fortis bond world emerging local

Q3 2007 Designator | author 1

Fortis Investments

For Professional Investors

Emerging Fixed Income Local Debt

December 2007

Fortis Investments

Fortis Investments | November | 2

1. Introduction

2. Evolution of the asset class

3. Investment case

4. Investment process

5. FLF Bond World Emerging Local

Appendix

Fortis Investments


Why invest in local debt

Strong fundamental and technical business case– Local debt is moving to the centre of the asset class

Return potential better than for external debt– Strong macro picture likely to drive local yields downwards– Currency risks skewed to the upside

Diversification – Against both developed and emerging external debt

Fortis Investments


Fortis Investments’ strengths

Expertise to exploit this growing opportunity– Proven process and team continuity since 1998– Track record of success in tackling traditional and new drivers of returns

Local debt is already at the heart of our investment process – One of the first dedicated funds – 50% of our AUM

Clear investment philosophy and appropriate resources– Global practice support by growing presence in key local markets

Fortis Investments


Investment Philosophy

There are two distinct sources of risk & return in local debt: bond and currency

Top-down factors drive the market and form the starting point for all our decisions

Detailed fundamental and technical scoring reveals expected returns We focus on curve, carry and currency in deep markets

The opportunity set is diverse and evolving We can take small, opportunistic positions in exploratory markets

Tight risk control can help to limit the impact of negative events in individual positions We are not “slave to the index” and seek broadly diversified position

Fortis Investments


1. Introduction


3. Investment case



Appendix

Fortis Investments


Local debt The asset class

Local debt is sovereign or corporate bonds issued in local currency

The risk profile is different from external debt– External debt: solvency risk– Local debt: currency risk

Local debt has grown in importance as the Emerging World has stabilised– Wealthier countries – less need to issue debt, retire outstanding external debt– Stable currency markets – investors are more willing to buy local debt– More diversified investor base – local investors want local debt

Fortis Investments


Powerful structural changes in the asset classReduced currency risk

Fiscal Balance (% GDP)

Current Account Balance (% GDP) FX reserves by region (USD mn)

Source: JPMorgan

Fortis Investments


Market evolution favours local debtBenefits for issuers

Advantages for issuers

– Avoid mismatch between local currency revenues and foreign currency debt service

– Reduce dependence on international capital

– Limit vulnerability to external shocks

Domestic Debt Securities stock (USDbn)

Fortis Investments


Market evolution favours local debtBenefits for investors

Ave. daily trading in quarter, cash (USD bn) Trading activity in EM by instrument (%)

Local markets are set to continue to overtake external debt as both cash and derivative markets deepen

A credible local curve and wide choice of instruments now exists

Instruments include– Sovereign T-bills and T-bonds– Corporate bonds– Inflation linked bonds– Local currency bonds issued in international

markets (eg Columbian europeso bonds)

Fortis Investments


Continuing trendNew issuers, new investors

Domestic Debt Securities stock

USDbn as of June 2006

Investor profile of local currency

government debt ownership becoming more diversified

Fortis Investments


1. Introduction


3. Investment case



Appendix

Fortis Investments


Attractive yields – high potential returns

Structural undervaluation of many emerging currencies Normalisation of curves in less developed countries Higher yield, shorter duration, improving credit quality

Source: JP Morgan Indices, Bloomberg, S&P

As at 18-12-2007Local Debt Markets External Debt Markets

S&P Rating Yield Duration S&P Rating Spread (bp)

Brazil BBB 10.7 6.5 BB+ +216

Hungary BBB+ 7.2 3.8 BBB+ +93

India BBB- 7.9 6.3 n/a n/a

Indonesia BB+ 10.1 6.0 BB- +269

Mexico BBB+ 8.1 5.1 BBB +166

Russia A- 6.1 2.0 BBB+ +158

South Africa A+ 8.5 5.0 BBB+ +159

Turkey BB 16.2 1.8 BB- +233

Fortis Investments


Diversification benefits

Correlations have risen (search for yield)

