2015 High Yield Market Outlook As Goes Energy, So Goes the Market

Transcription

1 2015 High Yield Market Outlook As Goes Energy, So Goes the Market As of December 31, 2014 Going into 2015, the high yield market s attention is split between positioning for an impending change in Fed interest rate policy and reassessing exposure to the energy sector in light of the recent collapse in the price of oil. The recent volatility has been exacerbated by an increased liquidity premium brought on in some part by regulatory changes that limit investor capital committed to high yield trading, or reduced dealer inventory levels for proprietary trading and market making. For long term strategic investors less beholden to short termism or immediate mark-to-market effects, taking advantage of the illiquidity premium can create attractive opportunities for longer term total returns where the risk of default is overblown by negative market technicals. Market Overview The Fed was a dominant theme in 2014, but despite the final wind down of the Quantitative Easing program and a consensus in calls for higher rates, YTD Treasury yields moved lower not higher, with a bias toward a curve flattening that saw higher duration high yield outperform the shorter end of the curve. The past year saw 3 phases of pronounced spread widening in the high yield market: one in July, triggered by a rise in geopolitical risk and a fear of higher rates on the back of an improving U.S. macro outlook; one in September and early October triggered by another speculative up move in Treasury rates, a continuation of geo-political risk, and a pickup in new issue activity that pushed on an already weak market; and thirdly the ongoing move in November and December driven primarily by the collapse in energy commodities. Each of these phase shifts was exacerbated by outflows from high yield and a lack of dealer support, with the subsequent illiquidity causing bid prices to gap down, sometimes on limited trading volumes. While the Broad High Yield Index i return was 5.6% in June, the full year ended with a lackluster 2.5% total return, driven by a -7.4% decline in the Energy sector, which makes up just under 15% of the high yield universe. The shakeout leaves us with reset valuation metrics that look much more attractive, with an average yield to worst of 6.6% and option adjusted spread of 500 bps, versus where we started 2014, at 5.6% and 394 bps respectively. Monegy s 2015 Expectations Scanning the fixed income universe, one needs to dip into fairly high risk regions in order to achieve comparable yields to that on offer for high yield corporates: Greek sovereigns or emerging market debt for example. Within U.S. high yield corporates, we are past the midpoint of the credit cycle, and while fundamentals remain sound, investor perceptions and changes in tactical positioning could continue to drive increased volatility in near term mark-to-market. The technical backdrop will provide less forward momentum if inflows slow, and bid/ask spreads are likely to be amplified by reduced dealer inventory capacity. Ultimately, the return of volatility to the high yield market should result in increased dispersion across asset managers, and there will be opportunities for investors taking a longer term strategic view of the asset class. While acknowledging that there is a lot of uncertainty regarding what will happen to the energy sub-sector, and how that will impact the overall high yield averages, we are predicting a 6% return for ex-energy high yield, and a lower 5% for leveraged loans. Our forecast is based on expectations for only modestly higher risk-free interest rates with any moves back-ended, low levels of realized defaults, and opportunity for credit spread contraction to partially offset any move higher in benchmark rates. When adding in the Energy sector, a rebound could take returns into the high single digit range, while sustained low energy prices could see another low single digit year for the combined index. In a year such as we are facing, there is a wider than normal range of plausible outcomes. Taking the three key return contributors (credit spreads, interest rates, and defaults) in turn: Credit Risk Credit spreads have recently blown out, with the energy sector leading to a wider overall average. At a current level of approximately 525 bps for the broad index, there is a bifurcation in the high yield market. There is ample room for spread tightening in the energy sector if oil prices and the supply/demand imbalance recover, but as we alluded to above, a prolonged period of low energy prices will lead to wider spreads for marginal issuers and a higher rate of default beyond Within the non-energy sector, where fundamentals remain sound and the tailwind of an improving U.S. macro environment will continue to lift demand, there is room for spread contraction to partially offset any prospective increase in risk free rates, and recent volatility has created more attractive valuations across many issuers. Interest Rates With respect to the Fed, there is a growing chorus of dissenters agitating for a rise in short term rates. However, while the U.S. labour market has seen some positive momentum, the cumulative payrolls have only

