Eric Granat Derivatives Analyst - Investment Revie · November 5, 2014 Eric Granat Derivatives Analyst P) 703538.1.0 F)703539.1.0 . 2 For Institutional Use Only Table of Contents

© 2014 FMR LLC. All rights reserved

Pyramis Global Advisors®

Equity derivatives: A reliable source of yield in a low rate environment

November 5, 2014 Eric Granat Derivatives Analyst

P) 703538.1.0 F)703539.1.0

For Institutional Use Only 2

Table of Contents

1. Why consider equity derivatives for yield?

2. Covered calls: opportunities & risks

3. Strategy enhancements and potential alpha opportunities

4. Appendix

See "Important Information" for a discussion of performance data, some of the principal risks related to any of the investment strategies referred to in this presentation and other information related to this presentation.

Why consider equity derivatives for yield? Attributes of publically-listed equity derivatives

3 For Institutional Use Only

High liquidity and transparency

Available on global indexes, ETFs and common stocks

Successfully deployed since the late 1970s

Transparent and listed benchmarks are available for the most popular implementations

Directly access and monetize equity risk premiums

Wide variety of income strategies are available • Iron condors • Secured put selling • Call/put spreads • Covered call selling

Source: (Top) FactSet, MSCI. Yields shown are that of the appropriate MSCI index. (Bottom) FactSet, NAREIT. Yields shown are that of the appropriate FTSE NAREIT REIT index, which excludes property development companies. Data as of 9/30/2014

Why consider equity derivatives for yield? Current yield environment: equities and REITs


Equity Dividend Yields

REIT Dividend Yields

2.00% 2.89%

4.65%

3.20%

1.84% 2.78%

3.67%

2.48%

0.00%1.00%2.00%3.00%4.00%5.00%

U.S. Switzerland Australia France Japan Canada U.K. ACWI

3.92% 3.86% 4.45%

5.17%

1.78%

5.69%

3.66% 3.06%

0.00%

2.00%

4.00%

6.00%

U.S. Singapore Australia France Japan Canada Global U.K.

Source: Factset

Why consider equity derivatives for yield? Current yield environment: fixed income


Yield Return U.S. Treasuries # of issues Mkt. Value Avg. Maturity 9/30/2013 9/30/2014 9/30/2013 9/30/2014

2-Year 193 1,434,241 2 years 0.33% 0.56% 0.48 0.05 5-Year 55 1,498,048 5 1.38% 1.76% 2.95 0.52 10-Year 15 130,516 10 2.61% 2.49% 7.29 0.70 30-Year 28 643,021 30 3.69% 3.20% 14.01 1.06 Sector

MBS 306 4,913,870 7.2 3.09% 2.90% 4.16 0.33 Corporate 2,505 2,253,145 10.2 2.86% 2.80% 6.16 0.50 Municipals 6,591 143,247 2.1 0.74%** 0.53%** 1.26 -0.01 Emerging Debt 1,356 1,428,659 9.3 5.33% 5.05% 7.93 0.07 High Yield 2,205 1,342,616 6.5 6.79% 6.44% 7.41 0.20 Tips 35 913,702 8.4 2.16% 2.26% 2.11 0.51

** = Yield-to-worst Fixed income sectors shown are provided by Barclays Capital and are represented by: MBS = Fixed Rate MBS Index; Corporate = U.S. Corporates; Municipals = Muni Bond Index; Emerging Debt = Emerging Markets Bond Index; High Yield = Corporate High Yield Index; TIPS = Treasury inflation protected securities (TIPS). Yield and return information based on Bellwethers for Treasury securities. Change in bond prices is calculated using both duration and convexity according to the following formula: New Price = (Price +(Price * -Duration * Change in Interest Rates))+(0.5 * Price * Convexity * (Change in Interest Rates)^2). Data as of 9/30/2014

Why consider equity derivatives for yield Current yield environment: call selling opportunities


CBOE S&P 500 BuyWrite

(BXM)

CBOE S&P 500 PutWrite

(PUT)

CBOE Russell 2000 BuyWrite

(BXR)

CBOE Nasdaq-100 BuyWrite

(BXD) Average Monthly Yield 1.03% 1.21% 1.59% 1.30%

Source: CBOE, Bloomberg

Monthly Yield Summary for CBOE Strategies (1 Year as of 9/30/14)

Covered calls: opportunities & risk Strategy basics


Long equity portfolio Long equity exposure obtained through a diversified portfolio of

actively managed common stocks or through passive index exposure via exchange traded fund or stock index replication with futures contracts.

