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© 2016 Columbia Management Investment Advisers, LLC. All rights reserved.
Threadneedle (Lux) - US High Yield BondInvestment Review
As of September 30, 2016
-6%
-2%
2%
6%
10%
14%
3 Month Year-to-Date 1 Year 3 Year 5 Year 10 Year SinceInception¹
TLUX - US HYBond (Gross) Custom Benchmark² Relative
3 Month (%)
Year-to-Date (%)
1 Year (%)
3 Year (%)
5 Year (%)
10 Year (%)
Since Inception1
(%)
Threadneedle (Lux) - US High Yield Bond (Gross) 4.59 10.64 10.88 6.10 8.96 8.13 8.01
BofA ML HY B-BB Cash Pay until 6/30/15, then BofAML US High Yield, Cash Pay, Constrained²
5.50 15.21 12.80 5.62 8.04 7.17 7.22
Relative - Gross Account vs. Benchmark -0.91 -4.57 -1.92 0.48 0.92 0.96 0.79
Calendar Year Returns
TLUX - US HYBond(Gross)
(%) Custom Benchmark2
(%)
Gross Account vs.Benchmark
(%)
Quarter-to-Date 4.59 5.50 -0.91
2015 -0.27 -4.33 4.06
2014 5.03 3.46 1.57
2013 5.29 6.29 -1.00
2012 15.87 14.71 1.16
2011 7.60 5.46 2.14
2010 13.42 14.50 -1.08
2009 41.12 46.12 -5.00
2008 -18.28 -23.60 5.32
2007 3.70 2.73 0.97
2006 9.28 10.64 -1.36
2005 4.67 3.36 1.31
2004 11.29 9.91 1.38
Since Inception1 8.01 7.22 0.79
As of September 30, 2016
Portfolio Performance
Source: Columbia Management Investment Advisers, LLC, FactsetPast performance does not guarantee future results. Please refer to the Disclosures at the end of this presentation for more information.
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved. 1
1 Inception Date: 12/12/2003 2 Custom Benchmark: BofA ML HY Cash Pay until 6/30/15, then BofA ML US High Yield, Cash Pay, Constrained
Characteristics TLUX - US HYBondBofA ML US HY Cash Pay
Cons Relative
Number of Issues 416 2212 -
Number of Issuers 230 978 -
Yield to Worst (YTW) 4.97% 6.17% -1.20%
Spread 357 bps 491 bps -134 bps
Effective Duration2 4.51 years 4.15 years 0.36 years
Average Maturity 6.92 years 6.31 years 0.61 years
Average Coupon 5.99% 6.57% -0.58%
Average Price 103.52 99.41 4.11
Average Credit Rating BB3 B1 -
Asset Type
Market Value $ 214,299,961
Asset Type TLUX - US HYBond BofA ML US HY Cash Pay Cons
Corporates 96.88% 99.37%
Cash and Cash Equivalents 3.12% 0.63%
International Exposure TLUX - US HYBond BofA ML US HY Cash Pay Cons
U.S./Canada 84.54% 86.54%
Rest of World 12.34% 12.83%
As of September 30, 2016
Portfolio Characteristics
1 Listed benchmark effective duration is the figure published by the benchmark provider using their calculations. The portfolio effective duration relies
upon Blackrock calculation.
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved. 2
Ratings Allocation: Account vs. Benchmark1
0%
5%
10%
15%
20%
25%
Cash Baa> Ba1 Ba2 Ba3 B1 B2 B3 Caa< NR/Other
TLUX - US HYBond BofA ML US HY Cash Pay Cons
Cash Baa> Ba1 Ba2 Ba3 B1 B2 B3 Caa< NR/Other
TLUX - US HYBond 3.12 5.37 9.36 18.08 19.94 10.42 13.43 12.67 7.14 0.49
BofA ML US HY Cash Pay Cons 0.63 0.00 14.24 16.71 18.76 12.06 11.45 13.53 12.62 0.00
Columbia Risk Rating Weight
Investment Grade 1.87%
HY Risk 1 14.28%
HY Risk 2 65.47%
HY Risk 3 18.37%
HY Risk 4 0.01%
Columbia Relative Value Rating Weight
Investment Grade 1.87%
Relative Value 1 12.37%
Relative Value 2 39.68%
Relative Value 3 41.02%
Relative Value 4 5.06%
Relative Value 5 -
As of September 30, 2016
Allocations: Credit and Internal Ratings
1 Bond ratings are divided into categories ranging from AAA (highest) to D (lowest) and are subject to change. The ratings shown are determined by
using the average of the ratings from Moody’s, S&P and Fitch each a third- party credit rating service provider. When a rating from only two agencies is available, the average of the two is used. When a rating from only one agency is available, that rating is used. When a bond is not rated by any of theseagencies, it is designated as Not Rated. Securities designated as Not Rated do not necessarily indicate low credit quality, and for such securities the investment adviser evaluates the credit quality. Holdings of the portfolio other than bonds are categorized under Other. Credit ratings are subjective opinions of the credit rating agencies and not statements of fact, may become stale and are subject to change.