2 recently recovered the number of jobs lost in the great recession (not accounting for population growth), wage gains remain poorly distributed, and inflation is well below threshold. As such, we maintain a bias for the Fed to keep short rates anchored at stimulative levels, with any token increase back ended and limited in size. Longer rates will be more volatile, but we believe the 10 year will end the year bps higher, with a bias toward curve flattening. Monetary policy outside the U.S. most notably the ECB ii and BOJ iii will continue to stimulate low yields and higher risk asset prices. Default Rates We expect a marginal increase in default rates in 2015, but ultimately for rates to remain below 3% and for default activity to be concentrated in issues currently rated CCC or worse. There is likely to be some concentration in defaults within the energy sector given both the fundamental stresses currently impacting that market, but also due simply to the volume of high yield issuance that has recently come out of that sector. However, while there is risk of a dramatic increase in energy defaults long-term if energy commodity prices remain suppressed for an extended period, the prevalence of near-term price hedging activity coupled with liquidity on hand and the ability to curtail some capital expenditure activity should combine to limit the number of defaulting issuers this year and 2014 have been record years for high yield issuance with over $370 billion coming to developed market high yield in each year. With limited refinancing needs in 2015 and 2016, and with a trend toward higher yields, the pace of refinancing activity is likely to slow in M&A and other opportunistic activity will likely continue at pace, but will be opportunistic outside of a limited roster of deals already in the pipeline or bridged by underwriters. Fund flows in 2014 have been volatile, linked directly to the 3 periods of acute volatility. For high yield bond ETFs and mutual funds, fund flows have been essentially flat with $1.1 billion flowing out of the asset class. For the floating rate sector, over $16 billion left the market in 2014 (after $54 billion came in in 2013), which we attribute to investors capitulating on premature speculative positioning around rising rates with falling retail and institutional demand offset by strong CLO demand. For 2015, it is reasonable to expect that the outflows from floating rate will slow, and that there may be further outflows from high yield bonds contingent on the uncertain outlook for the broader energy sector. While tactical investors concerned with the recent bouts of illiquidity may be considering reducing exposure to high yield in the near term, we expect longer term investors to see these wider spreads as an opportunity to capture higher total returns as the nonenergy fundamental backdrop and yield pickup relative to alternative fixed income asset classes appear more attractive at current levels. Potential Headwinds Energy prices are the most obvious wildcard going into 2015, and there is much uncertainty around how the current imbalance will resolve. Strategically, it appears OPEC or more specifically Saudi Arabia are committed to keeping prices low enough to shutter a significant volume of alternative oilfields and appear unwilling to sacrifice market share to remove excess supply when many of the new U.S. shale plays are higher cost and shorter lived. Below the market s surface there is a deeper underlying fear that has been labelled illiquidity, but which can be understood more simply as an excess of supply over demand whenever sellers have come to market in force. Whether because of regulatory changes that limit investor capital committed to high yield trading, or reduced dealer inventory levels for proprietary trading and market making, the impression and worry among tactical high yield investors is that if a great rotation emerges, there won t be enough buyers at current prices to absorb heavy volumes of selling activity. We remain cautious of macro risks in the Euro-zone, Japan and China, and have not forgotten that there are material imbalances in global trade patterns. Risks to global economic growth from a slowdown in China, or a return of aversion to marginal Euro countries will spread to developed markets through both trade statistics and market prices. There has been a return to higher leverage in high yield, as borrowers have taken advantage of the intense demand for spread product. One negative side effect for investors stemming from such strong demand has been the ability of borrowers to strip out covenants and higher pricing protections. One side effect of the recent volatility is that credit terms for more issuers should tilt in favour of lenders. Monegy Strategy We continue to adhere to our rigorous investment process that highlights disciplined bottom up security selection, ongoing monitoring and the balancing of risk and return. We remain highly diversified in our portfolios with no material overexposure to individual issuers (typically 1% maximum).

