Capturing Economic Shifts

Transcription

1 Fixed Income August 217 EM Corporate Debt Earning a Place at the Table Jasper Sagoo Executive Director EMD Portfolio Manager Angus Bell Executive Director EMD Portfolio Manager Executive Summary Emerging Market (EM) corporates are as varied as the language, climate and cuisines of their home countries. In this publication we outline why we believe investors should consider a structural allocation to EM corporate debt, while also shedding light on why an allocation to this dynamic asset class makes sense in the current market environment. We ultimately conclude that this growing, diverse and high-yielding asset class has earned its place at the global investment table. Investors can gain exposure to the EM growth story through EM corporate debt. EM assets stand to benefit from a swing in the global economic pendulum from developed to emerging markets. Economic growth and middle class formation will create a new population of consumers for EM companies to sell their goods and services to. EM corporate debt is a core component of the fixed income opportunity set. The sector has grown over 3% in the last decade and now represents over 16% of the global corporate market. This rapid growth reflects rising investor appetite and deepening capital markets. EM corporate debt provides investors with a high quality source of yield and offers relative value versus other fixed income sectors. In case the world sneezes, EM resilience has increased. In recent years, EM sovereigns and EM corporates have taken necessary steps to build resilience. At the micro level we have observed credit-friendly trends such as conservative capital expenditure, moderate net debt growth and low leverage. EM corporate debt can diversify a broader portfolio. Our analysis shows that there is scope for global fixed income investors to improve risk-adjusted returns and reduce exposure to interest rate movements by adding EM corporate debt to their investment allocation. EXHIBIT 1: EM SNAPSHOT STATISTICS By 225, 45% of Fortune Global 5 companies are expected to be headquartered in EM, compared to 5% in 2 EM companies on average are 14% less levered than US companies EM corporate debt issuance has surpassed EM sovereign debt issuance since 213 EM corporate debt represents over 16% of the global corporate debt market EM share of global growth was 58% in % of the EM corporate debt investment universe is investment grade rated Source: Top Left - McKinsey Global Institute. For others please see references throughout publication. Diversification does not protect an investor from market risk and does not ensure a profit. Fixed Income Goldman Sachs Asset Management 1

2 EM Corporates Earning a Place at the Table August 217 Capturing Economic Shifts EM countries already capture a larger share of global economic growth than the developed world and their slice of the global economic pie is expected to rise further (see Exhibit 2). This growth will help lift over a billion people into higher income and middle classes by 225 and is set to transform the consumption landscape. EM companies are well placed to benefit from local growth and consumption potential. They also stand to benefit from growing global demand and rising EM-to-EM trade, both of which can help EM firms find new consumers and new markets for their goods and services. EXHIBIT 2: GROWING EM SHARE OF GLOBAL GROWTH Emerging Markets Developed Markets 64% 36% 43% 42% 38% % 58% 62% Source: IMF World Economic Outlook database, GSAM. GDP based on Purchasing Power Parity share of world total. Data as of April 217. Capturing Global Demand EM companies are claiming global market share in many sectors (see Exhibit 3). South Korean technology firms have already gained ground in global markets, and more than 1 out of every 3 pills sold in the US is manufactured by Indian pharmaceutical firms. Looking ahead, we expect developed market taste buds to become even more accustomed to EM brands; thereby supporting growth potential for EM corporates. EXHIBIT 3: EM COMPANIES GAIN GROUND IN GLOBAL MARKETS EM Companies Change in Global Market Share (2-215) Oil & Gas Financial Services Telecommunications Industrials Basic Materials Technology Utilities Health Consumer Goods & Services Global Market Share (%) Source: GS Global Investment Research, Datastream. Based on top 5 companies by sales in each sector. Fixed Income Goldman Sachs Asset Management 2