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved. 3
5 Largest Overweight and Underweight Industries
-2.93
-2.15
-1.94
-1.31
-1.15
1.32
1.83
2.01
3.07
3.24
Basic Industry | Metals/Mining Excluding Steel
Energy | Oil Field Equipment & Services
Services | Support-Services
Basic Industry | Steel Producers/Products
Retail | Specialty Retail
Energy | Gas Distribution
Capital Goods | Packaging
Technology & Electronics | Software/Services
Energy | Energy - Exploration & Production
Media | Cable & Satellite TV
Top 10 Holdings by Issuer % of Portfolio
HCA HOLDINGS INC 2.57
LIBERTY GLOBAL PLC 1.91
SPRINT NEXTEL 1.79
T-MOBILE USA 1.72
ALLY FINANCIAL INC 1.68
FRONTIER COMMUNICATIONS CORP 1.57
CHARTER COMMUNICATIONS INC 1.55
FIRST DATA CORPORATION 1.50
NRG ENERGY INC 1.38
CVC 1.35
TOTAL 17.02
As of September 30, 2016
Portfolio Positioning
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved. 4
10 Largest Overweight Issuers
Issuer TLUX - US HYBond BofA ML US HYCash Pay Cons Over
LIBERTY GLOBAL PLC 1.91% 0.65% 1.26%
MARATHON PETROLEUM CORP 1.01% 0.00% 1.01%
LAREDO PETROLEUM INC 1.08% 0.10% 0.98%
AERCAP HOLDINGS NV 0.90% 0.04% 0.86%
WILLIAMS COMPANIES INC 1.12% 0.34% 0.78%
NRG ENERGY INC 1.38% 0.64% 0.74%
CONCHO RESOURCES INC 0.95% 0.22% 0.73%
PARSLEY ENERGY INC 0.80% 0.08% 0.72%
CARRIZO OIL & GAS, INC. 0.81% 0.10% 0.71%
FIRST DATA CORPORATION 1.50% 0.81% 0.70%
10 Largest Underweight Issuers
Issuer TLUX - US HYBond BofA ML US HYCash Pay Cons Under
ROYAL BANK OF SCOTLAND PLC 0.00% 0.89% -0.89%
ALCOA INC 0.00% 0.71% -0.71%
INTELSAT 0.00% 0.66% -0.66%
ALTICE SA 0.00% 0.56% -0.56%
BOMBARDIER INC 0.00% 0.55% -0.55%
ARCELORMITTAL 0.22% 0.74% -0.51%
DYNEGY INC 0.00% 0.46% -0.46%
TRANSOCEAN LTD 0.00% 0.43% -0.43%
IHEARTMEDIA INC 0.00% 0.43% -0.43%
CHESAPEAKE ENERGY CORPORATION 0.00% 0.42% -0.42%
As of September 30, 2016
Portfolio Positioning
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved. 5
IndustryTLUX - US HYBond
BofA ML US HY Cash Pay Cons
Over/Under
Automotive 1.12% 2.09% -0.97%
Auto Parts & Equipment 1.12% 1.59% -0.47%
Automakers 0.00% 0.50% -0.50%
Banking 2.90% 3.93% -1.02%
Banking 2.90% 3.93% -1.02%
Basic Industry 9.17% 12.89% -3.72%
Building & Construction 2.24% 2.30% -0.06%
Building Materials 2.43% 1.87% 0.55%
Chemicals 2.65% 2.01% 0.63%
Forestry/Paper 0.00% 0.62% -0.62%
Metals/Mining Excluding Steel 1.60% 4.52% -2.92%
Steel Producers/Products 0.26% 1.57% -1.31%
Capital Goods 5.94% 5.51% 0.44%
Aerospace/Defense 1.04% 1.44% -0.40%
Diversified Capital Goods 0.28% 0.90% -0.62%
Machinery 0.46% 0.84% -0.37%
Packaging 4.17% 2.34% 1.83%
Consumer Goods 3.76% 2.91% 0.85%
Beverage 0.62% 0.43% 0.20%
Food - Wholesale 1.43% 1.32% 0.11%
Personal & Household Products 1.70% 1.05% 0.65%
Tobacco 0.00% 0.11% -0.11%
Energy 15.75% 14.28% 1.47%
Energy - Exploration & Production 9.03% 5.96% 3.07%
Gas Distribution 5.90% 4.57% 1.32%
Integrated Energy 0.00% 0.35% -0.35%
Oil Field Equipment & Services 0.59% 2.74% -2.15%
Oil Refining & Marketing 0.23% 0.65% -0.42%
Financial Services 3.85% 2.99% 0.86%
Brokerage 0.66% 0.19% 0.48%
Cons/Comm/Lease Financing 3.19% 2.44% 0.74%
Investments & Misc Financial Services 0.00% 0.36% -0.36%
