Alternative view. A look across the border: Danish mortgages bonds versus Dutch mortgage loans. By David van Bragt and Nicolas Caplain September 2018

Transcription

1 Alternative view A look across the border: Danish mortgages bonds versus Dutch mortgage loans By David van Bragt and Nicolas Caplain September 2018 Intended exclusively for professional clients/institutional investors and not for retail clients.

2 A look across the border: Danish mortgage bonds versus Dutch mortgage loans Many institutional investors are currently attracted by the potential for high yields on mortgage investments. Exposure to the mortgage market can be achieved in various ways. For example, investors can acquire pools of mortgage loans or invest in repackaged mortgage-backed securities. An interesting alternative approach is used in Denmark. In this country mortgage loans are coupled to mortgage bonds. These bonds typically have a very high rating and can be traded on a secondary market. In this article, we compare Danish mortgage bonds with direct investments in Dutch mortgage loans. This analysis informs institutional investors about some of the distinguishing features of these mortgage markets. We first compare the underlying loans, namely Dutch and Danish mortgages, and then analyze some important distinctions, especially with respect to prepayment options, government support and currencies. After these preliminary steps, we analyze Danish mortgage bonds in more detail. These bonds are issued by specialized mortgage institutions and coupled with mortgage loans using the Danish balance principle : the mortgage institutions are retaining the credit risk, but pass the interest rate and prepayment risk to the bond holders. Ratings for Danish mortgage bonds are typically very high (AAA) and an active secondary market exists. The yield of Danish mortgage bonds is currently approximately 1.3% higher than for Danish government bonds. 1 Direct investments in Dutch mortgage loans currently yield approximately 1.0% more than Danish mortgage bonds. Danish mortgage bonds and Dutch mortgages both require a limited amount of capital under Solvency II, with an edge for Dutch mortgages due to larger diversification benefits. Based upon this analysis, we conclude that Danish mortgage bonds may be an attractive alternative to Danish government bonds (higher yield, high liquidity, low capital charge). For investors who allocate part of their assets to illiquid categories, Dutch mortgages can offer an additional spread (currently approximately 1.0%) compared to Danish mortgage bonds. 2 Dutch mortgages are also typically less complex in terms of embedded options, in particular when considering the prepayment risk of Danish mortgages. This can make Dutch mortgages more suitable for hedging the interest rate risk of long-term liabilities. 1 As of April See Section 3.2 for more details. 2 See footnote 1. 2

3 Table of Contents 1. Introduction Characteristics of the underlying mortgage loans Similarities Differences Characteristics of Danish mortgage bonds Comparison with covered bonds Yield Duration Solvency II treatment Capital charges for Danish mortgage bonds Capital charges for Dutch mortgages Solvency II analysis concluding remarks Conclusions

4 1. Introduction The functioning of mortgage markets and, in particular, the way in which banks and other financial institutions refinance themselves after issuing mortgages varies from country to country. For example: Mortgage loans are sold on directly to institutional investors in the Netherlands and other countries; Mortgage bonds are issued in Denmark; Covered bonds are used in France ( obligations foncières ), Germany ( Pfandbriefe ) and Spain ( cédulas ); Mortgage-backed securities (MBS) are issued in the USA, the UK, the Netherlands, and in several other European countries. The underlying instruments, i.e. mortgages to finance a house, are similar in all cases but the traded instruments differ in their legal and financial characteristics. Investors thus have various ways to expose themselves to mortgage markets. When focusing on Danish mortgage bonds and Dutch mortgage loans, the following distinction is particularly important: Dutch mortgages are direct loans. They are accessible via funds, special purpose vehicles (SPVs) or separate mandates. Investments are typically made via a pool of thousands of mortgages. The total size of the Dutch mortgage market is around 669 billion. 3 Danish mortgage bonds are listed bond issues, whose notional and coupon reflect the notional and coupon of a pool of similar mortgages on a pass-through basis. They can be directly accessible (via an investment in listed bonds) or via fund structures (such as UCITS funds). 4 The market for Danish mortgage bonds is one of the largest covered bond markets in the world (around 363 billion). 5 Virtually all Danish mortgages are coupled to mortgage bonds. It is important to note that Danish mortgage bonds come in three different flavors: callable, non-callable and floating rate. Market sizes are approximately 30% for fixed rate callables, 45% for fixed rate non-callables and 25% for floating rate (and other) mortgage bonds, see Figure 1. 3 Source: CBS / Statistics Netherlands, as of 30 June UCITS funds are collective investment schemes which can operate freely throughout the EU on the basis of a single authorisation from one member state. 5 Source: Danske Bank, as of 30 June 2017 and counting only the mortgage bonds denominated in Danish kroner. The size of the total Danish mortgage bond market is around 405 billion. 4

