Are We Nearing a Mount Kilauea Moment for IG Markets?

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1 MAY 2018 DRIEHAUS CREDIT COMMENTARY // APRIL 30, 2018 DRIEHAUS ACTIVE INCOME FUND PERFORMANCE SUMMARY Are We Nearing a Mount Kilauea Moment for IG Markets? With all of the news events over the past few weeks surrounding the royal wedding, Washington DC politics, and threats of trade wars, the science nerd of my youth has been most fascinated by the volcanic eruptions of Mount Kilauea in Hawaii. It s not every day that we re all able to witness lava exploding out of a volcano just like we learned about in elementary school science classes. One of the more interesting tidbits I ve learned about Kilauea is that the volcano has been erupting continuously since 1983, but only recently became more active after a series of earthquakes at the beginning of May. The volcano s eruptions have been well-documented for over 100 years and the most recent eruption has been the longest one ever observed for Kilauea. Interestingly, the volcano was named a World Heritage Site in 1987 and is one of Hawaii s largest tourist destinations, greeting 2.6 million visitors annually. There are even a few hotels nearby and an official Lava Viewing Area that opened in The one thing that has had me scratching my head about all of this is that there are several thousand Hawaiians who have lived in the shadow of Kilauea for years. They are presumably well-aware of the probability (and likely inevitability) that lava could, one day, be pouring into their yards or streets, and yet they have chosen to live in close proximity to this volcano. Despite constant eruptions since 1983 interspersed with some more active periods as recently as early 2015, there has not been a mass exodus of people in the surrounding area, and this is somewhat shocking to me. This strikes me a bit similar to the kinds of bets that investors sometimes take when we are nearing the end of a market cycle. Sure, they know that the cycle is going to end at some point, but they take calculated risks and hope for the best for a period of time, but when the cycle inevitably ends, there are fairly punitive consequences. While we don t believe lava is going to be at our doorstep in the coming weeks, we are monitoring a group of risks that have been percolating in the investment grade (IG) market that could potentially erupt at a later point in time with some ugly consequences. Source: livescience.com So far this year, we ve dedicated a fair bit of time addressing the handoff that is occurring in 2018 from the easy monetary, low inflation, and low volatility environments we ve experienced over the past several years to the new environment of monetary squeezing and interest rate and volatility normalization. As the markets have adjusted to these new conditions, the underperformance in investment grade credit this year has been notable. The Merrill Lynch IG index is down 3.03% through the end of April (the first time since 2006 with a negative YTD cumulative return) with excess returns of -0.54%. We have highlighted the duration risk associated with the IG market several times recently here and here. However, as we ve progressed through the year, there have been some other pressures that are somewhat unique to the IG market related to tax reform and hedging costs that have put some unexpected technical pressures on the market. Further, the quality of the IG market may not be as high as it has historically been, and there are a significant number of low-quality BBB- credits that the high yield (HY) market may have to absorb at an inopportune time. As a result, we view the IG market as one of the more vulnerable areas of the market this late in the economic cycle due to these secondary technical Page 1 of 15

2 REPATRIATION OVERHANG The passage of the tax reform law in late 2017 required many investment grade companies to repatriate a significant portion of their overseas cash and marketable securities. According to Goldman Sachs, at the end of 2017, at least $328 billion of $750 billion of overseas cash holdings were invested in short-dated IG bonds, which represents approximately 13% of the $2.6 trillion index-eligible IG bonds with maturities shorter than five years. Another way to put $328 billion of bonds in context is that it represents roughly 2.3x the average quarterly IG net new issue supply over the past two years ($141 billion). This is not an inconsequential amount of incremental supply. the quantitative easing (QE) era. Loose global monetary policies have made the US IG market an attractive place for global investors to park cash, resulting in their owning roughly 20% of the IG market (Exhibit 3). However, as short term interest rates have increased, the cost of hedging US dollar exposure has increased dramatically for foreign EXHIBITS 1&2: Corporate Bond Holdings by 20 Large Corporate Holders of Overseas Cash Once the cash and short-dated securities are back in the US, companies can either liquidate their corporate bond holdings or hold them until maturity (approximately two years for the vast majority of the bonds). Several of the cash-rich companies have already identified potential uses for this cash including M&A, capital expenditures (capex), debt paydown, pension contributions, and shareholder friendly actions such as share buybacks and dividends. This, in turn, has led to concerns about how and when these IG corporate holdings will be liquidated, and investors have waited for guidance via corporate filings and first quarter earnings calls. Now that we are largely through the first quarter earnings season, we ve learned that, on average, cash-rich companies were net sellers of all types of securities in their liquid portfolios, but were more aggressive reducing their corporate bond holdings. Liquid portfolios declined 7.9% ($78.9 billion) while the corporate bond holdings within those liquid portfolios declined by 10.3% ($35.3 billion). (Exhibits 1-2). The decrease of $35 billion in the corporate bond holdings was also a dramatic shift from the $10 billion of net buying companies had been doing in the second half of We acknowledge that we are only one quarter into this posttax reform environment, but it seems that there will be a bit of an overhang on short-dated IG credit for the foreseeable future until investors get comfortable with how these corporate portfolios runoff in the coming quarters. INCREASED HEDGING COSTS Under certain market conditions this extra IG supply from cash repatriation wouldn t be a major concern as there has been robust demand for IG paper from foreign buyers in Source: BAML EXHIBIT 3: US IG Corporate Bond Market Ownership Source: Morgan Stanley Page 2 of 15