Healthcare 10.31% 9.32% 1.00%
Health Facilities 5.23% 4.70% 0.53%
Health Services 0.81% 0.81% -0.01%
Managed Care 1.17% 0.48% 0.69%
Medical Products 1.00% 1.19% -0.19%
Pharmaceuticals 2.11% 2.13% -0.03%
Insurance 0.61% 0.81% -0.20%
Insurance Brokerage 0.61% 0.20% 0.40%
Life Insurance 0.00% 0.13% -0.13%
Monoline Insurance 0.00% 0.11% -0.11%
Multi-Line Insurance 0.00% 0.28% -0.28%
P&C 0.00% 0.08% -0.08%
IndustryTLUX - US HYBond
BofA ML US HY Cash Pay Cons
Over/Under
Leisure 5.29% 4.04% 1.25%
Gaming 3.83% 2.65% 1.18%
Hotels 0.74% 0.49% 0.26%
Recreation & Travel 0.72% 0.54% 0.18%
Theaters & Entertainment 0.00% 0.37% -0.37%
Media 13.17% 10.73% 2.44%
Advertising 1.32% 1.21% 0.11%
Cable & Satellite TV 9.46% 6.22% 3.24%
Media - Diversified 0.10% 0.24% -0.14%
Media Content 2.30% 2.43% -0.14%
Printing & Publishing 0.00% 0.62% -0.62%
Real Estate 0.30% 0.79% -0.49%
REITs 0.30% 0.52% -0.22%
RealEstate Dev & Mgt 0.00% 0.27% -0.27%
Retail 2.78% 4.93% -2.15%
Department Stores 0.00% 0.35% -0.35%
Discount Stores 0.49% 0.27% 0.22%
Food & Drug Retailers 0.26% 1.10% -0.83%
Restaurants 0.76% 0.80% -0.04%
Specialty Retail 1.26% 2.41% -1.15%
Services 2.05% 4.37% -2.33%
Environmental 0.00% 0.38% -0.38%
Support-Services 2.05% 3.99% -1.94%
Technology & Electronics 7.27% 5.69% 1.58%
Electronics 1.68% 1.59% 0.10%
Software/Services 4.49% 2.47% 2.01%
Tech Hardware & Equipment 1.10% 1.64% -0.53%
Telecommunications 10.09% 9.93% 0.16%
Telecom - Satellite 0.20% 1.04% -0.83%
Telecom - Wireless 4.76% 4.55% 0.21%
Telecom - Wireline Integrated & Services 5.12% 4.34% 0.78%
Transportation 0.00% 1.05% -1.05%
Air Transportation 0.00% 0.33% -0.33%
Rail 0.00% 0.12% -0.12%
Transportation Infrastructure/Services 0.00% 0.49% -0.49%
Trucking & Delivery 0.00% 0.11% -0.11%
Utility 2.51% 3.12% -0.61%
Electric-Generation 2.06% 1.92% 0.14%
Electric-Integrated 0.45% 1.20% -0.75%
Cash 3.12% 0.63% 2.49%
Cash 3.12% 0.63% 2.49%
As of September 30, 2016
Allocations: Industry
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved.6
Quarterly As of September 30, 2016
TLUX - USHYBondGross Return
BofA ML US HY CashPay Cons
ReturnIndustry
AllocationSecurity Selection Residual
Relative Return
4.59% 5.50% -0.07% -0.68% -0.17% -0.91%
Weight Total Return Attribution
Industry TLUX - US HYBond
BofA ML US HY CashPay Cons
TLUX - USHYBond
BofA ML US HY CashPay Cons
Industry Allocation
Security Selection
Relative Return
Advertising 1.52% 1.21% 0.28% 4.58% 0.00% -0.07% -0.07%
Aerospace/Defense 1.08% 1.50% 5.09% 5.08% 0.00% 0.00% 0.00%
Air Transportation 0.00% 0.33% 0.00% 4.08% 0.00% 0.00% 0.00%
Auto Parts & Equipment 1.10% 1.55% 3.12% 4.63% 0.00% -0.01% -0.01%
Automakers 0.00% 0.48% 0.00% 8.94% -0.02% 0.00% -0.02%
Banking 3.13% 4.00% 3.70% 3.42% 0.02% 0.01% 0.03%
Beverage 0.67% 0.43% 3.82% 2.84% -0.01% 0.01% 0.00%
Brokerage 0.72% 0.33% 3.74% 8.68% 0.01% -0.03% -0.02%
Building & Construction 2.21% 2.27% 4.39% 4.48% 0.00% 0.00% 0.00%
Building Materials 3.11% 1.89% 2.94% 3.48% -0.02% -0.02% -0.04%
Cable & Satellite TV 9.21% 6.35% 4.89% 4.82% -0.02% 0.01% -0.01%
Chemicals 2.98% 2.12% 7.51% 7.03% 0.01% 0.02% 0.03%
Cons/Comm/Lease Financing 3.53% 2.74% 6.75% 6.93% 0.01% 0.00% 0.01%