3 On balance, while we are adapting to the new realities in the energy sector by paring exposure to servicers and E&P iv and selling down exposure to issuers exhibiting the highest risk of default in an extended low oil scenario, at a market level our target is to remain risk neutral by underweighting the highest and lowest risk issuers across our strategies. We remain underweight CCC rated exposure in our Broad and Global strategies. THANK YOU Once again, we would like to thank all of our existing and prospective clientele for continuing to support Monegy, and we look forward to another profitable year in high yield. Ex-energy, we are comfortable taking on more risk given our perception of valuations at these new levels, and based on an assumption of continued albeit moderate U.S. economic improvement. We believe that security selection and sector weighting will be the key components driving excess returns in 2015, and believe we will see more dispersion across total returns by issuer and sector. With respect to duration we remain underweight the longest bucket of high yield issuers (>7 years), which is primarily a function of credit concerns for long dated bonds. While we are not predicting an aggressive rate hiking stance by the Fed, we expect the market to move in anticipation of official monetary policy. While 2015 is likely to see less robust demand than in past years, we expect investors to continue to see high yield as a highly attractive asset class in which to find absolute yield in a low rate environment, and with global macro risks that should continue to drive investors to the relative safety of U.S. borrowers. Where there is forced selling by other market participants, either for liquidity or tactical risk aversion reasons, we will seek to opportunistically add to our positions in high quality liquid issuers at attractive levels.

4 Monegy Monegy s team of experienced investment professionals has specialized in managing high yield credit portfolios for over 15 years, currently with US$2.2 billion in assets under management. We provide a full suite of asset management solutions for institutional, retail and high net worth investors, including segregated accounts, pooled funds and a selection of mutual fund investments on various platforms. Our objective is to achieve attractive long-term risk-adjusted returns, while providing capital protection and superior client service. We offer the following opportunities to invest in high yield: Quality High Yield Bond Strategies, geared toward a more risk-averse clientele; Broad High Yield Bond Strategies, tailored for investors with a higher risk tolerance; and Floating Rate and Leveraged Loan Strategies, aimed at investors looking to position for rising base interest rates, with higher downside protection given the senior position in the capital structure. Global High Yield Bond Strategies, aimed at investors seeking a higher exposure to non-us high yield corporate issuers. Key Elements of Our Style Rigorous Asset Selection Supported by Quantitative and Fundamental Credit Analysis High Yield Team Sadhana Valia, CFA Senior Portfolio Manager and Head of High Yield o MBA (University of Chicago) o B. Commerce Honours (Carleton University) o 30 years of investment experience Lori Marchildon, CFA Portfolio Manager o MA (Queen s University) o BA Economics (University of Western Ontario) o 19 years of investment experience Vincent Huang, CFA Associate Portfolio Manager o MBA (York University Schulich School of Business) o BA - Economics (Beijing University) o 12 years of investment experience Daniel Brennand, CFA Senior Trader/ Credit Analyst o MA (University of Toronto) o BA Economics & Politics (U of Western Ontario) o 14 years of investment experience Jason Anderson, CFA Senior Credit Analyst o MBA (York University Schulich School of Business) o BA Finance & Economics (U of Western Ontario) o 15 years of investment experience Risk-Adjusted Portfolio Construction and Monitoring High Levels of Diversification Focus on Low Volatility, Stable Long-Run Returns Disciplined Approach to Sell Decisions Rory Buchalter, CFA Senior Credit Analyst o B. Commerce (McMaster University) o 18 years of investment experience

