Liquid Fixed Income MarketsLet’s Talk Investments

Adrian Hull – Head of Fixed Income, Kames Capital

26 November 2019

Background

2

more negative yielding bonds…

Source: Bloomberg, Goldman Sachs Global Investment Research

3

Share of global bonds with negative yields, by country

…everywhere yields have collapsed: Irish Gilt 2045

Source: Bloomberg as at 30 September 2019

4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Jul 19

Price

Irish Bond 2% 2045

Lower yields = longer duration

Source: Bloomberg as at 31 October 2019. Barclays Global Aggregate Index, daily data points.

5

4.5

5.5

6.5

7.5

1.0

2.0

3.0

4.0

5.0

Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 Jan 13 Jan 15 Jan 17 Jan 19

Ye

ars

%

Yield to Worst (lhs) Option Adjusted Duration (rhs)

Active management

6

Opportunity for active duration management

As at 30 September 2019

7

-4

-2

0

2

4

6

8

Oct 08 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16 Oct 17 Oct 18

Ye

ars

Duration by currency bloc excluding high yield

AUD CAD EURO GBP MXN NZD SEK CHF USD YEN Grand Total

Opportunity for duration selection

Source: Bloomberg as at 30 September 2019

8

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Dec 15 Sep 16 Jun 17 Mar 18 Dec 18 Sep 19

Active duration relative to benchmark

June 2019

+

June 2016

+ Sept 2019

-

Nov 2018

-

Opportunity for credit selection

9

As at 30 September 2019 As at 31 August 2019

0%

20%

40%

60%

80%

Dec 10 Dec 12 Dec 14 Dec 16 Dec 18

%

Hun

dre

ds

Financials vs Corporates

Financials Corporates

0%

20%

40%

60%

Aug 16 Feb 17 Aug 17 Feb 18 Aug 18 Feb 19 Aug 19

Investment Grade High Yield

Investment Grade vs High Yield allocation

Valuations

10

Valuations: Investment grade spreads

Source: Barclays Live as at 31 October 2019

11

70

90

110

130

150

170

190

210

230

Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19

Sp

rea

d (

bp

s)

USD EUR GBP

Valuations: High yield spreads

Source: Bloomberg as at 30 September 2019

12

200

300

400

500

600

700

800

900

Sep 14 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 Mar 18 Sep 18 Mar 19 Sep 19

Sp

rea

d (

bp

s)

ICE BofAML US High Yield index ICE BofAML EURO High Yield index

Short dated fixed income

13

Investment Grade asset class track record

Source: Bloomberg, BofAML. From January 1997 to September 2019 (271 rolling quarterly observations).

14

3

14

7883

58

35

0

20

40

60

80

100

<-5% -5 to -2.5% -2.5% to 0% 0% to 2.5% 2.5% to 5% >5%

# O

bse

rva

tio

ns

Rolling quarterly returns of BofAML Global Large Cap (all) Corporate Index (1997-2019 Q3)

0%-5% 5%

Short dated IG asset class track record

Source: Bloomberg, BofAML. From January 1997 to September 2019 (271 rolling quarterly observations).

15

0 3

27

212

27

20

50

100

150

200

250

<-5% -5 to -2.5% -2.5% to 0% 0% to 2.5% 2.5% to 5% >5%

# O

bse

rva

tio

ns

Rolling quarterly returns of BofAML 1-5 year Global Large Cap Corporate Index (1997-2019 Q3)

0%-5% 5%

4 5

45

172

26

8

0

50

100

150

200

<-10% -10% to -5% -5% to 0% 0% to 5% 5% to 10% >10%

# O

bse

rva

tio

ns

Rolling quarterly returns of BofAML 1-5 year index (1Q97 – 4Q18)

Short dated HY asset class track record

Source: Bloomberg, BofAML as at December 2018 (260 rolling quarterly observations).

.