Department Stores 0.00% 0.42% 0.00% 8.17% -0.01% 0.00% -0.01%
Discount Stores 0.54% 0.27% 2.79% 3.10% -0.01% 0.00% -0.01%
Diversified Capital Goods 0.18% 0.87% 1.35% 4.79% 0.00% 0.00% 0.00%
Electric-Generation 2.15% 1.83% 3.99% 4.70% 0.00% -0.02% -0.02%
Electric-Integrated 0.48% 1.24% 3.97% 3.98% 0.01% 0.00% 0.01%
Electronics 1.73% 1.55% 5.74% 7.61% 0.00% -0.03% -0.03%
Energy - Exploration & Production 8.93% 6.25% 4.98% 7.93% 0.07% -0.25% -0.18%
Environmental 0.00% 0.39% 0.00% 3.09% 0.01% 0.00% 0.01%
Food & Drug Retailers 0.40% 1.06% 0.72% 3.44% 0.01% -0.01% 0.00%
Food - Wholesale 1.45% 1.23% 3.99% 3.31% 0.00% 0.01% 0.00%
Forestry/Paper 0.00% 0.54% 0.00% 5.14% 0.00% 0.00% 0.00%
As of September 30, 2016
Industry Attribution - Quarterly
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved. 7
Weight Total Return Attribution
Industry TLUX - USHYBond
BofA ML US HY CashPay Cons
TLUX - USHYBond
BofA ML US HY CashPay Cons
Industry Allocation
Security Selection
Relative Return
Gaming 3.83% 2.65% 5.26% 5.69% 0.00% -0.02% -0.02%
Gas Distribution 5.61% 4.46% 7.69% 6.88% 0.01% 0.04% 0.05%
Health Facilities 5.96% 4.98% 2.28% 2.06% -0.03% 0.01% -0.02%
Health Services 0.09% 0.56% 4.95% 3.05% 0.01% 0.01% 0.02%
Hotels 0.83% 0.48% 3.24% 2.88% -0.01% 0.00% -0.01%
Insurance Brokerage 0.76% 0.21% 5.32% 5.85% 0.00% 0.00% 0.00%
Integrated Energy 0.00% 0.35% 0.00% 4.32% 0.00% 0.00% 0.00%
Investments & Misc Financial Services 0.13% 0.40% 2.10% 3.65% 0.00% 0.00% 0.00%
Life Insurance 0.00% 0.14% 0.00% 1.17% 0.01% 0.00% 0.01%
Machinery 0.35% 0.86% 3.30% 3.82% 0.01% 0.00% 0.01%
Managed Care 1.26% 0.48% 3.75% 3.10% -0.02% 0.01% -0.01%
Media - Diversified 0.11% 0.26% 4.18% 4.34% 0.00% 0.00% 0.00%
Media Content 2.89% 2.35% 3.58% 4.40% 0.00% -0.02% -0.02%
Medical Products 1.33% 1.18% 3.04% 4.41% 0.00% -0.02% -0.02%
Metals/Mining Excluding Steel 0.86% 4.29% 4.68% 9.58% -0.13% -0.03% -0.15%
Monoline Insurance 0.00% 0.09% 0.00% 5.20% 0.00% 0.00% 0.00%
Multi-Line Insurance 0.00% 0.27% 0.00% 11.25% -0.01% 0.00% -0.01%
Oil Field Equipment & Services 0.42% 2.72% 2.15% 4.16% 0.03% -0.01% 0.03%
Oil Refining & Marketing 0.11% 0.74% 2.59% 5.44% 0.00% 0.00% 0.00%
P&C 0.00% 0.09% 0.00% 7.97% 0.00% 0.00% 0.00%
Packaging 4.04% 2.31% 3.36% 3.45% -0.03% 0.00% -0.04%
Personal & Household Products 1.83% 1.14% 4.20% 5.41% 0.00% -0.02% -0.02%
Pharmaceuticals 2.28% 2.19% 6.03% 6.03% 0.00% 0.00% 0.00%
Printing & Publishing 0.00% 0.76% 0.00% 7.12% -0.01% 0.00% -0.01%
Rail 0.00% 0.12% 0.00% 5.12% 0.00% 0.00% 0.00%
RealEstate Dev & Mgt 0.00% 0.28% 0.38% 4.24% 0.00% 0.00% 0.00%
Recreation & Travel 0.76% 0.59% 6.02% 6.45% 0.00% 0.00% 0.00%
REITs 0.33% 0.48% 2.15% 4.11% 0.00% -0.01% 0.00%
Restaurants 0.82% 0.81% 4.80% 3.51% 0.00% 0.01% 0.01%
Software/Services 4.59% 2.41% 4.32% 6.09% 0.01% -0.08% -0.07%
Specialty Retail 1.31% 2.41% 3.66% 3.97% 0.02% 0.00% 0.01%
Steel Producers/Products 0.47% 1.47% 9.59% 7.77% -0.02% 0.01% -0.01%
As of September 30, 2016
Industry Attribution - Quarterly
Source: Aladdin
Past performance does not guarantee future results. Please refer to the disclosures at the end of this presentation for more
information © 2016 Columbia Management Investment Advisers, LC. All rights reserved.