Short call option position Call options are sold (written) against the notional value of the equity

portfolio, generally on a monthly basis. Proceeds from the call option sale may be re-invested into the equity portfolio or paid out as a dividend.

Risk of Strategy Equity upside truncation beyond the call option strike price + call sale

premium.

Covered calls: opportunities & risk Understanding the strategy risk


There is one risk to a call selling strategy: Opportunity Risk

Covered calls: opportunities & risks Understanding the strategy benefits


Reliable yield generation Yield opportunities historically have ranged between 1% and 7%

Reduction of equity portfolio volatility A covered call strategy potentially will reduce annual portfolio volatility by 7.5%

to 25%

Highly customizable implementations A straight-forward add-on enhancement to an existing client account A fully-funded account to replicate a CBOE benchmark strategy

Applicable to many global equity indices, ETFs, or concentrated stock holdings

US-based strategies are currently favored Japan, Europe, Canada and Hong Kong are gaining popularity

Abundant alpha opportunities for active managers Call option strike price selection Trade tenor: weekly, monthly, quarterly Active trading

Strategy enhancements and alpha opportunities High alpha implementations


Set a modest annual income goal Annual income goals below 6.5% are best Annual income goals above 6.5% will impair equity

upside opportunity

Disciplined active management adds value Proactive management and trading seeks to add

500 bps+ to the total return performance

Strategy enhancements and alpha opportunities What active management looks like


Volatility-based option tenor selection

Volatility-based option strike selection

Summary


Favorable market conditions A reduction in government stimulus should enhance yield

opportunities for derivatives

Derivatives strategies are straight-forward and transparent implementations

Listed securities with centralized clearing Publically available benchmarks

An attractive source of higher yield

Broad range of yield opportunities Applicable to many global equity markets May be tactically deployed as an overlay to suit specific market

environments

Why consider equity derivatives in a low rate environment?

Appendix


Additional information on CBOE strategies http://www.cboe.com/micro/bxm/introduction.aspx


Important Information Read this important information carefully before making any investment. Speak with your relationship manager if you have any questions.

Risks Past performance is no guarantee of future results. An investment may be risky and may not be suitable for an investor's goals, objectives and risk tolerance. Investors should be aware that an investment's value may be volatile and any investment involves the risk that you may lose money. Performance results for individual accounts will differ from performance results for composites and representative accounts due to factors such as portfolio size, account objectives and restrictions, and factors specific to a particular investment structure.

The value of a strategy's investments will vary day to day in response to many factors, including in response to adverse issuer, political, regulatory, market or economic developments. The value of an individual security or a particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole.

The performance of fixed income strategies will change daily based on changes in interest rates and market conditions and in response to other economic, political or financial developments. Debt securities are sensitive to changes in interest rates depending on their maturity, and may involve the risk that their prices may decline if interest rates rise or, conversely, if interest rates decline, their prices may increase. Debt securities carry the risk of default, prepayment risk and inflation risk. Changes specific to an issuer, which may involve its financial condition or economic environment, can affect the credit quality or value of an issuer's securities. Lower-quality debt securities are often considered to be speculative and involve greater risk, especially in periods of general economic difficulty. The value of mortgage securities may change due to shifts in the market's perception of issuers and changes in interest rates, regulatory or tax changes.

Derivatives may be volatile and involve significant risk, such as credit risk, currency risk, leverage risk, counterparty risk and liquidity risk. Using derivatives can disproportionately increase losses and reduce opportunities for gains in certain circumstances. Investments in derivatives may have limited liquidity and may be harder to value, especially in declining markets.

The performance of international strategies depends upon currency values, political and regulatory environments, and overall economic factors in the countries in which they invest. Foreign markets, particularly emerging markets, can be more volatile than the U.S. market due to increased risks of adverse issuer, political, regulatory, market, or economic developments and can perform differently from the U.S. market. The risks are particularly significant for strategies that focus on a single country or region.


Important Information (continued) These materials contain statements that are “forward-looking statements,” which are based on certain assumptions of future events.