5 Figure 1: Bond type distribution in the Danish mortgage bond market. Source: Danske Bank (2017). Callable bonds tend to be the most attractive mortgage bond segment in terms of yield. 6 These bonds are coupled to callable mortgage loans. Mortgage borrowers can prepay a callable loan at par, which implies that the corresponding bond is also called (for the pro rata part). In case of non-callable mortgage bonds, the bonds are coupled to fixed-rate mortgage loans without a prepayment option. Prepayment penalties can be charged in order to allow bond investors to attain a similar yield as for the original mortgages. 7 Both callable and non-callable mortgages loans also have an embedded delivery option. 8 This option enables borrowers to buy back the corresponding bonds at the market price. By delivering the bonds to the mortgage bank, the loan is fully or partially redeemed. When exercising this option, borrowers will be charged a trading fee of %, depending on the loan size. Borrowers have an incentive to exercise this option when interest rates rise significantly. In this case they can reduce their outstanding debt by buying back the original bond below par and replacing it with a new bond with a lower notional and higher coupon. The net effect of the higher coupon payments is then mitigated by a larger tax deduction of the mortgage payments. This means that there are actually two prepayment options. In case of a callable bond, the borrower can prepay the underlying loan as well as buy back the corresponding bond. The first is attractive when interest rates decline, the second when interest rates rise. Even in case of a non-callable mortgage bonds, the borrower thus still has the option to prepay the loan by buying back the corresponding bond. Before making an in-depth comparison between Dutch mortgage loans and Danish mortgage bonds, we first look in more detail at the underlying mortgage loans. 6 See Danske Bank (2017, Chapter 10) for more information. 7 See Lea (2010) and Badarinza et al. (2014). 8 See Danske Bank (2017). 5

6 2. Characteristics of the underlying mortgage loans 2.1. Similarities Dutch and Danish mortgage loans have a number of similar characteristics: 9 Mainly fixed rates; Option of prepayment; Good overall quality (in terms of statistics on historical defaults, etc.); Full recourse to home owners is possible in case of a mortgage default; Property rights are clearly defined and efficient foreclosure procedures exist in case of default; Beneficial tax treatment of mortgage interest payments. Dutch and Danish mortgage borrowers also share similar characteristics: Both the Netherlands and Denmark have strong, open economies; The total mortgage debt (as a percentage of the GDP) is relatively high; Dutch and Danish home owners nevertheless have (on average) a high net worth Differences Prepayment penalty Prepayment conditions differ in the Netherlands and Denmark. 10 In the Netherlands, most mortgage lenders allow borrowers to prepay 10% of the original mortgage notional per year without a penalty. Prepayment penalties are typically also cancelled in case of relocation or hardship. Otherwise a penalty is possible, to ensure yield maintenance for the issuer. As mentioned above, prepayment is possible without a penalty for Danish mortgages which are linked to callable mortgage bonds. Government guarantee In the Netherlands, a large mortgage insurance structure is in place: the Nationale Hypotheekgarantie (NHG). The Stichting Waarborgfonds Eigen Woningen (WEW) is an entity that issues NHG mortgage loans. The WEW guarantees approximately 190 billion in mortgage loans and is fully guaranteed by the Dutch central government. 11 Based on this, a Dutch NHG mortgage loan can be considered to be government-guaranteed. 12 In Denmark, mortgage insurance structures do not exist. 9 See Van Bragt (2018) for more information. 10 See Van Bragt (2018) for an extensive overview. 11 See NHG mortgages issued before 1 January 2011 are guaranteed for 50% by the central Dutch government and for 50% by the Dutch municipalities. After this date, the central government guarantees NHG mortgages for 100%. 12 Note, however, that an NHG guarantee only offers a partial credit protection. This is due to several reasons. First, the payment in case of a default only covers the difference between the nominal value of the mortgage loan and the value of the property. NHG does therefore not cover all types of regular mortgage payments. Second, the guaranteed amount decreases over time because the assumption is made that the mortgage loan is repaid within 30 years. Third, as of 2014 an own risk clause of 10% applies. As of 1 January 2018, NHG loans are possible for mortgage loans up to 265,000. Lenders pay a onetime premium of 1% for this guarantee. 6