5 MONEGY MONEGY QUALITY HIGH YIELD BOND COMPOSITE ANNUAL DISCLOSURE PRESENTATION Composite Assets Annual Performance Results Total Firm **Strategy U.S. 3 Yr Std 3 Yr Std Assets Assets Dollars % Carve- % of Firm Number of Composite ML BB-B Deviation Deviation Composite Year End (millions) (millions) (millions) Out Assets Accounts Gross Net Constrained Composite Index Dispersion 2014 $2,213 $2,001 $1,923 0% 86.92% % 0.93% 3.49% 4.00% 4.25% 0.17% 2013 $2,599 $2,384 $2,352 0% 90.49% % 5.74% 6.31% 5.02% 5.79% 0.18% 2012 $2,186 $2,049 $1,532 0% 3.00% % 12.16% 14.58% 5.11% 6.17% 0.22% 2011 $1,931 $1,876 $1,861 0% 96.84% % 6.01% 5.40% 6.46% 9.19% 0.22% ,671 1,620 1,620 0% 96.95% % 12.10% 14.26% 10.35% 14.65% 0.19% ,750 1,745 1,745 0% 99.71% % 31.68% 46.06% 10.38% 14.52% 0.34% % 96.96% % % % 8.91% 11.82% 1.02% , % 69.23% % 3.43% 3.19% 4.10% 4.04% 0.16% ,509 1,041 1,041 2% 68.99% % 7.82% 9.29% 3.70% 3.55% 0.18% ,561 1,168 1,168 11% 74.82% % 2.57% 3.39% 4.11% 4.77% 0.16% **Strategy Assets are shown as supplemental information. Strategy assets include composite and non composite accounts that have the same investment mandate. Non composite accounts are excluded from the composite due to size, specific client guidelines, or other strategy limitations. The Monegy Quality High Yield Bond Composite contains fully discretionary highly diversified portfolios of high yield bonds focusing primarily on the BB/B segment of the U.S. market with an objective of maximizing the total return, both interest income and gains for a given risk appetite. For comparison purposes, the composite is measured against the Merrill Lynch, U.S. High Yield, BB/B Constrained Index. In presentations shown from January 1, 2004 through December 31, 2004, the Merrill Lynch, U.S. High Yield, BB/B Rated Index was presented as the benchmark for this composite. In presentations shown prior to January 1, 2004, the Bear Stearns BB/B Index was presented as the benchmark for this composite. The indices were changed to be more representative of the composite strategy. Effective January 1, 2005, Monegy changed its pricing sources to conform to systems used by its parent. This change resulted in a one time gain of 0.42% in As of December 31, 2010, 9% of composite assets are comprised of one account that uses currency hedging to remove the effect of currency. The minimum account size for this composite is $5 million. The composite was created October 1, Prior to July 1, 2010, the composite was called the High Yield Bond Segregated Composite. Prior to December 31, 2011, the composite was named the Quality High Yield Bond Composite. Past performance does not guarantee future results. Monegy is a member of BMO Financial Group Trademark of Bank of Montreal and a trade name used by the Bank of Montreal and BMO Harris N.A. in Canada and the US. Monegy, Inc. is a registered investment advisor with the SEC, and wholly owned subsidiary of BMO Asset Management Corp. Prior to June 1, 2012 Monegy, Inc. was known as HIM Monegy, Inc. Prior to 2003 the firm was known as BMO Monegy. Monegy is a registered trademark used by Monegy, Inc. Monegy claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. Monegy has been independently verified for the periods October 1, 1999 through March 31, A copy of the verification reports is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm wide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. The firm maintains a complete list and description of composites, which is available upon request. A significant external cash flow will be identified by the firm as a cash flow that affects performance of the account so that it is not representative of the underlying investment philosophy. Beginning September 1, 2010, when an account experiences a significant external cash flow greater than 20% of portfolio beginning assets, it is assumed that such a cash flow temporarily causes a loss of discretion, and the account will be excluded from the composite for the full month the cash flow occurred. The account will be re included in the composite the month after the cash flow occurred. Additional information regarding the treatment of significant cash flows is available upon request. Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Settlement date valuation was used to calculate performance prior to January 1, Past performance is not indicative of future results. The U.S. Dollar is the currency used to express performance. Returns are presented gross and net of management fees and include the reinvestment of all income. Net of fee performance was calculated using the highest management fee of 0.50%. Gross of fee performance returns are presented before management fees, custodial fees and withholding taxes, but net of all trading expenses. The annual composite dispersion presented is an equal weighted standard deviation calculated for the accounts in the composite the entire year. Additional information regarding the policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.