But diversification benefits remain

Source:, Bloomberg / Fortis Investments

Monthly rolling correlations: benchmark and major asset classesJan 2003-Nov 2007

- 1.00

- 0.80

- 0.60

- 0.40

- 0.20

0.00

0.20

0.40

0.60

0.80

1.00

Jan-

03

Mar

-03

May

-03

J ul-0

3

Sep-0

3

Nov-0

3

J an-

04

Mar

-04

May

-04

J ul-0

4

Sep-0

4

Nov-0

4

J an-

05

Mar

-05

May

-05

J ul-0

5

Sep-0

5

Nov-0

5

J an-

06

Mar

-06

May

-06

J ul-0

6

Sep-0

6

Nov-0

6

J an-

07

Mar

-07

May

-07

J ul-0

7

Sep-0

7

Nov-0

7

EMBI Global High Yield Inv Grade S&P500

Fortis Investments


1. Introduction


3. Investment case



Appendix

Fortis Investments


Investment process

Implementation

Macro-economic assessment expanded to include local debt drivers

Fundamentals

Bonds: domestic curve and carry analysis; implied move versus market

Currency: REER, carry against volatility

Value Catalysts

EM Debt and currency universe

PortfolioExpected

return

Country indicators

Investment decision

Drivers and risks to expected return – technical and policy driven

Risk monitoring and control

Coherence of views, positions and portfolios

Fortis Investments


Score cards based investment decisions

Final Views

ST MT LTFiscal

BalanceLiquidity (ex: Monetary Agg)

Last 3m volatility

Monetary Policy

Hot MoneyPolitics/

NewsFlow(--/++)

Indonesia 7.86 7.71 8.70 -1 0 -1 1 -1 0 =

India 7.42 7.43 7.22 0 1 -1 0 1 -1 +

South Korea 5.09 5.27 5.48 1 -1 -1 -1 1 0 =

Philippines 3.50 3.25 3.34 0 -1 -2 0 0 0 -

Malaysia 3.40 3.25 3.67 0 1 1 0 0 0 =

Singapore 2.18 1.89 1.92 2 0 1 0 2 0 =

Taiwan 2.16 2.13 2.02 0 0 0 0 2 -1 -

Thailand 2.91 2.82 3.19 0 1 0 1 2 -2 +

Local Bonds

Alpha Gap Catalysts (+2/-2)

0

1

2

3

4

5

6

7

8

9

10

-0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2Risk Decreasing

Local Bonds Local Currency

Final Views Final Views

ST MT LTFiscal


Last 3m volatility

Monetary Policy

Hot MoneyPolitics/

NewsFlow(--/++) (-/+) Real Flows Spec Flows

Indonesia 7.86 7.71 8.70 -1 0 -1 1 -1 0 = = 1 -1

India 7.42 7.43 7.22 0 1 -1 0 1 -1 + + 2 -2

South Korea 5.09 5.27 5.48 1 -1 -1 -1 1 0 = - 0 0

Philippines 3.50 3.25 3.34 0 -1 -2 0 0 0 - + 2 0

Malaysia 3.40 3.25 3.67 0 1 1 0 0 0 = = 2 -1

Singapore 2.18 1.89 1.92 2 0 1 0 2 0 = = 2 0

Taiwan 2.16 2.13 2.02 0 0 0 0 2 -1 - - 2 1

Thailand 2.91 2.82 3.19 0 1 0 1 2 -2 + = 1 0

Catalysts (+2/-2)Alpha Gap Catalysts (+2/-2)

Local Currency

0

1

2

3

4

5

6

7

8

9

10

-0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2Risk Decreasing

Currency Universe (Expected Return vs Risk Index)

IDR

INR

KRW

PHP

MYR

SGD

TWD

THB

-6%

-4%

-2%

0%

2%

4%

6%

8%

-1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00

Fortis Investments


FundamentalsMacro-economic assessment

Key variables affecting local debt– Growth, debt ratio, inflation,

balance of payments– Fiscal and monetary policy

relative to those factors

Example: underweight South Africa as Reserve Bank expected to hike rates to fight inflation

Source: Bloomberg

Fortis Investments


ValueBonds – primary source of returns and risk

Key assessment based on our macro view:

Do we override the curve?

Curve change versus consensus

Source: Fortis Investments

Thailand Yield Curve

TH 6m 5Y 10Y

19-Sep-2007 3.09 3.89 4.50

3mth Fwd 3.21 3.97 4.56

3 months forecast

2.90 3.75 4.20

3 months 2.90 3.75 4.20

Thailand Yield Curve

2.50

3.00

3.50

4.00

4.50

5.00

6m 5Y 10Y

19-Sep-2007

3 months

(%)

(%)

Fortis Investments


Value exampleThai bonds

Difference between 10 year and 2 year sovereign THB

bonds

(Sell 10 yr / Buy 2yr)

Source: Bloomberg

Fortis Investments


ValueCurrency – real effective exchange rate Key assessment: will the market rate converge to real rate

– Mean reversion or fundamental adjustment in REER– Remuneration versus volatility

Source: Bloomberg

Egypt– Positive pressure on

Balance of Payments means currency appreciation

– Plus 8% yield

Risk well rewarded

Fortis Investments


CatalystsRisks to expected returns - policy

Driven by top-down factors– Internal: fiscal policy, monetary policy, politics– External: hot money

India Hungary

Capital a/c Current a/c BofP

Example: India is much better positioned to finance a current account deficit than Hungary