8
Weight Total Return Attribution
Industry TLUX - USHYBond
BofA ML US HY CashPay Cons
TLUX - USHYBond
BofA ML US HY CashPay Cons
Industry Allocation
Security Selection
Relative Return
Support-Services 2.06% 3.93% 4.89% 4.75% 0.01% 0.00% 0.01%
Tech Hardware & Equipment 1.21% 1.65% 5.77% 6.51% 0.00% -0.01% -0.01%
Telecom - Satellite 0.17% 0.94% -0.32% 9.13% -0.02% -0.02% -0.04%
Telecom - Wireless 4.89% 4.61% 7.35% 9.33% 0.01% -0.09% -0.08%
Telecom - Wireline Integrated & Services 5.57% 4.44% 4.38% 4.93% 0.00% -0.03% -0.03%
Theaters & Entertainment 0.00% 0.35% 0.00% 2.30% 0.01% 0.00% 0.01%
Tobacco 0.00% 0.11% 0.00% 3.17% 0.00% 0.00% 0.00%
Transport Infrastructure/Services 0.00% 0.52% 0.00% 4.45% 0.00% 0.00% 0.00%
Trucking & Delivery 0.00% 0.06% 0.00% 10.43% 0.00% 0.00% 0.00%
Attribution Totals 100% 100% 4.70% 5.51% -0.07% -0.68% -0.74%
Attribution excludes cash
As of September 30, 2016
Industry Attribution - Quarterly
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved. 9
Quarterly As of September 30, 2016
TLUX - USHYBondGross Return
BofA ML US HY CashPay Cons
ReturnRatings
AllocationSecurity Selection Residual
Relative Return
4.59% 5.50% -0.28% -0.46% -0.17% -0.91%
Weight Total Return Attribution
Ratings TLUX - USHYBond
BofA ML US HY CashPay Cons
TLUX - USHYBond
BofA ML US HY CashPay Cons
Ratings Allocation
Security Selection
Relative Return
Investment Grade 5.01% 0.00% 4.15% 0.00% -0.07% 0.00% -0.07%
BB1 9.85% 14.55% 5.18% 4.24% 0.06% 0.10% 0.16%
BB2 18.62% 16.86% 4.34% 4.31% -0.02% 0.00% -0.02%
BB3 21.59% 18.70% 4.36% 4.15% -0.04% 0.05% 0.01%
B1 12.46% 12.17% 4.45% 4.52% 0.00% -0.01% -0.01%
B2 10.11% 11.13% 6.02% 6.86% -0.02% -0.07% -0.10%
B3 14.59% 13.93% 5.57% 6.87% 0.01% -0.19% -0.18%
CCC & Lower 7.24% 12.66% 4.02% 8.94% -0.18% -0.34% -0.52%
NR 0.52% 0.00% 2.82% 0.00% -0.02% 0.00% -0.02%
Attribution Totals 100% 100% 4.75% 5.52% -0.28% -0.46% -0.74%
Attribution excludes cash
As of September 30, 2016
Ratings Attribution - Quarterly
Source: Aladdin
Past performance does not guarantee future results. Please refer to the disclosures at the end of this presentation for more
information. © 2016 Columbia Management Investment Advisers, LLC. All rights reserved.
10
Economic and Market Review and Outlook
Market recap
The BofA Merrill Lynch U.S. High Yield Cash Pay Constrained Index (the Benchmark) returned 5.50% in the third quarter. High yield,
as measured by the Benchmark, outperformed U.S. Treasuries, other credit and the S&P 500 Index. U.S. 10yr Treasuries, the
Bloomberg Barclays U.S. Aggregate Bond Index and the S&P 500 Index returned -0.75%, -0.46% and 3.85%, respectively. Lower
quality bonds outperformed. BB, B and CCC rated issues returned 4.27%, 5.74% and 9.06%, respectively. Broadly, high yield
spreads tightened by 125bps, finishing at 487bps. Spread changes by BB, B and CCC rating were -77bps, -128bps and -267bps,
respectively.
Returns were driven by continued Central Bank accommodation and strong performance in commodity related sectors as oil reached a
3 month high during the quarter. OPEC initiated an agreement to manage oil production for the first time in 8 years. While individual
country production targets are still undetermined, there is an agreement in principle to reduce production slightly to 32.5-33 million
barrels/day compared to 33.75 million in September.
The second quarter U.S. GDP growth rate was weaker than expected and the Federal Reserve left rates unchanged in July.
Corporate earnings were mixed. Overall, 6 of the 10 S&P sectors reported negative year-over-year earnings growth while 4 sectors
were positive. Negative EPS guidance outnumbered positive guidance by almost a 2-to-1 margin.
Despite some weaker than expected economic data in September, high yield spreads and yields reached 15 month lows by the end of
the quarter as Central Banks remained accommodative and the market was supported by a strong technical backdrop. The U.S.