16

0%-10% 10%

Short-dated not short-duration credit…

Source: Bloomberg. Note: Price is rebased to 100

17

70

75

80

85

90

95

100

105

110

Aug 2018 Nov 2018 Feb 2019 May 2019

Price

Greater resilience to negative events

General Electric 6.25% Sep 2020 General Electric 5.75% Dec 2028

…is more resilient to negative events

Source: Bloomberg as at 25 September 2019

18

50

60

70

80

90

100

110

Jun 17 Sep 17 Dec 17 Mar 18 Jun 18 Sep 18 Dec 18 Mar 19 Jun 19 Sep 19

Price

Commscope: Short vs medium maturities

Commscope 5% 2021 Commscope 5% 2027

Active selection

19

Top issuers in high yield…

Source: BofAML Global High Yield index as at 30 September 2019

Global high yield bond market top 20 issuers – what we own

Petrobras Netflix

Telecom Italia Intelstat

Sprint China Evergrande

Charter Communications T-Mobile

Bausch Health Community Health Systems

Teva Pharmaceuticals CenturyLink

Softbank Group Altice France

Cablevision Dish

Tenet Healthcare Virgin Media

HCA TransDigm Group

20

…and average credit quality is declining in IG

21

Source: iBoxx as at 31 March 2019

15%

20%

25%

30%

35%

40%

45%

50%

55%

Jan 04 Nov 06 Sep 09 Jul 12 May 15 Mar 18

£

$

€

40%

45%

50%

55%

60%

65%

70%

75%

Jan 04 Nov 06 Sep 09 Jul 12 May 15 Mar 18

£

$

€

Share of BBB rated bonds in major

investment grade indices

Share of non-financial company debt in

major investment grade indices

…IG indices take what they’re given

22

Source: Kames Capital, Bloomberg, BoA Merrill Lynch

0%

5%

10%

15%

20%

25%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2Q96 4Q96 2Q97 4Q97 2Q98 4Q98 2Q99 4Q99 2Q00 4Q00%

of U

S$

HY

ma

rke

t

US

$m

Telecommunications boom (1996-2000)

USD Telecommunications bonds outstanding (lhs)

USD Telecommunications index weighting (rhs)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

50,000

100,000

150,000

200,000

250,000

4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15

% o

f U

S$

HY

ma

rke

t

US

$m

Shale energy boom (2006-2016)

USD Energy bonds outstanding (lhs)

USD Energy index weighting (rhs)

Kames

0

100

200

300

400

500

600

700

800

900

Funds must have high-conviction stock selection

Source: Morningstar Direct as at 31 December 2018. Note: short, long dated bonds and index tracker funds not included, number of holdings is defined as number of holdings (long). Sector: Lipper Global Bond Global Corporate. *Source: As at 30

September 2019. Rolling 12 month turnover = (Purchases+Sales) - (Subscriptions+Redemptions) / NAV.

23

Number of holdings

Kames Investment Grade Global Bond Fund* 139

Barclays Global Aggregate Corporate Index 12,483

Sector median 241

Highest number of holdings in sector 881

Lowest number of holdings in sector 42

Turnover* 109%

Median

Global bonds and liquidity

24

Maximising the opportunity set with a global approach…

25

Source: BofAML indices as at 31 December 2018

0

500

1,000

1,500

2,000

2,500

3,000

USD EUR GBP

Fa

ce

va

lue

ou

tsta

nd

ing (

$b

n)

Investment Grade

0

100

200

300

400

500

600

700

USD EUR GBP

Fa

ce

va

lue

ou

tsta

nd

ing (

$b

n)

High Yield

…to find the liquidity that exists

Source: Bloomberg as at 30 September 2019

26

0

50

100

150

200

250

300

0

1

2

3

4

5

6

Jul 01 Jul 03 Jul 05 Jul 07 Jul 09 Jul 11 Jul 13 Jul 15 Jul 17

Bro

ke

r –

de

ale

r n

et p

ositio

ns (

$b

n)

Ma

rket va

lue

($

trn

)

US Corporate ‒ Market Value (TN) US Broker ‒ Dealer Corp Inventory

Important information

FPID: 2019/7970

27

For Professional Clients only and not to be distributed to or relied upon by retail clients.

For Kames Investment Grade Global Bond Fund: The principal risk of this service is the loss of capital. Please note that other risks will be present. The materiality of these risks will be accounted for in the

mandate which will be governed by an investment management agreement.

For Kames Strategic Global Bond Fund: The principal risk of this product is the loss of capital. Please refer to the KIID and/or prospectus or offering documents for details of all relevant risks. Fund Charges

are taken from income but will be taken from capital where income is insufficient to cover charges. This document does not constitute an offer or solicitation to buy any funds mentioned, and no promotion or offer

is intended in jurisdictions other than those where the fund(s) is/are authorised for distribution.

Past performance is not a guide to future performance. Outcomes, including the payment of income, are not guaranteed.

All data is sourced to Kames Capital unless otherwise stated. The document is accurate at the time of writing but is subject to change without notice.

Data attributed to a third party (“3rd Party Data”) is proprietary to that third party and/or other suppliers (the “Data Owner”) and is used by Kames Capital under licence. 3rd Party Data: (i) may not be copied or

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the time of writing.

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Kames Capital plc (KC) is an Aegon Asset Management company and is authorised and regulated by the Financial Conduct Authority. Aegon Asset Management is a trading name of KC. KC is the investment

manager for KCICI and also the marketer for KCIC in the UK and otherwise outside of the EEA. EEA marketing is undertaken by the following named Aegon Asset Management affiliates: Aegon Investment

Management B.V. which is registered with and supervised by the Dutch Authority for Financial Markets (AFM); Aegon Asset Management Pan Europe B.V. (AAMPE) Germany branch, which markets KCIC in

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Please note that not all sub-funds and shareclasses may be available in each jurisdiction. This document is marketing and does not constitute an offer or solicitation to buy any fund(s) mentioned. No promotion or

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