3 EM Corporates Earning a Place at the Table August 217 EM Consumer Force EM middle class formation and changing consumer habits will create new consumers with new demands in new markets, and ultimately new opportunities for EM companies. Between now and 225, over a half of the world s middle class population will be based in an emerging market country (see Exhibit 4). As incomes grow, spending patterns will evolve from essentials to discretionary items and different consumer cohorts will emerge with different brand preferences. In China, discretionary desires are already growing among millennial populations, and domestic brands are starting to displace foreign brands in major items purchased (see Exhibit 4). EXHIBIT 4: RISING EM MIDDLE CLASS MAY SUPPORT EM BRAND POWER % of Global Middle Class 1 8 Developed Markets Emerging Markets By 225 over 5% of the world s middle class population is expected to be based in an EM country Smartphone Television 6 Kitchen goods 4 Cosmetics 2 Beer ' '5 '1 '15 '2 '25 '3 '35 '4 '45 '5 Years Sportswear Change in China Domestic Brand Share ( ) (%) Left Chart Source: Kharas, H. (21), "The Emerging Middle Class in Developing Countries", OECD Development Centre Working Papers, No. 285, OECD Publishing, Paris. Right Chart Source: Euromonitor, CLSA. Based on change in domestic brand market share between 211 and March 217. Made in EM (for EM) Rising trade between EM countries is also helping EM companies find new markets for their goods and services. Between 2 and 213, China s volume of imports from Africa rose over 2% 1, while strong Arab demand for construction and power generation projects has benefited firms in Turkey - trade between the two regions has grown consistently over the past twelve years 2. Looking ahead, the One Belt, One Road initiative is expected to pave the way for a series of infrastructure projects that could create opportunities for companies in transport, technology and construction sectors, across several regional spheres including Africa, Asia, Eastern Europe, the Middle East and Russia. In Latin America, expansion of the Pacific Alliance has potential to bring about growth benefits for businesses in Chile, Colombia, Mexico and Peru. 1 Source: Macrobond. 2 Source: Investment Support and Promotion Agency of Turkey. Fixed Income Goldman Sachs Asset Management 3

4 EM Corporates Earning a Place at the Table August 217 Core Component of Global Fixed Income Markets EM economic growth has been accompanied by growth in EM asset classes. Deeper capital markets and rising investor demand has helped the EM corporate debt sector grow 3% in the last decade to become a core component of the global fixed income opportunity set. This diverse asset class is largely investment grade, high yielding and offers relative value versus other fixed income sectors. Fast-Growing and Significant The EM corporate debt sector now represents over 16% of the global corporate debt market (see Exhibit 5). The total stock of EM corporate external debt reached $1.9tn this year, having surpassed the $1tn landmark in 212 and has exceeded the stock of US high yield debt since 213. EXHIBIT 5: OVER 16% OF THE GLOBAL CORPORATE DEBT MARKET IS EM CORPORATE DEBT US$ bn 12, 1, 8, 6, 4, 2, EM Corporate Debt Stock (left) Euro Corporate Debt Stock (left) US High Yield Debt Stock (left) US Investment Grade Debt Stock (left) EM Corporate Debt as a % of total debt stock (right) 212: EM corporate debt stock exceeds $1 trillion Source: JP Morgan, Bloomberg, Bond Radar. As of February 217. EM Corporate debt data reflects non-sovereign external debt. 213: EM corporate debt stock exceeds US high yield debt stock ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 Years % Realizing Relative Value EM corporate debt can provide investors with a high quality source of yield versus other fixed income sectors, and also has lower duration exposure than EM sovereign debt (see Exhibit 6). Over 6% of the investment universe is investment grade rated, which may seem surprising to those who assume investing in EM corporate debt requires compromise on credit quality. EXHIBIT 6: HIGH QUALITY SOURCE OF YIELD WITH RELATIVELY LOW DURATION EXPOSURE 3 Yield to Maturity (%) Duration (years) Average Credit Rating German 1yr Bund US 1yr Treasury Barclays Global Treasury Barclays Global Aggregate Euro IG Corporate Global IG Corporate EMD Sovereign (Local Currency) EMD Corporate (USD) EMD Sovereign (External) Euro HY Corporate AAA AAA AA AA- A- A- BBB+ BBB- BB+ BB- B US HY Corporate Fixed Income Goldman Sachs Asset Management 4