7 Mortgage rate stability Mortgage rates tend to be more stable in the Netherlands than in Denmark, see Figure 2 for an illustration. Note that the Danish mortgage rate changes more in line with the market interest rate over time. Figure 2: Evolution of mortgage and market rates over time. Sources: Bloomberg, Danmarks Nationalbank, ECB. 13,14 Currency Most Danish mortgages are denominated in Danish kroner, whereas Dutch mortgages are denominated in euros. The Danish krone is pegged to the euro in the Exchange Rate Mechanism II (ERM II) at a central rate of Danish kroner per euro. 15 The fluctuation band of the euro / krone exchange rate is equal to ± 2.25%. This bandwidth has not been breached in the past five years, but smaller deviations have occurred, see the figure below. The Danish central bank (in cooperation with the ECB) does intervene, if necessary, to keep the Danish krone within the bandwidth. 13 Possible currency hedging effects are ignored in this figure, i.e. we show unhedged yields. Note also that the duration of the underlying instruments will not be the same, which makes a comparison more difficult. Mortgages in the Netherlands and Denmark can also differ with respect to their loan-to-value ratio, the existence of a government guarantee, etc. 14 The interest rate on new Danish mortgages is obtained via Danmarks Nationalbank (see table DNRNURI). The interest rate on new Dutch mortgages is available via the ECB Statistical Data Warehouse (see 15 ERM II was set up on 1 January 1999 to couple non-euro currencies within the European Union to the euro. See for more information. 7

8 Figure 3: Exchange rate of the Danish krone and the euro. Source: Bloomberg. Euro investors who are concerned about the remaining exchange rate risk can hedge their exposure to the Danish krone using standard foreign exchange hedge instruments. These hedging costs are mainly driven by the interest rate difference between the eurozone and Denmark. The figure below gives an overview for the past years. Note that the Danish (12-month) interest rate is more volatile over time than the corresponding euro rate. Figure 4: Interbank (12-month) interest rates for Denmark and the eurozone. Source: Bloomberg. 8

9 The interest rate difference is slightly positive at the moment, meaning that hedging the DKK/EUR currency risk with one-year forwards currently adds some return ( 0.2%). 16 Conversely, hedging Dutch mortgages to Danish krone currently costs approximately 0.2% in terms of hedging costs. 17 We will discuss Danish mortgage bonds in more detail in the next section. 3. Characteristics of Danish mortgage bonds Danish mortgage bonds are mainly issued by specialized mortgage credit institutions: Nordea Kredit, Realkredit Danmark (a Danske Bank subsidiary), BRF Kredit, Nykredit, DLR Kredit, etc. These institutions retain the credit risk, but pass the interest rate and prepayment risk to the bond holders. Ratings for Danish mortgage bonds are typically high (most have an AAA rating) and a liquid secondary market exists (providing daily liquidity in practice) Comparison with covered bonds Danish mortgage bonds have a number of characteristics in common with covered bonds, the main one being that they are bonds issued by a credit institution, listed and often eligible for UCITS funds. For this reason, they are sometimes referred to as covered bonds. In reality, however, they differ from eurozone covered bonds for the following reasons: Pass-through principle: the cash flows of Danish mortgage bonds match those of the underlying mortgages. There is a balance principle between the mortgage bonds and the underlying mortgages; Like mortgages or mortgage-backed securities, callable Danish mortgage bonds bear a prepayment risk. In case of covered bonds the issuer and not the investor bears this risk; Over-collateralization rules are not the same: the security is generally greater when it comes to covered bonds Yield We give an impression of the yield on Danish mortgage bonds in the figure below. For mortgage bonds, we here show the yield from the Nykredits Realkreditindeks. As a comparison, we also show the yield on Danish government bonds and new Danish and Dutch mortgage loans. 16 Ignoring the effect of currency hedging transaction costs. 17 Note that this would not be a perfect hedge in terms of hedging the difference in long-term interest rates. For that, cross-currency asset swaps are needed. 9