Federal Reserve left rates unchanged following the September meeting and the “dot plot” consensus indicated 2 hikes in 2017. The
ECB remained on hold and left rates unchanged. However, the European Central Bank kept open the possibility of up to $90 billion in
monthly asset purchases until March. Lastly, the Bank of Japan changed course slightly by changing the focus to keeping the rate on
the 10-year JGB at 0%.
Six issuers defaulted in the third quarter for $5.2bn. Year to date, 39 issuers have defaulted on $42.2bn in bonds. The Energy sector
accounts for 21 issuers and $29.1bn, while Metals & Mining accounts for 5 issuers and $6.10bn. Heavy new issuance level continued
into September with 55 new bonds pricing during the month, totaling $35.2bn. For the year, there have been 338 new issues totaling
$233bn. Third quarter experienced a net inflow of $4.5bn into high yield retail products, bringing the year-to-date total to a net inflow of
$9.6bn.
Portfolio performance
The Threadneedle (Lux) – US$ High Income Bonds portfolio returned 4.59% (gross of fees, USD) in the third quarter, underperforming
the benchmark by 91bps.
An overweight allocation to Energy-Exploration & Production, as well as an underweight allocation to Oil Field Equipment & Services,
contributed positively to relative performance. Overweight allocations to Health Facilities and Packaging, as well as an underweight
allocation to Metals/Mining Excluding Steel detracted from relative performance. Security selection was strongest in Gas Distribution.
Weaker relative results were generated in Energy - Exploration & Production, Telecom - Wireless, Software/Services and Advertising.
An underweight allocation to CCC & below rated issues detracted.
The portfolio is positioned with an underweight to BB rated issues, a market weight to B rated issues and an underweight to CCC rated
issues. Overweight sectors include Media, Technology & Electronics, Energy, Leisure, Healthcare, Financial Services and Consumer
Goods. Underweight sectors include Basic Industry, Services, Retail, Banking, Transportation and Automotive.
As of September 30, 2016
Market Commentary
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved. 11
Investment outlook
Valuations continue to tighten with spreads and yields at their lows for the year as commodity prices remain firm and economic
fundamentals in the U.S. are adequate in a global environment of tepid growth and continued uncertainty. Given supportive technicals,
adequate fundamentals and high yield’s relative attractiveness to other risk assets in a low economic growth environment, we continue
to expect low single-digit returns for the asset class over the next twelve months. If commodity prices remain stable or move higher,
we see an upper bound scenario of mid-to-high single digit returns. We continue to believe that the next 12 months will not retest the
lows experienced in February as companies within the commodity sector have taken self-help measures to improve their balance
sheets in addition to support from improved underlying commodity prices. That being said, given tighter valuations we could see
scenarios unfolding where modest negative returns for the asset class are a possibility.
Valuations no longer offer additional compensation to the non-commodity segment of the market in excess of defaults, which are
expected to increase. However, technicals continue to remain supportive as the asset class continues to benefit from a search for
yield, driven by $11T of negative yielding sovereign debt, and lower year over year new issue activity. The Fed left rates unchanged at
its September meeting following weaker than expected employment, retail and housing data. The market has priced in a modest
tightening trajectory as a result of Fed commentary and dot plot implied guidance. Additionally, other central banks remained on hold
rather than providing additional stimulus, yet they maintain they stand ready to act if necessary. Given the tremendous liquidity
provided by the Central Banks, there is a risk that investor sentiment is overly dependent upon continued global central bank
accommodation and tapering or holding off on additional stimulus may lead to a negative market reaction.
Fundamentally our outlook is stable for the U.S. consumer while commodity markets are mixed and the industrial economy has
troughed but has yet to lift off the bottom. Corporations in general appear unwilling to get too aggressive with uncertainty surrounding
a U.S. election outcome, the outlook for the Chinese economy and the eventual Brexit process. We believe we are largely positioned
for this backdrop and are focused on investments in credits that are not overly reliant on access to capital in the near term. We will
look to be opportunistic when we believe we are being compensated appropriately for risk. Investor behavioral psychology may limit
sell offs in the near term and maintain support for the market as high yield money managers may have the impulse to maintain and
stretch for yield/risk as they have had difficulty keeping pace with the market’s rally year to date.
Q2 earnings beat reduced expectations, but guidance was skewed negative by a 2 to 1 margin. We believe 2H16 earnings estimates
remain too aggressive, but we still expect modest growth. While we remain sanguine about the U.S. economic backdrop, the most
recent GDP report was disappointing as well as slowing momentum in the current quarter. As a result, uncertainty remains as to the
degree of the impact of slowing global growth and the feedback loop to the U.S. economy. Additionally, the quarterly Fed Loan Officer
July survey showed a tightening of lending standards to commercial and industrial borrowers for 4th consecutive quarter. Historically,
the tightening of lending standards has been a precursor to increased defaults.
For our view on commodity related sectors, please see our Commodity Sector appendix.
Our internal rates strategists have lowered their forecasts, and believe that 10-year rates over the next 12 months will be at 1.50%
which is below the market implied 12-month forward rate of 1.92%. The current consensus forecast for 2016 GDP is 1.5%, with 2.9%
expected in the 3Q16. First half ’16 GDP growth came in at 1.0%.
