Rathbones

Citywire Wealth Manager Retreat Strategic Bonds – Are you asking the right questions?

Bryn Jones, Fixed Income Investment Director, Fund Manager

Greg Mullins, Sales Director

Helen Van Heesewijk, Associate Director – Sales

18th – 19th October 2012

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Bryn Jones

Fund Manager: Bryn Jones

Fund size: £38.90m (mid-market value, as at 30.09.12)

Additional Fund Managed: Ethical Bond Fund, valued at £93.26m

(mid-market value, as at 30.09.12)

Bryn was shortlisted in the IMA Sterling Bond sector for the Investment

Week Awards 2011 whilst managing the Ethical Bond Fund.

Bryn joined Rathbones in November 2004. He graduated from Birmingham University with a Bachelor of Arts

degree in Geography in 1995.

Bryn previously worked at Merrill Lynch managing $2bn of Fixed income assets. He is a member of the

Strategic Asset Allocation Committee, Chairman of Fixed Income Committee, and a member of the Banking

Committee. Bryn appears regularly on CNBC and Bloomberg TV. Bryn was awarded the accolade of one of 20

of the globe’s fixed income rising Stars by II news in 2008.

He is an APCIMS representative for the HMT DMO’s (Debt Management Office) Gilt market consultation

process. He has been a guest speaker at the Euromoney bond conference in London, at the Euromoney bank

capital conference in Amsterdam, and recently at the Sterling Bond conference in London this September.

Bryn holds the Investment Management Certificate and sits on the IMA Fixed Income Committee.

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The Strategic Bond sector

A complex world where people are looking to outsource

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Performance of various Fixed Income Assets

Global High yield £ Hedged (BOFA ML GLB HY TR £ Hedged)

UK High yield (BOFA ML £ HIGH YIELD BB-B TR £ Hedged)

Global Non UK Corporate Bonds (BOFA

ML £ CORP ALL NON-UK TR £ Hedged)

UK Corporate Bonds (IBOXX £ NON-GILTS ALL MATURITIES TR)

Global Government Bonds (CGBI WGBI

WORLD ALL MATS TR £ Hedged)

UK Gilts (FTSE BRIT.GOVT.FIXED ALL STOCKS TR £)

Global Govt Index Linked Bonds (BOFA ML GLB GVT INFL -LKD EX UK TR £ Hedged)

UK Index Linked Gilts (FTSE.BRIT.GOVT.

IND-LNK.ALL MAT TR £)

Emerging Market Debt (BOFA ML USD EMRG SOV PLUS TR £ Hedged)

Convertible Bonds Developed Market

(ML CONVERTIBLE DEV MARKET BOND $ TR ~£ Unhedged)

Data source: DataStream. Data from 30.12.2011 to 05.10.2012

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Strategic Bond headlines…

By Aimee Steen | Published Sep 03, 2012

Strategic bond funds have proved popular with investors looking to

secure a bond-like income stream with the flexibility to chase the best

performers in the market.

The sector was third most popular with retail investors in July 2012

with £109m in sales.

Take a strategic view By Leonora Walters, 16 August 2012

“…many advisers argue that the greater flexibility afforded by

strategic bond funds makes them a better choice than plain-

vanilla corporate bond funds.”

Author: Katie Holliday

IFAonline | 03 Oct 2012

Fixed income continued to drive inflows and was the best-selling sector for the

ninth consecutive month, with the IMA Sterling Strategic Bond sector the most

popular with net retail sales of £187m, above the sector monthly average of

£158m over the previous 12 months

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0

5,000,000,000

10,000,000,000

15,000,000,000

20,000,000,000

25,000,000,000

30,000,000,000

Total FUM £'s Tota l FUM £'sThe Strategic Bond Sector -

Total FUM (£) since the creation of the sector

Sector creation date: Launched

in May 2008.

How many funds in the sector:

65 (as at 31August 2012).

These funds are represented

across all major asset

management groups.

Funds Under Management

(FUM) in sector: £26.2bn (as

at 31 August 2012).

Source: The Investment Management Association as at 31.08.2012

Significant Growth in thin markets

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Data source: Financial Express, as at 30.09.12

0

10

20

30

40

50

60

0 2 4 6 8 10 12

3 y

ear

cu

mu

lati

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erf

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3 year annualised volatility (5)

Outsourcing – Strategic Bond

Caveat Emptor

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Why use Fixed Interest?

Reduce portfolio risk.

Offset equity risk.

Increase diversification.

Correlations.

Add value in falling markets.

Equity risk buffer.

Ease drawdowns.

Fixed Interest

A Clear Message

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What are the Strategic Bond Funds trying to achieve?

Outperformance –

The Fund aims to achieve a high

income with the prospect of capital

growth by seeking out the best

opportunities within the fixed interest

universe globally.