10 Figure 5: Comparison of Danish and Dutch mortgage rates with the market yield on the Nykredit Danish mortgage bond index and Danish government bonds. Sources: Bloomberg, Danmarks Nationalbank, ECB. 18 Note that Danish mortgage bonds currently offer a spread of 1.3% over Danish government bonds, mainly as a compensation for the embedded options in the mortgage bonds. The rate on new (long-term) Danish and Dutch mortgages is currently 1.0% higher than for Danish mortgage bonds. This is mainly a compensation for the less liquid direct mortgage loans, compared to the liquid Danish mortgage bonds Duration It is important to note that the prepayment option embedded in callable Danish mortgage bonds has an impact on the duration of these loans. A non-callable bond typically has a relatively stable duration if interest rates change. Depending on the maturity of the bond, the duration will increase at lower interest rate levels. A completely different picture emerges, however, for callable bonds. In this case, the bond will be called (at par) with a higher probability at a lower interest rate level. 19 This means that the duration of these loans will typically decrease (instead of increase) at lower interest rate levels. As a result, Danish mortgage bonds are less suited as an interest rate hedge instrument for investors with long-term liabilities: when the duration is needed (at low interest rate levels), the bonds can be called, which results in a deteriorating interest rate hedge. An illustration is given in the figure below. For mortgage bonds, we here show the duration of the Nykredits Realkreditindeks, compared to the yield on 10-year Danish sovereign bonds. 18 Possible currency hedging effects are ignored in this figure, i.e. we show unhedged yields. Note also that the duration of the underlying instruments will not be the same, which makes a comparison more difficult. 19 See Danske Bank (2017, Chart 28) for an illustration. 10

11 Figure 6: Comparison of the duration of the Nykredit Danish mortgage bond index with the yield on 10 yr. Danish government bonds. Source: Bloomberg. Note that the duration of the mortgage bond index typically drops rapidly if the market rate decreases. When interest rates fall the chance of mortgages being paid off early increases and so the duration of the expected payments reduces. If interest rates start to rise the opposite effect is seen and the duration increases. The effect of this embedded option outweighs the fact that for the underlying bond, the duration will increase as interest rates fall. 4. Solvency II treatment As of 1 January 2016, Solvency II is the supervisory framework for European insurance companies. Under Solvency II, the required capital is the amount of capital that an insurance company should hold to be able to withstand a severe stress scenario (occurring once every 200 years). 20 The required capital is equal to the basic solvency capital requirement (BSCR) plus the required capital for operational risk (Op) and an adjustment for the loss-absorbing effect of technical provisions and deferred taxes (Adj), see the figure below. 20 See EIOPA (2014) and EU (2015) for a detailed specification of the standard required capital calculation under Solvency II. 11

12 Figure 7: Structure of the overall required capital calculation under Solvency II. Source: EIOPA. 21 The BSCR is the solvency capital requirement before any adjustments and combines the capital requirements for six major risk categories. Note that these risk categories are typically broken down into more categories (e.g. market risk is sub-divided into interest rate risk, equity risk, property risk, etc.). The capital charges associated with each of these risks are combined with a correlation matrix, which is prescribed under Solvency II. 22 The purpose of this correlation matrix is to produce an adequate overall capital charge for a oneyear time horizon. In practice, the correlation between the different components of the BSCR is assumed to be small. For example, the probability of a (1 in 200 year) tail event occurring simultaneously for market risk and life risk is assumed to be quite low (a correlation of only 0.25). Due to the low correlation between the major risk categories, it is possible to achieve a significantly lower required capital by diversifying risk. Mortgages are in fact a very good required capital diversifier, because this asset class falls under the counterparty default risk module instead of the market risk module. Market risk typically contributes heavily to the overall required capital, whereas the contribution of default risk is much smaller. 23 It therefore pays to transfer risk from market risk to default risk in order to better exploit the low correlation (of 0.25) between these modules. An example is given later on. 21 See EIOPA (2014), p See EIOPA (2014), p See for example typical (average) numbers for life insurers from the QIS-5 impact study for Solvency II. See EIOPA (2011), graph 35, p