Source: Bloomberg & Fortis Investments

Fortis Investments


CatalystsRisks vs expected returns - technicals Israeli bonds stretched technically despite strong fundamental support

Source: Bloomberg

Fortis Investments


CatalystsRisks to expected returns – external Huge support for Philippines peso

– Growth in remittances from overseas as global economy grows– Laws to encourage overseas investors Philippines peso

Source: Bloomberg

Fortis Investments


All decisions within risk-return frameworkData based on score cards

Currency Universe

THB

TWD

SGD

MYR

PHP

KRW

INR

IDR

ZAR

BWP

EGP

ILS

UYUPEN

MXNCOP

CLP

BRL

ARS

BYR

UAH

EURRON RUB

EURTRY

EURSKK

EURHUF

EURCZK

EURPLN

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

-0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40

Expected Risk

Ex

pe

cte

d R

etu

rn

Fortis Investments


Opportunistic positionsOutside the process, max 1% each Tanzania

– 50% of central budget comes from international donors– Fiscal position highly uncertain– Seasonal remittances

Source: Bloomberg

Tanzanian shilling June 2002-June 2007

Fortis Investments


1. Introduction


3. Investment case



Appendix

Fortis Investments


FLF Bond World Emerging LocalOverview

JP Morgan GBI EM Global Diversified, unhedged in USD as of Jan 1, 2007. This benchmark is indicative; the “best selection” approach will result in a

large tracking error versus its benchmark. Tracking error up to 10%

Indicative maximum 20% in corporate bonds Indicative maximum 20% in EM bonds denominated in hard currencies (e.g.

USD, EUR)

High returns and declining volatility De-correlation from global markets Low correlation of returns within the emerging country universe Strategic role in asset allocation: enhanced returns with lower volatility

Fortis Investments


FLF Bond World Emerging LocalPerformance Global emerging debt fund (US$ or Euro based) invested primarily in local debt

instruments of both sovereign and corporate issuers and in currency markets Wider universe than the benchmark to allow further diversification

Past performance or achievements are not indicative of current or future performance.

Fortis Investments


Conclusion

Value exists in local bonds and currencies

Top-down drivers determine both the risk and the return

Our process reviews all aspects of expected return and risks to that return

Fortis Investments


1. Introduction


3. Investment case



6. Performance

Appendix

Fortis Investments


Biographies

Pierre-Yves Bareau, CIO Product CIO (since ‘98) Responsible for Emerging Fixed

Income funds management 16 years’ investment

experience Graduate in Finance

Raphaël Maréchal Fund manager (since Jun ’01) Regional focus: Emerging

Europe Responsible for Emerging

Europe FI funds and Emerging CDOs

10 years’ investment experience

Graduate in Engineering and Post-graduate in Finance

Sergio Trigo Paz Fund manager (since Oct ‘04) Regional focus: Latin America Responsible for Absolute

Return funds 13 years’ investment

experience Graduate in Economics and

Finance; Post-graduate in Management

Didier Lambert, CFA Fund manager (since ‘00) Regional focus: Asia, MiddleEast,

Africa Responsible for Global EM funds 7 years’ investment experience Graduate in Banking & Finance;

Post-graduate in Economic and Financial Modelling

Fortis Investments


Biographies

Yves Oloui Senior Quant Analyst

since Aug ‘06 6 years’ business experience Graduate in Applied

Mathematics

Filip Ruszkowski Junior Portfolio Manager

since October ’06 (FI Jul ‘05) 3 years’ investment experience Master’s in Management,

ESCP-EAP European School of Management, Paris, Oxford, Berlin

Alain Defise Credit Analyst

since Oct ’06 (FI Aug ‘00) 10 years’ business experience Graduate in Finance

Vladimir Gersamia Economist

since Mar ’07 3 years’ investment experience BSc in Economics and History

Fortis Investments


Biographies

Michal Wozniak, CFA* Eastern Europe Fund Manager

since Sept. 07 5 years’ business experience Graduate in Economics

*Partnership with the Euro Fixed Income Investment Center

Fortis Investments


Team structure Stable, successful team

Local Offices Research Support – Turkey, Russia, Indonesia (C. Arras, V. Tsuprov, W. Kastami)

EM Equities teams – London, Boston, Hong Kong

Global Credit Research Team with 21 analysts

London, Boston, Paris (A. Serpico, Y. de Bray, M. Baud)