5 Financial Oil & Gas TMT Utilities Consumer Metals & Mining Industrial Real Estate Diversified Infrastructure Pulp & Paper Transport EM Corporates Earning a Place at the Table August 217 Since 213, investment grade rated EM corporate debt has provided a stable spread premium versus DM corporate debt (see Exhibit 7). 3 This premium in part reflects factors such as lower liquidity and higher EM sovereign risk. However, astute security selection combined with top-down macro analysis can unveil idiosyncratic opportunities where spread premium adequately compensates for risks. EXHIBIT 7: STABLE SPREAD PREMIUM OVER DM COPRORATE DEBT SINCE 213 OAS (bps) 2 EM IG Corporate Debt - US IG Corporate Debt EM IG Corporate Debt - European IG Corporate Debt Source: J.P.Morgan, Bloomberg, Barclays. As of June 217. Investment Grade (IG). Option adjusted spread (OAS). Menu of Opportunities The diverse EM corporate debt investment universe 4 offers exposure to over 55 issuers across over 5 countries and a broad array of sectors (see Exhibit 8). EXHIBIT 8: BROAD INVESTMENT UNIVERSE Regional Breakdown (MV, %) 6 17 Industry breakdown (MV, %) Africa Europe Middle East Asia Latin America Source: J.P. Morgan CEMBI Broad Diversified Index. As of February 217. GSAM calculations. Technology, Media and Telecommunications (TMT). 3 Source JP Morgan, Barclays, Citi Group, Credit Suisse, GSAM. Duration as of June 3, 217. Past performance does not guarantee future results, which may vary. 4 As defined by the J.P. Morgan Corporate Emerging Markets Bond Index Broad Diversified Index, a commonly used index for EM corporate bonds. Fixed Income Goldman Sachs Asset Management 5

6 EM Corporates Earning a Place at the Table August 217 Traditionally, EM companies have been considered the world s supplier of commodities, textiles and telecommunications services. While these industries still account for a large proportion of the EM corporate debt investment universe, going forward, investment in innovation may see credible EM companies emerge in a broader range of sectors. Evidence of this investment includes rising EM country expenditure on research and development, and a growing number of EM patent applications, which exceeded those filed by the developed world for the first time in (see Exhibit 9). EXHIBIT 9: PATENTLY OBVIOUS EM Patent Applications ('s) Singapore Mexico Brazil India Source: World Intellectual Property Organization, as of 215. Repaired, Resilient and Rising to Global Standards EM assets are considered to be particularly vulnerable to external shocks. However, in recent years, many EM sovereigns and companies have taken steps to improve fundamentals. We believe this has and will strengthen resilience when faced with future external shocks. Concurrently, from an investment standpoint, we are encouraged by increased adoption of global reporting standards. Improving Sovereign and Macro Backdrops A company s performance can be supported or challenged by its sovereign and macro backdrop. While the macro setting still varies significantly across emerging markets, certain countries are in the midst of economic recovery and many governments have taken necessary steps to improve the operating environment for businesses. This includes transitioning to more conventional fiscal and monetary policy. Argentina is a prime example; since coming into office in 215, the Macri Administration has liberalized the exchange rate market, strengthened the central bank and adopted market-friendly regulations. These measures have enabled Argentinian corporates to access international capital markets. Nonetheless, we are alert to the still challenging sovereign and political backdrop across many EM markets and see scope for further improvements. 5 Source: World Intellectual Property Organization, based on 12 leading EM countries. Fixed Income Goldman Sachs Asset Management 6

7 EM Corporates Earning a Place at the Table August 217 Corporate Conservatism While we recognize there is a high degree of dispersion across issuers, sectors and countries, in aggregate, we have observed improvements in corporate behaviors in recent years. In response to a testing operating environment, EM companies have adopted a prudent approach to capital expenditure (see Exhibit 1) and have sought to reduce costs. This has resulted in muted net debt growth levels (see Exhibit 1) and helped to improve credit metrics. EM companies on average are 14% less levered than US companies 6. Companies across the commodity complex have already demonstrated improved resilience in the last couple of years, and we see investment potential in Brazilian and Russian oil companies, particularly those with strong balance sheets and competitive cost structures. EXHBIT 1: PRUDENT APPROACH TO CAPEX AND MODERATE NET DEBT GROWTH CAPEX Change YoY (%) Global (ex. Real Estate) Emerging Europe Middle East/Africa Asia Latin America Net Debt Growth YoY (%) Global (ex. Real Estate) Emerging Europe Middle East/Africa Source: J.P.Morgan, Bloomberg. Based on an evolving set of external bond issuers with debt outstanding and excluding 1% quasi-sovereign, financials, real estate and defaulted companies. Asia Latin America Adopting Global Standards From an investment analysis perspective, we are encouraged by better access to company data and a rise in the number of EM companies reporting under International Financial Reporting Standards (IFRSs). Furthermore, around 9% of instruments in the EM corporate bond benchmark are issued under UK or New York law, providing a sturdy foundation for legal recourse 7. 6 According to data compiled by Bank of America Merrill Lynch on a gross leverage basis as of June Source: Bloomberg, based on the J.P. Morgan Corporate Emerging Markets Bond Index Broad Diversified Index. Fixed Income Goldman Sachs Asset Management 7