6 The investment management fee schedule for the composite is: 0.50% on the first $50 million, 0.45% on the next $50 million, and 0.40% thereafter. Actual investment advisory fees incurred by clients may vary. Prior to 2008 carve outs were included in this composite and performance reflected total segment returns. The accounts from which carve outs were taken did not hold a cash balance. The percentage of carve outs for the individual years is as follows: 2007: 2%, 2006: 2%, and 2005: 11%. Purchases are funded by the client upon purchase and proceeds from sold assets are returned to the client upon the close of the sale.

7 MONEGY MONEGY BROAD HIGH YIELD BOND COMPOSITE ANNUAL DISCLOSURE PRESENTATION Composite Assets Annual Performance Results Total Firm **Strategy U.S. Number ML US HY 3 Yr Std 3 Yr Std Assets Assets Dollars % of Firm of Composite Master II Deviation Deviation Composite Year End (millions) (millions) (millions) Assets Accounts Gross Net Con Composite Index Dispersion 2014 $2,213 $94.08 $ % % 0.45% 2.51% 4.04% 4.44% N.A $2,599 $ $ % % 7.24% 7.41% 5.58% 6.43% N.A $2,186 $63.87 $ % % 12.85% 15.55% N.A. N.A N.A $1,931 $54.51 $ % % 5.70% 4.37% N.A. N.A N.A. 2010* 1, % % 9.73% 9.89% N.A. N.A N.A. N.A. is shown on composite dispersion information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year. N.A is shown on the 3 Yr Std Deviation for the composite and index because 36 monthly returns are not available on the composite. **Strategy Assets are shown as supplemental information. Strategy assets include composite and non-composite accounts that have the same investment mandate. Non-composite accounts are excluded from the composite due to size, specific client guidelines, or other strategy limitations. *Results shown for the year 2010 represent partial period performance from July 1, 2010 through December 31, The Monegy Broad High Yield Bond Composite contains fully discretionary highly diversified portfolios of high yield bonds focusing primarily on the U.S. market with an objective of maximizing the total return, both interest income and gains for a given risk appetite. For comparison purposes, the composite is measured against the Merrill Lynch, U.S. High Yield, Master II Constrained Index. The minimum account size for this composite is $20 million. The composite was created July 1, Prior to December 31, 2011, the composite was named the Broad High Yield Composite. Past performance does not guarantee future results. Monegy is a member of BMO Financial Group Trademark of Bank of Montreal and a trade name used by the Bank of Montreal and BMO Harris N.A. in Canada and the US. Monegy, Inc. is a registered investment advisor with the SEC, and wholly owned subsidiary of BMO Asset Management Corp. Prior to June 1, 2012 Monegy, Inc. was known as HIM Monegy, Inc. Prior to 2003 the firm was known as BMO Monegy. Monegy is a registered trademark used by Monegy, Inc. Monegy claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. Monegy has been independently verified for the periods October 1, 1999 through March 31, Copies of the verification reports are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm wide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any composite specific composite presentation. The firm maintains a complete list and description of composites, which is available upon request. Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Past performance is not indicative of future results. The U.S. Dollar is the currency used to express performance. Returns are presented gross and net of management fees and include the reinvestment of all income. Net of fee performance was calculated using the highest management fee of 0.50%. Gross of fee performance returns are presented before management fees, custodial fees and withholding taxes, but net of all trading expenses. The annual composite dispersion presented is an equalweighted standard deviation calculated for the accounts in the composite the entire year. Additional information regarding the policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. The investment management fee schedule for the composite is: 0.50% on the first $50 million, 0.45% on the next $50 million, and 0.40% thereafter. Actual investment advisory fees incurred by clients may vary.