Forward-looking statements are based on information available on the date hereof, and Pyramis does not assume any duty to update any forward-looking statement. Actual events may differ from those assumed. There can be no assurance that forward-looking statements, including any projected returns, will materialize or that actual market conditions and/or performance results will not be materially different or worse than those presented.

Performance Data Performance data is generally presented gross of any fees and expenses, including advisory fees, which when deducted will reduce returns. See the GIPS® Composite Performance Data for performance figures that are net of the maximum investment advisory fee charged any client employing this strategy. Some clients may request a performance fee arrangement, which if imposed will also reduce returns when deducted. See Pyramis' Form ADV for more information about advisory fees if Pyramis Global Advisors, LLC is the investment manager to the account. For additional information about advisory fees related to other Pyramis advisory entities, speak with your relationship manager. All results reflect realized and unrealized appreciation and the reinvestment of dividends and investment income, if applicable. Taxes have not been deducted. In conducting its investment advisory activities, Pyramis utilizes certain assets, resources and investment personnel of FMR Co., which does not claim compliance with the Global Investment Performance Standards (GIPS®).

Representative account information is based on an account in the subject strategy’s composite that generally reflects that strategy’s management and is not based on performance of that account. An individual account’s performance will vary due to many factors, including inception dates, portfolio size, account guidelines and type of investment vehicle. Index or benchmark performance shown does not reflect the deduction of advisory fees, transaction charges and other expenses, which if charged would reduce performance. Investing directly in an index is not possible.


Important Information (continued) The business unit of Pyramis Global Advisors (Pyramis) consists of: Pyramis Global Advisors Holdings Corp. , a Delaware corporation;

Pyramis Global Advisors Trust Company, a non-depository trust company (PGATC); Pyramis Global Advisors, LLC, a U.S. registered investment adviser (PGA LLC); Pyramis Canada ULC, an Ontario registered investment adviser; Pyramis Global Advisors (UK) Limited, a U.K. registered investment manager (Pyramis-UK); Pyramis Global Advisors (Hong Kong) Limited, a Hong Kong registered investment adviser (Pyramis-HK); Pyramis Distributors Corporation LLC, a U.S. registered broker-dealer; and Fidelity Investments Canada ULC, an Alberta corporation (FIC). Investment services are provided by PGATC, PGA LLC, Pyramis Canada ULC, Pyramis-UK and/or Pyramis-HK.

"Fidelity Investments" refers collectively to FMR LLC, a US company, and its subsidiaries, including but not limited to Fidelity Management & Research Company (FMR Co.) and Pyramis. “Fidelity International” refers collectively to FIL Limited, a non-US company, and its subsidiaries. “Fidelity” refers collectively to Pyramis and Fidelity Investments.

Products and services presented here are managed by the Fidelity Investments companies of Pyramis Global Advisors, LLC, a registered investment adviser, or Pyramis Global Advisors Trust Company, a non-depository limited purpose trust company. Pyramis products and services may be presented by Fidelity Investments Institutional Services Company, Inc., Fidelity Investments Canada ULC, Fidelity International, Fidelity Brokerage Services, LLC, Member NYSE, SIPC, all non-exclusive financial intermediates that are affiliated with Pyramis.

Certain data and other information in this presentation have been supplied by outside sources and are believed to be reliable as of the date of this document. Data and information from third-party databases, such as those sponsored by eVestment Alliance and Callan, are self-reported by investment management firms that generally pay a subscription fee to use such databases, and the database sponsors do not guarantee or audit the accuracy, timeliness or completeness of the data and information provided including any rankings. Rankings or similar data reflect information at the time rankings were retrieved from a third-party database, and such rankings may vary significantly as additional data from managers are reported. Pyramis has not verified and cannot verify the accuracy of information from outside sources, and potential investors should be aware that such information is subject to change without notice. Information is current as of the date noted.

Pyramis has prepared this presentation for, and only intends to provide it to, institutional, sophisticated and/or qualified investors in one-on-one or comparable presentations. Do not distribute or reproduce this report.

Third party trademarks and service marks are the property of their respective owners. All other trademarks and services marks are the property of FMR LLC or its affiliated companies. Pyramis does not provide legal or tax advice and we encourage you to consult your own lawyer, accountant or other advisor before making an investment.


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Eric Granat Derivatives Analyst - Investment Revie · November 5, 2014 Eric Granat Derivatives Analyst P) 703538.1.0 F)703539.1.0 . 2 For Institutional Use Only Table of Contents