13 4.1. Capital charges for Danish mortgage bonds For Danish mortgage bonds, the following risk charges are relevant: Interest rate risk The capital charge for interest rate risk can be reduced by investing in Danish mortgage bonds, due to the duration that is added by these assets. Note, however, that the duration of these bonds can change significantly as a function of the interest rate level, due to the embedded prepayment options in the underlying Danish mortgages. Currency risk There exists a currency risk because the underlying mortgage loans are in Danish kroner. But, as mentioned before, the Danish krone is pegged to the euro. The capital charge for Danish currency risk is therefore much lower than for currencies with a floating exchange rate against the euro (0.39%, instead of 20%). 24 This risk can be reduced further with currency derivatives. Concentration risk Concentration risk needs to be considered on the overall balance sheet level. The capital charge for this risk factor is typically very small when exposures are well spread over different counterparties. Spread risk This is the main risk factor for Danish mortgage bonds. Danish mortgage bonds are treated as covered bonds under the standard model of Solvency II. 25 The Solvency II capital charge for covered bond loans is depending on the rating and the (spread) duration, see the figure below. Figure 7: SCR for spread risk for corporate and covered bonds under Solvency II as function of rating and duration. Source: EIOPA (2015). 24 See EIOPA (2015), Article See EU (2015), Article

14 Note that capital charges for covered bonds are lower than for corporate bonds for similar ratings and durations. The figure shows, for example, that the capital charges for AAA corporate bonds and AA covered bonds are the same. Danish mortgage bonds are typically rated AAA. If we assume that the (spread) duration is approximately 5, this leads to a capital charge for spread risk of 3.5%. For example: Danish government bonds have a capital charge for spread risk of zero under Solvency II, whereas Danish corporate bonds with a rating of BBB and a duration of 5 would have a spread capital charge of 12.5%. The capital charge for Danish mortgage bonds is thus at the lower end Capital charges for Dutch mortgages For Dutch mortgages, the following risk charges are important: Interest rate risk The capital charge for interest rate risk can be reduced by investing in Dutch mortgages. Due to penalties, prepayments are relatively limited for most Dutch mortgage loans. Their duration is therefore quite stable, compared to Danish mortgage bonds. Currency and concentration risk Currency risk is not applicable, because Dutch mortgages are euro denominated. With respect to concentration risk: see the discussion in the previous section. Spread risk The spread risk module is only applicable if the mortgages do not qualify for the default risk module, see below. Default risk The capital charge for Dutch mortgages should be calculated using the default risk module, instead of the spread module (see Van Bragt, 2017, for more information). Typically, a capital charge of 5% would apply for default risk. However, as this module has a low correlation with other modules (0.25), the overall capital charge for Dutch mortgages is very small under Solvency II. In fact, the added capital charge on the overall balance sheet level is approximately equivalent to adding an asset class with a spread risk charge of only 2%. Note that Danish mortgage bonds do not qualify for the default risk module (only mortgage loans can qualify for this module) Solvency II analysis concluding remarks Dutch mortgages and Danish mortgage bonds have a mitigating impact on the required capital for interest rate risk, with some added complexity in case of callable Danish mortgage bonds due to the embedded prepayment options. Capital charges for spread or default risk are low for Danish mortgage bonds ( 3.5%) and even lower ( 2% in equivalent terms) for Dutch mortgages. 5. Conclusions We have compared Dutch mortgage loans with Danish mortgage bonds in this article. Both asset classes share similar underlying instruments (namely, mortgage loans) but their characteristics are quite different in certain regards. A global comparison is made in the table below. 14