8 MONEGY MONEGY HIGH YIELD LOAN COMPOSITE ANNUAL DISCLOSURE PRESENTATION Composite Assets Annual Performance Results Total Firm **Strategy U.S. Number 3 Yr Std 3 Yr Std Assets Assets Dollars % of Firm of Composite Deviation Deviation Composite Year End (millions) (millions) (millions) Assets Accounts Gross Net Benchmark* Composite Index Dispersion 2014 $2,213 $ $ % % 1.12% 1.09% 2.39% 1.36% N.A $2,599 $ $ % % 4.51% 3.85% N.A. N.A. N.A $2,186 $52.03 $ % % 9.97% 7.12% N.A. N.A. N.A $1, , , $22 $ % % % % 8.43% 9.56% N.A ,417 $371 $ % % 2.30% 2.35% 2.28% 2.64% N.A ,509 $393 $ % % 6.21% 6.19% 0.53% 0.65% N.A ,561 $293 $ % % 5.07% 4.69% 0.62% 0.69% N.A. N.A. is shown on Composite Dispersion -Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year. *Benchmark from 01/01/2012 forward is S&P/LSTA BB Loan Index. Prior to January 1, 2012 the benchmark was the S&P BB Leverage Loan Index. Prior to January 1, 2005, the benchmark was the BAS High Yield Loan Index **Strategy Assets are shown as supplemental information. Strategy assets include composite and non-composite accounts that have the same investment mandate. Non-composite accounts are excluded from the composite due to size, specific client guidelines, or other strategy limitations. The Monegy High Yield Loan Composite contains fully discretionary portfolios of leveraged loans, focusing primarily on non investment grade rated companies in the U.S. market with an objective of maximizing the total return, both interest income and gains for a given risk appetite. Currency Forwards or Swaps may be used for hedging purposes. For comparison purposes, the composite will be benchmarked to the S&P/LSTA B/BB Loan Index. Prior to May 1, 2014 the benchmark was the S&P/LSTA BB Loan Index. Prior to January 1, 2012 the benchmark was the S&P BB Leverage Loan Index. Prior to January 1, 2005, the benchmark was the BAS High Yield Loan Index. The indices were changed to be more representative of the composite strategy. The minimum account size for this composite is $5 million. The Composite was created January 1, 2000 and had performance until December 31, 2008 when the composite was closed due to no more client accounts investing in the strategy. The composite was re opened January 1, Prior to January 1, 2012 the composite had been called the High Yield Loan Segregated Composite. Monegy is a member of BMO Financial Group Trademark of Bank of Montreal and a trade name used by the Bank of Montreal and BMO Harris N.A. in Canada and the US. Monegy, Inc. is a registered investment advisor with the SEC, and wholly owned subsidiary of BMO Asset Management Corp. Prior to June 1, 2012 Monegy, Inc. was known as HIM Monegy, Inc. Prior to 2003 the firm was known as BMO Monegy. Monegy is a registered trademark used by Monegy, Inc. Monegy claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. Monegy has been independently verified for the periods October 1, 1999 through March 31, Copies of the verification reports are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm wide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. The firm maintains a complete list and description of composites, which is available upon request. An account will not be removed from a composite due to a significant cash flow. In the event of a regular occurrence of cash flows that will prevent the account from being managed in a fashion consistent with the other accounts in the composite, this would deem the account non discretionary, and therefore the account would be removed from the composite. Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Settlement date valuation was used to calculate performance prior to January 1, Past performance is not indicative of future results. The U.S. Dollar is the currency used to express performance. Returns are presented gross and net of management fees and include the reinvestment of all income. Net of fee performance was calculated using the highest management fee of 0.65%. Gross of fee performance returns are presented before management fees, custodial fees and withholding taxes, but net of all trading expenses. The annual composite dispersion presented is an equal weighted standard deviation calculated for the accounts in the composite the entire year. Additional information regarding the policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.