The fund aims to provide a total

return to investors based on

exposure to optimal income

streams in investment markets.

The Fund aims to achieve a total return by

investing predominantly in fixed income

markets but may selectively invest in

other markets and asset classes as

determined by the manager's strategy

from time to time.

The investment seeks to generate a total return above

sterling cash interest rates, primarily through a flexible

allocation to investment grade bonds, non investment grade

bonds and derivative instruments.

To achieve a total return by

investing principally in a

range of fixed and variable

rate income securities.

To provide a return by

investing in higher

yielding assets including

high yield bonds,

investment grade bonds,

government bonds,

preference shares and

other bonds.

No Stated Mention of Risk

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Six major players in the sector compared to FTSE All Share

A Fund -6.65%

B Fund -4.75%

C Fund -6.97%

D Fund -7.82%

E Fund -5.39%

F Fund -2.18%

Source: Financial Express, total return bid-bid performance (from 31 Jul 2011 to 16 Sep 2011), of Sterling Strategic Bond Sector

from Managed Funds universe, and FTSE All Share Sector.

Funds listed are Net of fees

-7.30%

A Possible Mismatch

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Bryn Jones

Fixed Income Investment Director, Fund Manager

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A utopian Strategic Bond Fund –

The wish list

To outperform the IMA Strategic Bond Sector median, with lower volatility.

To target a top quartile Sharpe Ratio.

Total return bias – yield will be determined by asset allocation not a specific nominal target.

Protecting capital is an important consideration.

A Total Return with an Acceptable Level of Risk

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Index returns and back-tested Strategic Bond Fund –

Delivering the wish list

Invester Master Name 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

UK Gilts ACTUARIES All GILT INDEX

TOTAL RETURN STERLING - FTAGOVT 18.9% -0.9% 8.8% 3.0% 9.3% 2.1% 6.6% 7.9% 0.7% 5.3% 12.8% -1.2%

UK Credit BarCap Sterling Bond Non Gilts All Maturities Total Return Prior to

JAN 1997 & ML £ CORP.ALL UK (£) (CORPORATE BOND INDEX) TOTAL RETURNS STERLING THEREAFTER

17.1% -0.2% 8.8% 7.2% 11.0% 6.9% 7.3% 9.5% 1.0% 0.0% -9.6% 14.7%

Global Corporate Bonds BOFA ML GLOBAL BROAD CORPORATE BONDS

TOTAL RETURN £ HEDGED 10.8% 1.7% 8.5% 10.0% 10.7% 8.7% 8.7% 5.2% 3.3% 3.8% -3.4% 16.1%

Global High Yield BOFA ML GLOBAL HIGH YIELD

TOTAL RETURN £ HEDGED 5.0% 3.1% -4.5% 3.0% 0.4% 30.7% 14.7% 4.8% 11.4% 2.2% -27.4% 59.5%

Emerging Sovereign BOFA ML USD EMERGING SOVEREIGN PLUS

TOTAL RETURN £ HEDGED -12.8% 23.9% 13.7% 7.1% 16.7% 30.2% 15.1% 13.7% 10.0% 6.8% -9.9% 27.0%

Global Government Bonds ex UK CITIGROUP WGBI WORLD EX UK ALL MATURITIES

TOTAL RETURN £ HEDGED 12.6% 1.7% 10.2% 7.6% 10.3% 4.5% 8.0% 6.5% 2.9% 6.2% 11.4% 1.4%

UK Index Linked Bonds FTSE BRITISH GOVERNMENT INDEX LINKED BONDS

ALL MATURITIES 19.9% 4.4% 4.2% -0.5% 8.2% 6.6% 8.5% 9.0% 2.9% 8.5% 3.7% 6.4%

Back-tested Strategic Bond Fund

Back-tested Strategic Bond Fund 10.4% 4.6% 7.0% 5.5% 9.8% 12.9% 9.8% 8.4% 4.5% 4.1% -5.4% 18.3%

Only one negative year in 12 Source: Rathbones, PerTrac and Datastream.

Back-tested Strategic Bond Fund: These figures are based on a model portfolio, used for illustrative purposes only.

Data: Annual calendar year returns, 1998 –2010.

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Source: Rathbones, PerTrac and Datastream.

Back-tested Strategic Bond Fund: These figures are based on a model portfolio, used for illustrative purposes only

Data: November 1997 – April 2010.

