -10.48 -12.44

£ High Yield Bond -0.71 -18.83 -21.71 -18.02 -24.33

Outperforming and preserving capitalSource: Lipper as at 13 Feb 2009

L&G Dynamic Bond 7.59 3.89 1.12 5.80 3.20

5

Risk management

Significant outperformance without significant risk

Risk

Management

Value at risk

Source: LGIM internal data and UBS Delta as at 13 Feb 2009

iBoxx Sterling Collateralised & Corporate - Spread

iBoxx Sterling Collateralised & Corporate - Interest Rate

iBoxx Sterling Collateralised & Corporate - Total

Dynamic Bond Trust - Interest Rate

Dynamic Bond Trust - Spread

Dynamic Bond Trust - Total

• Actively managed risk

• Nothing left to chance

• Independent risk monitoring and reporting

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

31-A

ug

28-S

ep

26-O

ct

23-N

ov

21-D

ec

18-J

an

15-F

eb

14-M

ar

11-A

pr

09-M

ay

06-J

un

04-J

ul

01-A

ug

29-A

ug

26-S

ep

24-O

ct

21-N

ov

19-D

ec

16-J

an

13-F

eb

Value at risk

6

Our competitive advantage

• One of largest macro / analytical teams

• Continuing to add diversified talent

• Bringing new techniques to evolving asset class

Scale, access, people

• £130bn FI AUM

• £65bn actively managed

• Value adding market presence

• 5% FTSE 350

• Superior access to boardrooms

• Driving new issuance deals

7

• Real recovery consumer led

• Must get people working

3

4

5

6

7

8

9

10

70 74 78 82 86 90 94 98 02 06 10

LGIM forecast

Doesn’t look good

Risk

Management

Source: LGIM estimate, Reuters Ecowin

Macro view

• Unemployment set to rise sharply

G4 unemployment

8

• Anaemic recovery in 2010

• Rates to stay low, headline inflation could go negative

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

70 71 73 75 76 78 80 81 83 85 86 88 90 91 93 95 96 98 00 01 03 05 06 08 10

Pessimistic outlook

Risk

Management

Source: LGIM estimates, Reuters Ecowin

Macro view

• Significant global contraction in 2009

Global spare capacity “Actual growth vs average growth”LGIM

forecast

9

-40% -30% -20% -10% 0% 10% 20%

Asset Allocation

Positioning for outperformance

Relative to neutral *

*Neutral = 50% High Yield/ 25% IG Non-Financial/ 25% IG Financial

Source: LGIM 10 Feb 2009

IG Financial Corporate

Cash, FRN & FX

Sovereign & Supranational

High Yield Corporate

IG Non-Financial Corporate

• Currently stressing robustness over risk

• Industrial and HY debt bombed out

• Waiting to take advantage

10

Positioning for outperformance

Risk

Management

Direction

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

3M 6M 1 2 3 4 5 7 8 9 10 15 20 25 30

UK Gilts-Lower Coupon Curve 01-Jun-07 UK Gilts-Lower Coupon Curve 10-Feb-09

• Rates going nowhere anytime soon

• Investors ‘safe’ yield hunger to strengthen

• Looking to put on curve flattener

Source: Bloomberg

11

Fixed Income Suite

FIT MMIT DBT

£ Corporate Bond sector

Aims to outperform the benchmark on a rolling 3 year

basis

Low concentration

Corporate Bond

Capital growth & Income

Global investment opportunities

Derivatives are used for efficient portfolio management

Managed by Dickie Hodges and Ben Edwards with a pooled

investment approach

£ Corporate Bond sector

Aims to achieve top quartile performance on a rolling 3 year

basis

Medium concentration

Corporate Bond with High Yield

Capital growth & Income

Global investment opportunities

Derivatives are used for efficient portfolio management

Managed by Dickie Hodges and Ben Edwards with a pooled

investment approach

£ Strategic Bond sector

Aims to achieve top quartile performance on a rolling 3 year

basis

High concentration

Unconstrained approach

Total Return

Global investment opportunities

Full use of derivatives is permitted for alpha generation

and hedging

Managed by Dickie Hodges with a pooled investment approach

Range of fixed income funds

12

Summary

• Not the beginning of a bull run for bonds

• Interest rate and credit management are key

• Credit expertise and ability to harvest opportunities is paramount

• Proven track record

An approach for all seasons

13

Important Information

This presentation, and any information it contains, has been produced for use by professional managers and advisors only and should not be distributed without the permission of Legal & General Investment Management Limited or Legal & General (Unit Trust Managers) Limited.

The Dynamic Bond Trust (“the Fund”) is an authorised unit trust, established as a UCITS III fund, managed by Legal & General (Unit Trust Managers) Limited. Legal & General Investment Management Limited has been appointed as the Investment Advisor and Distributor of the Fund and its main function is to invest the assets of the Fund. Both companies are authorised and regulated by the Financial Services Authority.

The Fund is designed to be held for the longer term and invests in fixed income securities which are sensitive to interest rate trends. The Fund may invest in fixed rate securities with low credit ratings and therefore there is potentially a greater risk of default with adverse consequences for the Fund. The Fund is able to use financial derivatives making use of the expanded regulations as set out by the FSA and UCITS III regulations. These financial derivatives may have greater volatility than the securities to which they relate. The Fund includes the use of ‘Over-the-Counter’ (OTC) derivatives where there may be uncertainty as to the fair value of such instruments and the Investment Advisor seeks to mitigate the risk of any loss to the Fund from counterparties defaulting by requiring collateral. The Fund will invest in overseas instruments; however the fund will hedge a significant proportion of these exposures back to sterling.

Capital growth will be constrained as half the annual management charge will be deducted from capital and further charges will be deducted from capital if there is insufficient income.

The risks associated with this Fund are set out in the Prospectus and these should be understood before making any investment decisions. Additional information in relation to the Risk Management process is available on request. A copy of the Prospectus can be obtained from:

Legal & General Investment Management Limited: Telephone number 020 3124 3583