3 investors. According to Exhibit 4, the 3-month forward exchange rate for Eurozone investors is approximately 2.8%, up from 1.0% 18-months ago. This means that the first 2.8% of yield on an IG investment (where the average yield is approximately 4.0%) for a foreign buyer are lost on hedging costs. And this is before the investor has to worry about risk, duration, valuation etc. That 2.8% is a hefty price to pay in today s markets! Outside of Europe, it appears that Japanese investors have been rotating from US bonds into European bonds (Exhibit 5), as the value proposition of US fixed income assets has decreased due to US dollar hedging costs. All of these factors contribute to a great deal of selling pressure and supply, and there isn t an obvious source of demand to potentially offset these pressures. This technical imbalance already caused a minor disruption in the IG market in first quarter. In March, the increased supply helped push credit spreads 15 basis points wider to the widest levels of the year (117 basis points). (Exhibit 6). Although credit spreads have recovered modestly in the second quarter, we don t view either of the risks that we ve highlighted as being temporary. If there are any other further supply shocks (new M&A deals adding to the supply pipeline, for example), credit spreads could continue to move wider simply because there are less natural buyers of IG paper than there have been in the recent past. EXHIBIT 4: Annualized 3M Dollar Hedging Cost for EUR Investors Source: BAML EXHIBIT 5: Japanese Net Purchases of US and European Bonds Source: Goldman Sachs Exhibit 6: IG Credit spreads YTD 2018 ICE BAML IG Index Source: Bloomberg Page 3 of 15

4 Finally, in addition to the technical imbalance we ve highlighted, we have some fundamental concerns about the quality of credits in the IG market, particularly the lower quality BBB- credits that live on the cusp of HY. First, the sheer growth of both the IG and BBB markets have been incredible over the past 10 years. Since the lows of 2008, non-financial IG debt has grown from $1.3 trillion to 4.4 trillion (224% growth), and non-financial BBB debt has grown similarly from $700 billion to $2.5 trillion (248% growth). (Exhibit 7) Also, the amount of BBB- non-financial bonds has grown to approximately $718 billion and now represents 16% of the IG market. (Exhibit 8). Exhibit 7: The Non-Financial IG and BBB Markets Have Grown Over 200% since 2008 CFOX ICE BAML US Non-Financials IG Index C4NF ICE BAML BBB Non-Financial IG Index Source: Bloomberg Exhibit 8: BBB- Debt Represents 16% of Non-Financial Debt, up from 11% in 2012 Source: JPM Page 4 of 15

5 What drove this incredible growth? M&A has been the significant driver. Recently, a good deal of M&A financing has migrated from the HY market to the leveraged loan or the IG market. Importantly, firms that would have been characterized as HY in the last cycle have been permitted to issue substantial amounts of IG debt at this late stage in the cycle. In fact, 14% of the IG market has leverage that is >4.0x, despite strong earnings and high margins levels we haven t seen in 15 years! (Exhibit 9). Further, according to JP Morgan the risk of downgrades to HY over 1 year is 3.2x larger for BBB- issuers than for BBB issuers, and, on average, over the past 30 years, 27% of the issuers rated BBB- at the beginning of a year were downgraded to HY within the following 3 years. Not surprisingly the data also show that ratings changes for BBB- issuers are correlated with the economic cycle. Therefore, we should expect roughly a quarter of the BBBmarket (which is as large as it s ever been) to be downgraded to HY in the coming years. It s also worth noting that the BBB market is also roughly 4.3x the size of the BB market (and historically this ratio has been closer to 2x). (Exhibit 10). We don t believe it s a stretch to think that the HY market might struggle to absorb these fallen angels when the downgrades Exhibit 9: Percentage of IG Market with Net Leverage >4.0x Source: UBS occur. In addition to the fundamental issues that are typically the catalysts for a downgrade (declining cash flow, high leverage etc.), the technical selling could also be exacerbated by some extremely large foreign holders who are more ratings sensitive than some US investor and by ETFs which have also grown substantially. (Exhibit 11). Exhibit 10: The Non-Financial BBB Market is 4.3x the size of the BB market H0A1 ICE BAML BB HY Index C4NF ICE BAML BBB Non-Financial IG Index Source: Bloomberg Page 5 of 15