9 The investment management fee schedule for the composite is: 0.65% on the first $50 million, 0.60% on the next $50 million, and 0.55% thereafter. From January 1, 2000 through December 31, 2008 the management fee was 50 bps Actual investment advisory fees incurred by clients may vary. Prior to 2009 Carve outs are included in this composite and performance reflects total segment returns. The percentage of carve outs is 100% for all years prior to The accounts from which carve outs are taken do not hold a cash balance. Purchases are funded by the client upon purchase and proceeds from sold assets are returned to the client upon the close of the sale.

10 MONEGY MONEGY GLOBAL HIGH YIELD BOND COMPOSITE ANNUAL DISCLOSURE PRESENTATION Composite Assets Annual Performance Results Total Firm **Strategy U.S. BofA ML Global 3 Yr Std 3 Yr Std Assets Assets Dollars % of Firm Number of Composite Composite High Yield BB/B Deviation Deviation Composite Year End (millions) (millions) (millions) Assets Accounts Gross Net ex Financial Composite Index Dispersion 2014 $2,213 $9.93 $ % % -1.43% 0.53% N.A. N.A. N.A. N.A. is shown on composite dispersion information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year. N.A is shown on the 3 Yr Std Deviation for the composite and index because 36 monthly returns are not available on the composite. **Strategy Assets are shown as supplemental information. Strategy assets include composite and non-composite accounts that have the same investment mandate. Non-composite accounts are excluded from the composite due to size, specific client guidelines, or other strategy limitations. *Results shown for the year 2014 represent partial period performance from March 1, 2014 through December 31, The Monegy Global High Yield Bond Composite contains fully discretionary highly diversified portfolios of high yield bonds focusing primarily on the BB/B, non financial segment of the Global market with an objective of maximizing the total return, both interest income and gains, for a given risk appetite. For comparison purposes, the composite will be benchmarked to the BofA Merrill Lynch BB B Global Non Financial High Yield Constrained Index. The minimum account size for this composite is $5 million. The composite was created March 1, Past performance does not guarantee future results. Monegy is a member of BMO Financial Group Trademark of Bank of Montreal and a trade name used by the Bank of Montreal and BMO Harris N.A. in Canada and the US. Monegy, Inc. is a registered investment advisor with the SEC, and wholly owned subsidiary of BMO Asset Management Corp. Prior to June 1, 2012 Monegy, Inc. was known as HIM Monegy, Inc. Prior to 2003 the firm was known as BMO Monegy. Monegy is a registered trademark used by Monegy, Inc. Monegy claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. Monegy has been independently verified for the periods October 1, 1999 through March 31, Copies of the verification reports are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm wide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any composite specific composite presentation. The firm maintains a complete list and description of composites, which is available upon request. Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Past performance is not indicative of future results. The U.S. Dollar is the currency used to express performance. Returns are presented gross and net of management fees and include the reinvestment of all income. Net of fee performance was calculated using the highest management fee of 0.75%. Gross of fee performance returns are presented before management fees, custodial fees and withholding taxes, but net of all trading expenses. The annual composite dispersion presented is an equalweighted standard deviation calculated for the accounts in the composite the entire year. Additional information regarding the policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. The investment management fee schedule for the composite is: 0.70% on the first $100 million and 0.50% thereafter. Actual investment advisory fees incurred by clients may vary.

11 DISCLOSURES This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This publication is prepared for general information only. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with investments may rise or fall. Accordingly, investors may receive back less than originally invested. Investments cannot be made in an index. Past performance does not guarantee future results. BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management, retirement, and trust and custody services. Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO). Investment products are: NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE 2015 BMO Financial Corp. i BofA Merrill Lynch US High Yield Index (H0A0). ii European Central Bank iii Bank of Japan iv Expoloration & Production