As of 9/30/2016, valuations for the high yield market according to the BofA Merrill Lynch U.S. High Yield Cash Pay Constrained Index
are at 6.16% YTW and +501 STW. Yields are lower by 12bps and spreads are tighter by 9bps for the month. When we exclude the
Energy/Metals/Mining sectors, yields would be 25bps lower and spreads would be 23bps tighter than current levels. In other words,
excluding these two challenged sectors of Energy/Metals/Mining, spreads would be at 478bps, for a YTW of 5.91%, which is inside of
the historical median of 500bps.
High yield is now pricing in a 2.7% default rate. (1.6% excluding Energy/Metals/Mining). Our internal expectations for defaults are
5.7% in 2017 and 5.4% in 2018 on an issuer-weighted basis. Default expectations continue to be elevated in the Energy sector over
the next 2 years. Excluding energy and mining, we expect default rates of 2.3% and 4.1% in 2017 and 2018, respectively. Energy
defaults are expected to be 23.7% in 2017 and 12.8% in 2018 (ex-Midstream). Commodity prices, access to capital and out-of-court
restructurings/exchanges for less than 100% of value can heavily influence these default figures.
Economic and Market Review and Outlook
As of September 30, 2016
Market Commentary
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved. 12
High yield bond issuance during September totaled $35.2bn, bringing the YTD total to $233.0bn. We expect new issue volumes to
decline in 2016 vs. 2015. We continue to keep a watchful eye on shareholder activism, as these scenarios can play out to either the
benefit or detriment of bondholders—depending on covenants. In general, we expect both the shareholder activism and M&A activity
to lead to a modest increase in overall leverage in the market. We are hearing comments that M&A activity is heating up due to
companies seeking growth opportunities. In addition, Private Equity firms have quite a bit of dry powder waiting to invest in deals,
however, expensive valuations and strategic competition has made transacting difficult. Overall, if these trends play out, it could
reduce the quality of issuance relative to the last several years which were largely driven by refinancing and, as we have said in the
past, the deleveraging cycle is largely behind us.
Given the reasonable fundamentals of the majority of the high yield asset class, limited refinancing risk, low overall levels of leverage
and reasonable earnings outlook, we still view high yield as an attractive investment alternative to equity and somewhat attractive to
other core fixed income products given our range of return expectations. We continue to be cautious on the higher beta part of the
market over the medium-term although it may continue to be supported in the near-term. As a result, we do not believe this is the time
to stretch for return or reach for yield by adding significant risk to the portfolio. We believe that credit selection will continue to be a key
driver of our performance over the coming year; and by positioning for improving credit situations, avoiding credits with deteriorating
fundamentals and remaining disciplined in terms of getting paid for taking risk, we believe we will generate solid risk-adjusted returns.
We will continue to maintain our disciplined credit selection based on strong fundamental analysis and rigorous risk management in
order to take advantage of opportunities in the marketplace.
Appendix: commodity sectors
We continue to have a positive outlook on oil and cautious view of natural gas. Oil production has declined in the U.S. but OPEC
production is slightly ahead of December levels. Global demand has remained steady. While the U.S. oil rig count is down
meaningfully from the 2014 peak, it is up almost 123 rigs since May when oil reached $50/bbl. So while we have a more positive view
on the stability of oil prices, we don’t expect a spike up in prices (absent a geopolitical event) as some producers have positive
economics at those $50/bbl levels. In September, OPEC initiated an agreement to manage a slight decrease in production for the first
time in 8 years, however, individual country production targets are still undetermined. While we believe that we are seeing a recovery
in the supply/demand balance, we must also acknowledge that inventories are well above average, Iranian production is still a wildcard
and demand needs to remain steady to keep the fundamental improvement intact.
For natural gas, the rig count is down more than 90% from peak levels and remains at the trough. However, U.S. natural gas
production remains robust particularly in the Marcellus Shale area.
Because of an improved oil price outlook, we have recently added to some existing E&P positions on weakness as well as taken
advantage of select new issue opportunities. Some of our portfolio holdings have issued additional equity in 2016 and we have seen a
number of Permian Basin property acquisitions.
An improved outlook for oil is beneficial for the E&P sector but we continue to be significantly underweight oilfield services. While land
based drilling activity continues to increase, significant pricing power is still not likely in the near term. Additionally, it appears that
North American production can be sustained/increased with a lower rig count than in the past.
We remain constructive on the Pipeline/Midstream sector. While midstream companies no longer have the tailwinds of rising U.S.
production and robust commodity prices, we still view the sector favorably given low maintenance capex requirements, the ability of
companies to reduce cash dividends meaningfully and the long lived nature of the assets that will used through a number of commodity
cycles. We continue to focus on midstream companies that have assets located in lower cost basins and that have a diversified asset
and customer base because assets located in lower cost basins are more likely to have healthier customers, production and volume
declines are less of a risk and producers will be incented to continue getting their oil and gas to market.
