LDI Swap Funds and Gilt Funds

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1 LDI Solutions For professional investors only PAGE 1 LDI Swap Funds and Gilt Funds BMO Global Asset Management is a leading provider of Liability Driven Investment (LDI) solutions in the UK marketplace with a reputation for innovation and client-focused solutions. Our LDI Swap Funds and Gilt Funds offer clients access to effective and capital efficient LDI solutions, tailored to each client s unique hedging requirements. Contact us Institutional business: +44 () institutional.enquiries@ bmogam.com Our LDI Funds allow a pension scheme to hedge its interest rate and inflation risks without the need to eliminate its exposure to growth assets such as equities. Alex Soulsby, Head of Liability Driven Investment bmogam.com Background to Liability Driven Investment Liability Driven Investment (LDI) is about understanding the risks inherent in the liabilities of a pension scheme and providing asset solutions which reduce unrewarded risks. The value placed on the liabilities will move as interest rate and inflation expectations change over time. However, assets of the scheme may not show a similar change in value and therefore the scheme is exposed to the risk of asset and liability values not moving in line with each other. For many years, LDI has proved itself to be an invaluable tool in helping pension funds to manage such risks better. LDI structures enhance flexibility for pension funds with the inclusion of leverage. By leverage, we simply mean that we require less than of assets invested in LDI to hedge of liabilities. This allows the scheme to reduce risks whilst still being able to invest in growth assets such as equities. What is the key difference between a fully funded and partially funded strategy? Our LDI funds are partially funded or, put another way, they are leveraged. An LDI fund that is three times leveraged means that 1 invested in the fund will hedge 3 of liabilities. Pension schemes would like to match their liabilities by holding fixed income assets. At the same time many schemes also want to hold equities or other growth assets to generate return and perhaps to help repair any deficit that might exist. Leveraged LDI funds could be a solution to this dilemma. For example,

2 PAGE 2 Low cost and flexible hedging solutions Nominal interest rate, real interest rate or inflation* risks can be hedged separately *swaps only if a pension scheme wants to hedge m of liabilities using bonds then that scheme will need to invest m in bonds. However, if the scheme elects to hedge m of liabilities using a three times leveraged LDI fund, the scheme will only need to invest 33m in the LDI fund leaving 66m to invest elsewhere. Example showing a funded vs partially funded strategy: Fully funded LDI strategy m assets in LDI unleveraged strategy Partially funded LDI strategy 33m assets in LDI leveraged strategy (i.e. 3 times leverage) 66m in growth assets Provides a liability hedge of c. m Provides a liability hedge of c. m Our LDI Swap Funds Each fund consists of investments in two types of instruments: a) Interest rate and / or inflation swaps b) Collateral assets invested in a conservative money market strategy Each fund provides interest rate and / or inflation swaps in a five-year bucket which pension funds can combine to match their unique liability profile. Exposure in each bucket is achieved by means of swaps. The collateral assets of each fund are invested in short-term money market instruments. The benchmark for the collateral assets is the 7-day GBP LIBID. The leverage in each sub-fund varies with the shorter-dated sub-funds being more leveraged. In general, the fund targets an average leverage of three times. There are three series for hedging different types of liability risks: a) Nominal for hedging nominal interest rate risk b) Real for hedging real interest rate risk (nominal and inflation risks) c) Inflation only for hedging inflation risk only Our Leveraged Gilt Funds There are two series for hedging nominal and real liabilities. Each sub-fund provides exposure to a named gilt, on a leveraged basis. Leverage is generated through gilt repo or gilt total return swaps. The shorter-dated sub-funds are more leveraged but, on average, the leverage is about three times. The amount of exposure to the underlying gilt does not vary over time, at a unit level, meaning that pension schemes can accurately hedge their projected cash flows.