8 EM Corporates Earning a Place at the Table August 217 Diversification Benefits We believe EM corporate debt is an important component of the global investment opportunity set. Our analysis shows that global fixed income investors can increase potential annual returns by 75bps, with no material change in risk (see Exhibit 11). The addition of EM corporate debt may also reduce overall sensitivity to changes in interest rates, given its lower duration exposure. EXHIBIT 11: POTENTIAL FOR GLOBAL INVESTORS TO IMPROVE RISK-ADJUSTED RETURNS Annualized Return (%) % EM Corporate % EM Corporate 75% Global Aggregate Risk: No change Return: + 75 bps Duration: -.57 yrs 3. 1% Global Aggregate Risk (standard deviation) Source: GSAM, J.P.Morgan and Barclays Indices. As of February 217. Efficient frontier plotted on last 1 year risk (standard deviation) and annualized return metrics. EM Corporate index: JPM CEMBI Broad Diversified index, Global investor allocation is based on Global Aggregate: Barclays Global Aggregate Bond Index. Duration used in the above chart is Option Adjusted Duration. Diversification does not protect an investor from market risk and does not ensure a profit. Past performance does not guarantee future results, which may vary. The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be Conclusion: Recipe for Success The EM corporate debt sector has grown to become a staple component of the global fixed income opportunity set. A structural allocation to this high yielding and high quality asset class can help investors capture a shift in economic potential from developed to emerging markets. The investment universe is already extremely diverse and we expect it to become even riper with opportunity as EM capital markets deepen and as innovative EM companies emerge. Investors should view EM corporate debt as an extension to existing corporate credit allocations or as a compliment to EM sovereign exposure. An improvement in corporate fundamentals due to conservative behavior in recent years and relative value versus developed market corporate debt are additional factors that support an allocation to the asset class. In our view, EM corporate debt deserves a place at the investment table. Truly active managers can cook up a recipe for successful alpha generation by combining investment ingredients such as growth potential, high yields and diversity with their ability to combine detailed bottom-up security analysis with top-down macro insights. Fixed Income Goldman Sachs Asset Management 8

9 EM Corporates Earning a Place at the Table August 217 General Disclosures THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO. Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. This material contains information that pertains to past performance or is the basis for previously-made discretionary investment decisions. This information should not be construed as a current recommendation, research or investment advice. It should not be assumed that any investment decisions shown will prove to be profitable, or that any investment decisions made in the future will be profitable or will equal the performance of investments discussed herein. Any mention of an investment decision is intended only to illustrate our investment approach and/or strategy, and is not indicative of the performance of our strategy as a whole. Any such illustration is not necessarily representative of other investment decisions. This material has been prepared by GSAM and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. This information may not be current and GSAM has no obligation to provide any updates or changes. It should not be relied upon in making an investment decision. This material contains information that discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It also pertains to past performance or is the basis for previously-made discretionary investment decisions. This information should not be construed as a current recommendation, research or investment advice. It should not be assumed that any investment decisions shown will prove to be profitable, or that any investment decisions made in the future will be profitable or will equal the performance of investments discussed herein. Any mention of an investment decision is intended only to illustrate our investment