Global Fixed Income - London

DealersProduct

Specialist

G. Tossou (London) A. Jakubowicz

L. DevelayA. Macleod

C. Carney (Boston)

Michel Gonnard

Emerging Market Fixed IncomePierre-Yves Bareau – CIO

Credit Analyst Strategist Absolute return

Latin America

CDO, Corporates

Emerging Europe

Global & Local funds

Asia, ME, Africa

Junior Portfolio Manager

Quant Analyst

Alain Defise Vladimir Gersamia Sergio Trigo Paz Raphael MarechalMichal Wozniak*

Didier Lambert Filip Ruszkowski Yves Oloui

PORTFOLIO MANAGERS

Key supportingteams withinFortis Investments

*Partnership with the Euro Fixed Income Investment Centre

Fortis Investments


AUM evolution

CDO, 122 CDO, 114CDO, 249 CDO, 207 CDO, 191

EM Europe571

EM Europe704

EM Europe473EM Europe

315EM Europe

259

EM Europe424

Global EM686

Global EM559

Global EM348

Global EM225

Global EM249

Global EM768

Balanced EM232

Balanced EM223

Balanced EM146

Balanced EM9

Balanced EM8

Balanced EM134

Local EM429

Global Local EM510

Total Return636

Total Return124

Total Return44

Total Return29Total Return

14

Total Return944

2002 2003 2004 2005 2006 October 2007

€530 mm €700 mm

€1,125 mm

€1,858 mm

€2,768 mm €2,846 mm

Fortis Investments


Local debt exampleClear view of risk and return opportunities

(As of December 21st 2006)

Local Bonds Local Currency

Final Views

ST MT LTFiscal


Last 3m volatility

Monetary Policy

Hot MoneyPolitics/

NewsFlow(--/++)

Indonesia 7.86 7.71 8.70 -1 0 -1 1 -1 0 =

India 7.42 7.43 7.22 0 1 -1 0 1 -1 +

South Korea 5.09 5.27 5.48 1 -1 -1 -1 1 0 =

Philippines 3.50 3.25 3.34 0 -1 -2 0 0 0 -

Malaysia 3.40 3.25 3.67 0 1 1 0 0 0 =

Singapore 2.18 1.89 1.92 2 0 1 0 2 0 =

Taiwan 2.16 2.13 2.02 0 0 0 0 2 -1 -

Thailand 2.91 2.82 3.19 0 1 0 1 2 -2 +

Catalysts (+2/-2)Alpha Gap

0

1

2

3

4

5

6

7

8

9

10

-0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2Risk Decreasing

Currency Universe (Expected Return vs Risk Index)

IDR

INR

KRW

PHP

MYR

SGD

TWD

THB

-6%

-4%

-2%

0%

2%

4%

6%

8%

-1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00Risk Decreasing

Fortis Investments


Risk management and controlFLF Bond World Emerging Local

Base CCY USD 03-Dec-07NAV 303,375,154

TEV Full TEV

1 Year TEV% 1.609% 1.237%1 Month TEV% 0.464% 0.355%

VaR Percentile VaR Full VaR %

95.00% 2.65% 2.04%99.00% 3.74% 2.88%99.90% 4.97% 3.82%

Asset TypeAsset-Class Sole VaR

ContributionAsset-Class Div VaR Contribution

FX 2.061% 1.68%IR 1.682% 1.18%CREDIT 0.000% 0.00%

Fortis Investments


Fortis Investments


This document has been prepared solely for informational purposes and does not constitute 1) an offer to buy or sell or a solicitation of an offer to buy or sell any security or financial instrument mentioned in this document or 2) any investment advice. Any decision to invest in the securities described herein should be made after reviewing the most recent version of the prospectus, which can be obtained free of charge from Fortis Investments*. Moreover, prospective investors should conduct such investigations as the investor deems necessary and should seek their own legal, accounting and tax advice in order to make an independent determination of the suitability and consequences of an investment in the securities. The opinions contained herein are subject to change without notice.

Investors should ensure themselves that they read the last available version of this document.

Past performance or achievements are not indicative of current or future performance. The performance data do not take account of the commissions and costs incurred on the issue and redemption of units.

For more information, please contact [email protected]

Fortis Investments is the trade name for all entities within the group of Fortis Investment Management. This document has been issued by Fortis Investment Management Belgium N.V./S.A. (address : Avenue de l’Astronomie 14, 1210 Brussels, Belgium, RPM/RPR 0882 221 433).

Fortis Investments


Fund Legal FactsheetFund Manager:Didier Lambert

Management fees: 1.50% for C-shares0.60% for I-shares

ISIN Code:Capital: LU0251280011Distribution: LU0251280102Institutional: LU0251280367Registration: Belgium, Luxembourg and The Netherlands

Legal Form: Compartment of the Fortis L Fund UCITS III SicavNationality: Luxembourg fundNAV Agent: Fastnet Lux SA

Risk indicators: Risk class: 3 on a 0 to 6 scaleAdvised Horizon: 8 yearsInvestor Profile: Dynamic

The investments in Fortis L Fund Bond World Emerging Local are subject to market fluctuations and the risks inherent in investments in securities. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.

fortis bond world emerging local

Economy & Finance