15 Overall comparison Criteria Danish mortgage bonds Dutch mortgage loans Yield + ++ Liquidity + Required capital Solvency II + ++ Interest rate hedge + Government guarantee possible + Currency DKK EUR Table 1: Global comparison of Danish mortgage bonds and Dutch mortgages. The main similarities and differences are: The general characteristics of the Dutch and Danish mortgage market are quite similar: both markets are large, well developed and supported by households with (on average) a high net worth; The complexity of Danish mortgages is, however, higher due to the embedded prepayment options; Dutch mortgages are loans while Danish mortgage bonds are listed bond issues, whose notional and coupon reflect the notional and coupon of the underlying mortgages on a pass-through basis; Danish mortgage bonds have the advantage of being more liquid (the underlying financial instruments being listed bonds) than Dutch mortgages; The yield to maturity for Dutch mortgage loans is higher than for Danish mortgage bonds despite the fact that the underlying mortgage rates are comparable; Capital charges under Solvency II for Danish mortgage bonds and Dutch mortgages are very low, with an advantage for Dutch mortgages due to larger diversification benefits; Dutch mortgages are often eligible for an additional (State) guarantee; Danish mortgage bonds are less suited as an interest rate hedge instrument for investors with long-term liabilities: when the duration is needed (at low interest rate levels), the bonds can be called which results in a deteriorating interest rate hedge; Because the Danish krone is pegged to the euro, hedging costs and capital charges for currency risk are limited for euro investors. Danish mortgage bonds are an important alternative for Danish government bonds as they can have a higher yield, coupled with secondary market liquidity and a limited capital charge. For investors who allocate part of their assets to illiquid categories, Dutch mortgages offer an additional spread (currently around 1.0%) compared to Danish mortgage bonds. The Dutch mortgage product is also less complex in terms of embedded options, in particular with respect to prepayment risk which may manifest itself in case of decreasing interest rates. 15

16 References Badarinza, C., J.Y. Campbell, G. Kankanhalli and T. Ramadorai (2014), International Mortgage Markets: Products and Institutions, Available via Danske Bank (2017), Danish Covered Bond Handbook - The covered bond handbook of mortgage banks in Denmark, 15 September Available at EIOPA (2011), EIOPA Report on the Fifth Quantitative Impact Study (QIS5) for Solvency II, Report EIOPA-TFQIS5-11/001, 14 March Available at EIOPA (2014), Technical Specification for the Preparatory Phase (Part I), Report EIOPA-14/209, 30 April Available at _Technical_Specification_for_the_Preparatory_Phase Part_I_.pdf. EIOPA (2015), Final report on public consultation No. 14/059 on the implementing technical standards with regard to the adjusted factors to calculate the capital requirement for currency risk for currencies pegged to the euro, Report EIOPA-Bos-15/121, 30 June 2015, Available at EU (2015), Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), Official Journal of the European Union, January Available at Nykredit (2018), Danish Covered Bonds, April Available at Lea, M. (2010), International Comparison of Mortgage Product Offerings, Research Institute for Housing America, September Available at Van Bragt, D. (2017), Capital Requirements for Mortgage Loan Investments under FTK, Solvency II and Basel III, Regulatory Insight, Aegon Asset Management. Available at Van Bragt, D. (2018), The Dutch mortgage market from an international perspective, Alternative View, Aegon Asset Management. Available at 16

17 About the authors This article is written by David van Bragt of Aegon Asset Management and Nicolas Caplain of La Banque Postale Asset Management (LBPAM). David van Bragt is a senior consultant in the Investment Solutions team at Aegon Asset Management. Nicolas Caplain is Head of Fund Selection at LBPAM. Acknowledgments The authors would like to thank Oliver Warren, Rens Ramaekers, Frank Drukker, Parisa Veldman, Niek Swagers and Robert Alexander for their useful suggestions when preparing this article. About the Investment Solutions Center The Investment Solutions Center of Aegon Asset Management is the knowledge hub for investment strategy solutions. Various experts of Aegon Asset Management collaborate on research and publications in areas such as balance sheet management, regulatory impact, capital optimization and Asset-Liability Management. The joint knowledge and expertise is used to support clients with research insights and suitable solutions. Strategic partnership and cooperation Aegon Asset Management and La Banque Postale Asset Management have a strategic, long-term partnership since La Banque Postale Asset Management is the 5 th asset manager in France with 218 billion assets under management (as of October 2017) on behalf of both retail and institutional clients. Among this strategic partnership there is a strong collaboration between the Investment Solutions team of La Banque Postale Asset Management and the Investment Solutions Center of Aegon Asset Management. This collaboration provides synergies in research and knowledge sharing on investment solutions for our clients. More information Frank Drukker, Sr. Business Development Director Aegon Asset Management Netherlands T (0) E. frank.drukker@aegonassetmanagement.com Fernand Schürmann, Partnership Relations Director Aegon Asset Management Netherlands T (0) E. fernand.schuermann@aegonassetmanagement.com 17