approach and/or strategy, and is not indicative of the performance of our strategy as a whole. Any such illustration is not necessarily representative of other investment decisions. United Kingdom and European Economic Area (EEA): In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority. Switzerland: For Qualified Investor use only - Not for distribution to general public. This document is provided to you by Goldman Sachs Bank AG, Zürich. Any future contractual relationships will be entered into with affiliates of Goldman Sachs Bank AG, which are domiciled outside of Switzerland. We would like to remind you that foreign (Non-Swiss) legal and regulatory systems may not provide the same level of protection in relation to client confidentiality and data protection as offered to you by Swiss law. Asia Pacific: Please note that neither Goldman Sachs Asset Management International nor any other entities involved in the Goldman Sachs Asset Management (GSAM) business maintain any licenses, authorizations or registrations in Asia (other than Japan), except that it conducts businesses (subject to applicable local regulations) in and from the following jurisdictions: Hong Kong, Singapore and Malaysia. This material has been issued for use in or from Hong Kong by Goldman Sachs Asset Management (Hong Kong) Limited, in or from Singapore by Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: H) and in or from Malaysia by Goldman Sachs (Malaysia) Sdn Berhad (88767W). Australia: This material is distributed in Australia and New Zealand by Goldman Sachs Asset Management Australia Pty Ltd ABN , AFSL ( GSAMA ) and is intended for viewing only by wholesale clients in Australia for the purposes of section 761G of the Corporations Act 21 (Cth) and to clients who either fall within any or all of the categories of investors set out in section 3(2) or sub-section 5(2CC) of the Securities Act 1978, fall within the definition of a wholesale client for the purposes of the Financial Service Providers (Registration and Dispute Resolution) Act 28 (FSPA) and the Financial Advisers Act 28 (FAA),and fall within the definition of a wholesale investor under one of clause 37, clause 39 or clause 4 of Schedule 1 of the Financial Markets Conduct Act 213 (FMCA) of New Zealand (collectively, a NZ Wholesale Investor ). GSAMA is not a registered financial service provider under the FSPA. GSAMA does not have a place of business in New Zealand. In New Zealand, this document, and any access to it, is intended only for a person who has first satisfied GSAMA that the person is a NZ Wholesale Investor. This document is intended for viewing only by the intended recipient. This document may not be reproduced or distributed to any person in whole or in part without the prior written consent of GSAMA. This information discusses general market activity, industry or sector trends, or other broad based economic, market or political conditions and should not be construed as research or investment advice. The material provided herein is for informational purposes only. This presentation does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Canada: This material has been communicated in Canada by Goldman Sachs Asset Management, L.P. (GSAM LP). GSAM LP is registered as a portfolio manager under securities legislation in certain provinces of Canada, as a non-resident commodity trading manager under the commodity futures legislation of Ontario and as a portfolio manager under the derivatives legislation of Quebec. In other provinces, GSAM LP conducts its activities under exemptions from the adviser registration requirements. In certain provinces, GSAM LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts and is not offering to provide such investment advisory or portfolio management services in such provinces by delivery of this material. Japan: This material has been issued or approved in Japan for the use of professional investors defined in Article 2 paragraph (31) of the Financial Instruments and Exchange Law by Goldman Sachs Asset Management Co., Ltd. Germany: Bei diesen Informationen handelt es sich um Werbung. Diese Dokument darf nur als Ganzes verwendet werden, die Verwendung einzelner Seiten ist nicht genehmigt. Diese Dokument dient der Unterstützung unserer Vertriebspartner und ist für die Berater in Deutschland, Österreich und der EEA bestimmt. 