Economic and Market Review and Outlook
As of September 30, 2016
Market Commentary
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved. 13
This material is being provided by Columbia Management Investment Advisers, LLC as subadviser to Threadneedle Management Luxembourg S.A.
(the "Investment Adviser") for the Threadneedle (Lux) – US$ High Income Bonds portfolio (the “Account") and constitutes part of the advisory services
being provided to the Account. To the extent the Investment Adviser uses this material with third parties or in marketing materials, sales literature,
contracts, forms or other documents, the Investment Adviser is solely responsible for compliance with relevant laws and rules applicable to use of this
material, including any applicable disclosures.
The views expressed are as of the date provided and are subject to change at any time based upon market and other factors. There is no guarantee
that investment objectives will be achieved or that any particular investment will be profitable. Past performance does not guarantee future
results.
While we expect improving supply/demand dynamics within the oil market, we are less constructive on the Metals & Mining sector.
The high yield opportunity set in the Metals & Mining is largely limited to issuers exposed to steel, copper, aluminum, iron ore and
metallurgical (met) coal, which rely on China as the dominant buyer. The run-up in commodity pricing during the first half of the year
was driven at least partially by aggressive Chinese stimulus, the sustainability of which is questionable over a longer period of time.
China accounts for over 40% of global steel demand and Chinese demand for steel is expected to decline by low single digits over the
coming years as they attempt to transition to a more consumer driven economy. China represents 70% of the demand for seaborne
iron ore. Demand is at risk given the transition of China’s economy and iron ore supply is expected to increase by up to 10% over the
coming years from low-cost projects coming online. Lastly, China represents nearly 50% of global copper demand and new, low-cost
supply will be entering the market in the coming years. Recent capacity reduction and consolidation in the Chinese steel sector have
led to some improvement in the met coal markets. We are monitoring this closely to determine if this presents any opportunities or
changes our relative cautious opinion on the mining/steel sectors.
As expected, defaults have increased meaningfully in the Energy sector. The Energy sector default rate over the last twelve months
ended September 30th was 14.3% (18.7% if you include distressed exchanges), compared to an overall high yield default rate of 3.5%
for the same period. We expect defaults to continue to increase as we have already seen additional companies draw down their
revolvers and/or go into the 30 day grace period to make a coupon payment. Our internal forecast calls for an Energy sector default
rate 23.7% in 2017 and 12.8% in 2018 (ex- Midstream).
Economic and Market Review and Outlook
1611406 (10/16)
As of September 30, 2016
Market Commentary
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved. 16
Market Commentary
Past performance does not guarantee future results. Results are for the client's own account and are not composite results. Performance is based
on time-weighted, daily calculation using values that are determined in good faith by Columbia Management Investment Advisers, LLC and is
calculated based on trade date, net of transaction costs and reflects accrued interest. Gross performance does not reflect the deduction of
management fees. The net performance reflects the deduction of management fees as of the most recent quarter end. If you have any questions
regarding the above information, or if there are any changes in your investment objectives or guidelines, please contact your client relationship
manager.
This performance report is separate from the custodial brokerage statement that is delivered to you identifying the securities and other assets held in
your account at the end of the reporting period and setting forth all transactions in the account during that period. Transaction and valuation
information reflected in this report may be inconsistent with information presented in your custodial brokerage statement due to settlement dates and
other factors. We urge you to compare the account statements from your custodian with those that you receive from Columbia Management
Investment Advisers, LLC.
Any client portfolio holdings information provided is proprietary and confidential. In receiving holdings data, clients and their authorized agents agree
that the data is not being obtained in order to effect securities transactions based upon such information or to provide such information to another
party. References to specific securities should not be considered a recommendation to purchase or sell a particular security but rather an illustration of
investment management strategy. Complete holdings information is available in client statements.
Current and future holdings are subject to risk.
Top holdings exclude short-term holdings and cash, if applicable. Holdings are as of the date given, are subject to change at any time, and are not
recommendations to buy or sell any security.
Risk and relative value ratings reflect the Team’s internal, proprietary ratings system. Our internal risk rating system is as follows: Risk 1 indicates an
issue that we believe has solid fundamentals and a stable or improving outlook. Risk 2 indicated a credit that we believe to have an adequate financial
condition. Risk 3 indicates an issue that we believe may have deterioration in credit quality or experience volatility in credit quality in the near future,
and Risk 4 indicates an issue that we believe has weak or deteriorating financial condition. Our internal relative value rating system indicates our
performance expectations to the credit vs. the index over the next 12 months as follows: 1= strong outperform (>150%), 2=outperform (110-150%), 3=
market perform (90-110%), 4= underperform (50-90%), 5= sell (<50%). There is no guarantee that return expectations will be met.
Entity Definitions and Disclosures
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.
Columbia Management Investment Advisers, LLC (“CMIA”) is an investment adviser registered with the U.S. Securities and Exchange Commission.
Disclosures
1409255 (03/16)
© 2016 Columbia Management Investment Advisers, LLC. All rights reserved. 15