18 Important Information: This communication is provided by Aegon Asset Management (AAM) as general information and is intended exclusively for Institutional and Wholesale investors as well as Professional Clients as defined by local laws and regulations. This document is for informational purposes only in connection with the marketing and advertising of products and services and is not investment research, advice or a recommendation. It shall not constitute an offer to sell or the solicitation to buy any investment nor shall any offer of products or services be made to any person in any jurisdiction where unlawful or unauthorized. Any opinions, estimates, or forecasts expressed are the current views of the author(s) at the time of publication and are subject to change without notice. The research taken into account in this document may or may not have been used for or be consistent with all AAM investment strategies. References to securities, asset classes and financial markets are included for illustrative purposes only and should not be relied upon to assist or inform the making of any investment decisions. Forward looking statements contained in this document are based on the manager s beliefs and may involve certain risks, uncertainties and assumptions which are difficult to predict. Outcomes, including performance, are not guaranteed and may differ materially from statements contained herein. The information contained in this material does not take into account any investor's investment objectives, particular needs, or financial situation. It should not be considered a comprehensive statement on any matter and should not be relied upon as such. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to any particular investor. Reliance upon information in this material is at the sole discretion of the recipient. Investors should consult their investment professional prior to making an investment decision. AAM is under no obligation, expressed or implied, to update the information contained herein. Neither AAM nor any of its affiliated entities are undertaking to provide impartial investment advice or give advice in a fiduciary capacity for purposes of any applicable U.S. federal or state law or regulation. By receiving this communication, you agree with the intended purpose described above. Past performance is not a guide to future performance. All investments contain risk and may lose value. An issuer of bonds may be unable to make payments due to the client s managed account (known as a default). The value of bonds may fall as default becomes more likely. Both default and expected default may cause the account's value to fall. Investment grade bonds generally offer lower returns because of their lower default risk in comparison to high yield bonds which generally offer a comparatively higher return due to the increased risk of default. Currency rates may fluctuate significantly over shorter time periods and may reduce the returns of a portfolio significantly. The value of real estate and portfolios that invest in real estate may fluctuate due to losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses. Structured Products (such as ABS, MBS and CLOs) are complex instruments typically involving a high degree of risk and may not be suitable for all investors. The market value of these instruments may be affected by changes in economic, financial, and political environment (including but not limited to spot and forward interest and exchange rates), as well as market, maturity and credit quality of the issuer. Aegon Group companies utilize Aegon Asset Management (AAM) as a brand name to market their asset management products and services. The AAM group of companies includes the investment management services performed by various affiliates or their investment advisory business units and joint ventures. AAM is comprised of the following global entities: Aegon Asset Management US (Aegon AM US), Aegon Real Assets US (Real Assets), Kames Capital plc, Aegon Investment Management BV, Aegon Asset Management Asia LTD (AAM Asia), Aegon Asset Management Central and Eastern Europe (AAM CEE), Aegon Asset Management Pan-Europe BV (AAM PE), TKP Investments BV 18

19 (TKPI) and Aegon Asset Management Spain along with joint-venture participations in Aegon Industrial Fund Management Co. LTD (AIFMD), La Banque Postale Asset Management SA (LBPAM), Pelargos Capital BV (Pelargos), Saemor Capital BV (Saemor). This communication may be issued by the following entities: Kames Capital plc (Kames) is authorised and regulated by the Financial Conduct Authority and is additionally a registered investment adviser with the United States (US) Securities and Exchange Commission (SEC). Aegon Investment Management B.V. (AIMBV) and TKP Investment B.V. (TKPI) are registered with the Netherlands Authority for the Financial Markets as a licensed fund management company. Aegon Magyarország Befektetési Alapkezelő Zártkörűen Működő Részvénytársaság (AAM CEE) is registered with the National Bank of Hungary as a licensed fund management company. Aegon Asset Management Pan Europe B.V. (AAM PE) is an appointed introducer AAM affiliates and has branches in Germany, Spain and Japan. AAM PE does not operate in the Americas. Aegon Asset Management (Asia) Limited is licensed by the Securities and Futures Commission of Hong Kong to provide services in securities dealing and securities advising. Recipient shall not distribute, publish, sell, license or otherwise create derivative works using any of the content of this report without the prior written consent. 2018, Aegon Asset Management. 19