1. GENERAL INFORMATION: Goldman Sachs AG is a stock corporation (Aktiengesellschaft) established under German law with its registered seat in Friedrich Ebert Anlage 49 (Messe Turm), 6327 Frankfurt am Main, Germany, Tel: +49 () For further information on Goldman Sachs AG and its services please refer to your Goldman Sachs contact. Goldman Sachs AG is authorised and regulated by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht),Graurheindorfer Str. 18, Bonn and Lurgiallee 12, 6439 Frankfurt am Main, Germany. Goldman Sachs AG provides certain services including reception and transmission of orders in relation to one or more financial instruments, portfolio management and investment advice as well as advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings. Communication between Goldman Sachs AG and its clients will be in English and/or German, generally orally, in writing (including fax), by or other electronic means. Please note, however, that orders for the purchase or sale of financial instruments must be given to Goldman Sachs AG orally unless explicitly agreed with Goldman Sachs AG otherwise. 2. CLIENT CLASSIFICATION: Based on the information available to Goldman Sachs AG, Goldman Sachs AG will categorise you as a professional client and you will benefit from those regulatory protections afforded to that category of client under the WpHG. You should be aware that professional clients will not be entitled to certain protections afforded by the WpHG to retail clients. Goldman Sachs AG will provide you with further information on client classification upon request. Fixed Income Goldman Sachs Asset Management 9

10 EM Corporates Earning a Place at the Table August NATURE, FREQUENCY AND TIMING OF REPORTS: Generally, Goldman Sachs AG does not execute orders, but will place them with executing brokers, including Goldman Sachs group companies. Goldman Sachs AG will not send the client a trade confirmation but Goldman Sachs AG will endeavour that the executing broker will provide the trade confirmation as soon as possible and no later than legally required. Upon request, Goldman Sachs AG provides the client with information about the status of his order. 4. HOLDING OF FINANCIAL INSTRUMENTS AND CLIENT MONIES: Generally, Goldman Sachs AG does not hold custody over any of its clients' assets or client money. Matters of custody and client money will be dealt with by the respective custodian under its respective governing law. Further details are available on request. However, Goldman Sachs AG is a member of the Compensation Scheme of German Banks (Entschädigungseinrichtung deutscher Banken GmbH) and the Deposit Scheme of the Association of German Banks (Einlagensicherungsfonds des Bundesverban des deutscher Banken). 5. ORDER EXECUTION : Goldman Sachs AG has put in place arrangements that enable Goldman Sachs AG to comply with applicable requirements in relation to best execution as they apply to investment firms providing services of reception and transmission including an execution policy (the "Execution Policy") information on which is set out below. 5.1 Scope of the Execution Policy: Goldman Sachs AG's Execution Policy applies to clients of Goldman Sachs AG when Goldman Sachs AG receives and transmits orders on behalf of clients and places them with Goldman Sachs AG affiliates or third parties, in each case in respect of financial instruments covered by MiFID and the German Securities Trading Act (Wertpapierhandelsgesetz or "WpHG"). 5.2 The relevant obligation: When Goldman Sachs AG receives and transmits an order on behalf of a client or places an order with another entity (including affiliates of Goldman Sachs AG) for execution Goldman Sachs AG will, subject to any specific client instructions, take all reasonable steps to obtain the best possible result taking into account the factors identified in accordance with Goldman Sachs AG's Execution Policy. In such circumstances, Goldman Sachs AG will either determine the ultimate execution venue and give the other broker or dealer a specific instruction to that effect, or Goldman Sachs AG will have satisfied itself that the other broker or dealer has arrangements in place to enable Goldman Sachs AG to comply with its best execution obligation. When Goldman Sachs AG quotes or negotiates with a client the terms of a transaction in which an affiliate is willing to deal with such client as principal for its account, therefore the Execution Policy will not apply, unless a client requests otherwise and Goldman Sachs AG agrees to such request 5.3 Executing firms: Goldman Sachs AG includes in its Execution Policy details of the various executing firms which it accesses for each of the financial instruments covered by MiFID or WpHG in respect of which Goldman Sachs AG places or transmits orders to other entities for execution. Goldman Sachs AG includes those execution firms in its Execution Policy that it believes enable Goldman Sachs AG to obtain on a consistent basis the best possible result when placing client orders. Goldman Sachs AG will usually transmit the orders received for execution to an executing firm for all financial instruments (including equities and fixed income instruments) to a third party or to one of Goldman Sachs AG's affiliates such as Goldman Sachs International, London, to Goldman, Sachs & Co., New York, and to Goldman Sachs Bank AG, Zurich. 