3 PAGE 3 LDI Swap Fund Range Maturity Common sterling liquidity fund LDI Nominal 1 LDI Real 1 LDI Inflation LDI Nominal 2 LDI Real 2 LDI Inflation LDI Nominal 3 LDI Real 3 LDI Inflation LDI Nominal 4 LDI Real 4 LDI Inflation LDI Nominal 5 LDI Real 5 LDI Inflation LDI Nominal 6 LDI Real 6 LDI Inflation LDI Nominal 7 LDI Real 7 LDI Inflation LDI Nominal 8 LDI Real 8 LDI Inflation LDI Nominal 9 LDI Real 9 LDI Inflation LDI Nominal LDI Real LDI Inflation Average 4x leverage Leveraged Gilt Fund Range Maturity: out to 5+ years Nominal Gilt 22 Index-linked Gilt 22 Nominal Gilt 27 Index-linked Gilt 27 Nominal Gilt 32 Index-linked Gilt 32 Nominal Gilt 38 Index-linked Gilt 37 Nominal Gilt 42 Index-linked Gilt 42 Nominal Gilt 46 Index-linked Gilt 47 Nominal Gilt 52 Index-linked Gilt 52 Nominal Gilt 55 Index-linked Gilt 55 Nominal Gilt 6 Index-linked Gilt 62 Nominal Gilt 68 Index-linked Gilt 68 Average 3x leverage LDI funds How are the investments in each fund determined? We can determine the sensitivity of a pension fund s liabilities to both inflation and interest rates. The sensitivities of the liabilities and existing fixed income assets are then aggregated into five-year maturity buckets that correspond with the LDI funds, as demonstrated below. Nominal Interest Inflation Sensitivities* ( s) Unhedged Corporate bonds Funded liabilities Unhedged Corporate bonds Funded liabilities Sensitivities** ( s) LDI Unhedged Corporate bonds Funded liabilities LDI Unhedged Corporate bonds Funded liabilities * Change is value for a.1% parallel shift in nominal interest rates ** Change is value for a.1% parallel shift in inflation rates Sensitivities* ( s) Sensitivities** ( s) 66+ Source: BMO Global Asset Management, for illustrative purposes only. Collateral assets LDI is envisaged as a risk reduction strategy and therefore we use low risk assets as collateral. For our swap funds, we use our Sterling Liquidity Fund. The Sterling Liquidity Fund invests in a range of high-quality assets with low maturity limits, which means that the fund should demonstrate a high level of price stability, low credit risk and high liquidity. For our gilt funds, we use the gilt that the particular sub-fund invests in.

4 PAGE 4 Leaders in LDI Liability Driven Investment is one of our key strategic pillars and it is one of our most rapidly growing areas of business. To date the team has implemented over 9bn in notional derivatives overlay transactions. The scale and importance of this capability means that we are committed to the continued growth and reinforcement of the product platform. Risk Management Provider of the Year 15 Team and resources Led by Alex Soulsby, the 18-strong team includes derivatives fund managers, quantitative analysts and investment specialists who are experts in derivatives, insurance, pensions, quantitative methods and fund management, with an average of 12 years in the industry. The team is well supported in its dealing activities by our client and business support functions. This includes a team of in-house lawyers, an independent risk oversight team, a large team of client directors supported by a client servicing team and a derivatives middle office team. LDI Provider of the Year 12, 13, 14 and 15 Liability-driven Investment F&C Management Glossary Inflation swap: This is an agreement between two parties to exchange a series of inflation-linked cash flows in exchange for fixed cash flows. Pension schemes typically hedge their inflation-linked liabilities by receiving inflation-linked cashflows in exchange for fixed cash flows. LDI Manager of the Year 11, 12 and 13 Interest rate swap: An interest rate swap is an agreement between two parties to exchange a series of cash flows. Typically a pension scheme would hedge its fixed liabilities by paying floating cash flows in exchange for fixed cash flows. Sale and repurchase agreement (gilt repo): This is a method of generating leverage within a gilt portfolio.

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6 PAGE 6 This information is for existing or professional investors only and is not intended for distribution to any other persons. This document is provided for information only and is not to be construed as investment advice to a recipient on the merits of their subscribing for any investment in the units of the F&C LDI Fund (the Fund ). This document does not constitute, or form part of, any solicitation of any offer to deal in the units of the Fund, nor shall it (or any part of it) or the fact of its distribution, form the basis of, or be relied on in connection with, any investment decision or any other purpose to invest in the same. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of any investment in the units of the Fund, and should consult its own legal counsel and financial, actuarial, accounting, regulatory and tax advisers to evaluate whether to make such an investment. No reliance may be placed for any purposes whatsoever on the contents of this document or on its completeness. All information herein regarding possible investment potential arising from the liability driven investment strategy for the Fund is indicative based on certain assumptions and current market conditions and is subject to change without notice. All other information (including market data and statistical information) has been obtained from various sources. With the exception of any information herein stated as being derived directly from the prospectus for the Fund, no representation or warranty, express or implied, is given and no responsibility or liability is or will be accepted by or on behalf of BMO Global Asset Management or by any of its subsidiaries, affiliates, employees, directors, officers or agents or any other person as to the accuracy, completeness or correctness of the information contained in this document or any other oral information made available and any such liability (whether in negligence or otherwise) is expressly disclaimed. Any analysis presented herein that indicates a range of outcomes that may result from changes in market parameters is not comprehensive, is not intended to suggest that outcome is more likely than another and may have been derived using BMO Global Asset Management proprietary models, historic data and subjective interpretation. The investments made by the Fund will include swap derivatives and therefore an investment in units in the Fund may give rise to substantial risk and will not be suitable for all investors. Transactions of the sort described in this presentation contain complex characteristics and risk factors. Past performance should not be seen as an indication of future performance. The value of investments and the income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. Information in this document is correct as at February BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority. CM7967 (2/16).