Back-testing

500

1000

1500

2000

2500

3000

Nov.1997 Nov.1999 Nov.2001 Nov.2003 Nov.2005 Nov.2007 Nov.2009

Rathbones Proposed Fixed Income Fund 3M Libor + 2% Total Returns FTSE World Index Total Return £ Actuaries All Gilt Index TR £ ML UK Corp Bond TR £ UK CPI + 5% FTSE APCIMS Balanced Total Returns Sterling FTSE APCIMS Growth Total Returns Sterling

Rathbones Back-tested Strategic Bond Fund

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Core strategy - normalised ranges

In order to meet our objectives, we will undertake active asset allocation within the ranges identified below:

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Rathbone Strategic Bond Fund –

Philosophy put into practice

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Current Market View

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Current themes - Gilt yields

Still underweight duration. Trading the technical range in Gilt yields Data: Bloomberg, from13/10/2011 to 13/10/2012

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Financial Credit Spreads

Data: Bloomberg, from 20/09/2011 to 12/09/2012

Central Banks willingness to support the Government Bond Market

is a clear positive for Financial Bonds rather than Equity.

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Macro drivers

Source: Morgan Stanley; Bloomberg Where Were We?

Lots of cash

No liquidity

Too much bad news

priced into spreads

Value, value, value

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Macro drivers

Source: Bloomberg, Morgan Stanley

Lots of cash

No liquidity

Too much bad news

priced into spreads

Value, value, value

Where Are We Now?

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We said don’t fight people bigger than you in the playground

Source: ECB, Federal Reserve, The Bank of England, Google Images

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Current fund position

Asset Allocation

(%overall) 30 Oct 11 29 Feb 12 30 Sept 12 Core strategy

UK Index Linked 10.38% 6.52% 5.06% 12.5%

UK Gov Bonds 3.43% 4.15% 5.75% 12.5%

UK Corp Bonds 32.09% 32.19% 33.28% 25%

Emerging Sovereign Bonds 9.57% 7.22% 8.09% 15%

Global High Yield Bonds 12.36% 12.49% 18.30% 15%

Global Corp Bonds (IG) 9.07% 8.43% 7.55% 10%

Global Government Bonds 11.19% 14.83% 12.35% 10%

Cash 11.14% 8.11% 3.46% -

Credit Long/Short 0.00% 2.86% 2.11% -

Other 0.77% 3.20% 3.05% -

100.00% 100.00% 100% 100%

RPI recalculations

Chinese landing

Concerted Global

Policy Monetary

Easing driving risk

assets.

Demand/supply

imbalance in

credit.

Low outright levels

of Government

Bond Yields.

Data source: Rathbones

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Since Launch data as at 08/10/2012

Volatility max gain max drawdown sharpe

Source: Financial Express Analytics data from fund inception 03/10/2011 to 08/10/2012

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Rathbone Strategic Bond Fund –

Performance

Source: Financial Express.

Performance data as at 08.10.12, bid to bid, net income reinvested for I-Class Shares

*Volatility, Max Drawdown, Max Gain since inception (03/10/2011) to 08/10/2012, calculated using weekly data.

Past performance should not be seen as an indication of future performance

YTD 3Month 6 Months

Rathbone Strategic Bond Fund 8.59 3.92 5.50

IMA Sterling Strategic Bond Sector 10.41 4.34 6.11

Rank 47/69 48/72 50/72

Fund Volatility Vs IMA Sector 2.41 Vs 2.90 1.75 Vs 2.42 2.19 Vs 2.99

*Since inception to 08/10/2012

Volatility Max Gain Max Drawdown

Rathbone Strategic Bond Fund 2.57 3.51 -1.11

IMA Sterling Strategic Bond Sector 3.27 4.65 -1.62

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Return divided by risk – Since fund inception

Rathbone Strategic Bond Fund: 4.09%

Fund A: 3.16%

Fund B: 3.17%

Fund C: 3.35%

Fund D: 2.50%

Fund E: 3.56%

Fund F: 3.30%

Source: Financial Express. Per unit of risk return is calculated by performance divided by weekly volatility as at 08/10/2012

Performance: Data from 03/10/2011 to 08/10/12, bid to bid, net income reinvested for I-Class Shares.

Volatility: Data from 03/10/2011 to 08/10/2012, calculated using weekly data.

Rathbone Strategic Bond Fund was launched on 03/10/2011

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A utopian Strategic Bond Fund

To outperform the IMA Strategic Bond Sector median, with lower volatility.

To target a top quartile Sharpe Ratio.

Total return bias – yield will be determined by asset allocation not a specific nominal target.

Protecting capital is an important consideration.

Rathbone

A Total Return with an Acceptable Level of Risk

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Important Information

The information contained in this presentation is for use by

investment advisers and is not intended for circulation to private

clients or the general public

Past performance should not be seen as an indication of future

performance. The value of investments and the income from them may

go down as well as up and you may not get back your original

investment.

Rathbone Unit Trust Management is authorised and regulated by the Financial Services Authority and Rathbone Unit

Trust Management is a member of the IMA.

Rathbone Unit Trust Management Limited : Registered Address 1 Curzon Street, London, W1J 5FB

Registered No. 02376568 - A Member of the Rathbone Group.

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For guidance, call:

0207 399 0399

Or email:

[email protected]

The Website: www.rutm.com

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