5.4 Relevant factors: In circumstances where a client has been classified as a professional client, subject to any specific instructions that Goldman Sachs AG accepts from clients, Goldman Sachs AG takes into account a range of factors that allow Goldman Sachs AG to comply with its requirements in relation to best execution as they apply to investment firms providing services of reception and transmission of orders. These may include price, costs, speed, likelihood of execution and settlement, together with any other consideration relevant to the order. In determining what is the best possible result for a client, Goldman Sachs AG does not compare the results that can be achieved for a client on the basis of its Execution Policy and fees with results that might be achieved for a client by another investment firm on the basis of that firm's execution policy or a different structure of commission or fees, nor does Goldman Sachs AG compare the differences in its own commissions or fees which are attributable to the nature of the services that Goldman Sachs AG provides to clients. 5.5 Monitoring and review: Goldman Sachs AG monitors the effectiveness of its order execution arrangements and Execution Policy on an ongoing basis to identify and implement any appropriate enhancements. In addition, Goldman Sachs AG regularly reviews whether the brokers and dealers to whom it transmits orders for execution and with whom Goldman Sachs AG may place orders provide for the best possible result for its clients on a consistent basis and whether Goldman Sachs AG needs to make changes to its execution arrangements. Goldman Sachs AG will notify its clients of any material changes of its Execution Policy. 6. CONFLICTS OF INTEREST: Goldman Sachs AG and its European affiliates ("Goldman Sachs") offer a wide range of financial services to many clients. The broad range of services, such as investment research, investment advice, trading, asset management, corporate finance business including underwriting or selling in an offering of securities and advising on mergers and acquisitions, and the diverse group of clients and products may give rise to a number of competing interests. Goldman Sachs has established, implemented and maintains a written conflicts of interest policy which reflects its approach to managing such competing interests. Goldman Sachs has identified circumstances with reference to specific services and activities, which may give rise to a conflict of interest entailing a material risk of damage to the interests of one or more of its clients. To manage such conflicts Goldman Sachs has principles, procedures and measures that are designed to ensure that the services provided or activities conducted are carried out with integrity and an appropriate degree of independence to protect the interests of clients. These principles, procedures and measures include the prevention or control of information exchange, appropriate organisational structures and supervisory roles (to prevent inappropriate influence of one person over another, or the involvement of a person where such involvement could impair the proper management of conflicts of interest), and avoiding any direct link between the remuneration of employees and revenues generated by them. The policy provides that in certain circumstances it may be appropriate for Goldman Sachs to disclose the general nature of a conflict of interest to aclient. Further details of Goldman Sachs' conflicts of interest policy are available on request. 7. STATEMENT OF RISKS AND NATURE OF FINANCIAL INSTRUMENTS: A client should not deal in a financial instrument unless such client understands the nature and associated risk. A client should also be satisfied that the product is suitable in light of the client's investment objectives,risk affinity, other personal circumstances and the client's financial position. Goldman Sachs AG holds available the information on risks and nature of financial instruments. 8. COST AND ASSOCIATED CHARGES: The actual amounts will depend on the service provided to a client. Each client will be provided with information on applicable fees and their method of calculation in writing prior to the provision of an investment service. If you would like additional information on Goldman Sachs AG or any of its affiliates contact your usual Goldman Sachs contact. Confidentiality No part of this material may, without GSAM s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. 217 Goldman Sachs. All rights reserved. Date of first use: 1/17/ OTU // 9916-OTU Fixed Income Goldman Sachs Asset Management 1