6 Exhibit 11: Foreign Investors and Mutual Funds/ETFs Have Been the Largest Buyers of Corporate Bond Net Supply Recently Source: BAML So what conclusions are we to draw from all of these observations on the evolution of the IG market? Like nearly every other market, the IG market has benefitted substantially from the QE conditions of loose global monetary policy, which has lured in investors from all over the world, while at the same time permitted companies to issue debt at significantly more favorable terms than they would have 10 years ago because there were plenty of buyers for this paper. Now as the global interest rate and volatility regimes normalize, many of the former buyers of IG supply have turned sellers themselves or can no longer absorb as much paper as they have historically. And this supply-demand imbalance will only get worse when some larger issuers start to underperform, leading to a HY downgrade. While none of these risks alone are likely to cause IG spreads to move out basis points in short order, we also don t believe that they are temporary or getting smaller. They seem to fall more into the when, not if category. Just as Mt Kilauea eruptions have been a persistent risk for the past 35 years and some Hawaiians have chosen to ignore the possibility of major eruptions, we don t love the idea of lava arriving at our doorsteps and are therefore approaching the risks in the IG markets with caution. Until next month, K.C. & Cass K.C. Nelson Lead Portfolio Manager Elizabeth Cassidy Portfolio Manager Disclosures This material is not intended to be relied upon as a forecast or research. The opinions expressed are those of Driehaus Capital Management LLC ( Driehaus ) as of May 17, 2018 and are subject to change at any time due to changes in market or economic conditions. The commentary has not been updated since May 17, 2018 and may not reflect recent market activity. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Driehaus to be reliable and are not necessarily all inclusive. Driehaus does not guarantee the accuracy or completeness of this information. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Page 6 of 15

7 LCMAX Performance Review Month-end Performance as of 4/30/18 Average Annual Total Return Fund/Index MTH YTD 1 Year 3 Year 5 Year 10 Year Since Inception 1 Driehaus Active Income Fund % 1.74% 1.31% 1.66% 1.47% 3.68% 3.56% FTSE 3-Month T-Bill Index % 0.48% 1.16% 0.54% 0.34% 0.31% 1.11% Bloomberg Barclays Aggregate Index % -2.19% -0.32% 1.07% 1.47% 3.58% 4.07% Calendar Quarter-end Performance as of 3/31/18 Average Annual Total Return Fund/Index QTR YTD 1 Year 3 Year 5 Year 10 Year Since Inception 1 Driehaus Active Income Fund % 0.81% 1.29% 1.48% 1.40% 3.57% 3.50% FTSE 3-Month T-Bill Index % 0.35% 1.07% 0.49% 0.31% 0.31% 1.11% Bloomberg Barclays Aggregate Index % -1.46% 1.20% 1.20% 1.82% 3.63% 4.16% Annual Fund Operating Expenses 5 Management Fee 0.55% Other Expenses Excluding Dividends and Interest on Short Sales 0.26% Dividends and Interest on Short Sales 0.37% Total Annual Fund Operating Expenses 1.18% The performance data shown represents past performance and does not guarantee future results. Current performance may be lower or higher than the performance data quoted. Principal value and investment returns will fluctuate so that investors shares, when redeemed, may be worth more or less than their original cost. Performance data represents the rate that an investor would have earned (or lost), during the given month, on an investment in the Fund (assuming reinvestment of all dividends and distributions). Average annual total return reflects annualized change. Since Fund performance is subject to change after the month-end, please call (877) or visit www. driehaus.com for more current performance information. 1 Inception Date: 11/8/ The Driehaus Active Income Fund commenced operations on June 1, 2009 following the receipt of the assets and liabilities of the Lotsoff Capital Management Active Income Fund (the Predecessor Fund ) through a reorganization into the Driehaus Active Income Fund (the Fund ). Lotsoff Capital Management was the investment adviser from inception through April 2, Driehaus Capital Management LLC (the Adviser ) became the interim investment adviser to the Predecessor Fund on April 3, The FTSE 3-Month T-Bill Index is designed to mirror the performance of the 3-Month U.S. Treasury Bill. The FTSE 3-Month T-Bill Index is unmanaged and its returns include reinvested dividends. 4 The Bloomberg Barclays Aggregate Index, an unmanaged index, represents securities that are SEC-registered, taxable and dollar denominated. This index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. 5 Represents the Annual Fund Operating Expenses as disclosed in the current prospectus dated April 30, It is important to understand that a decline in the Fund s average net assets due to unprecedented market volatility or other factors could cause the Fund s expense ratio for the current fiscal year to be higher than the expense information presented. A shareholder may be required to pay a commission to their financial intermediary. The Driehaus Active Income Fund (the Fund ), in addition to investing in unrated and investment grade bonds, may also invest in junk bonds, which involve greater credit risk, including the risk of default. The prices of high yield bonds are more sensitive to changing economic conditions and can fall dramatically in response to negative news about the issuer or its industry, or the economy in general. The use of derivatives involves risks different from, and possibly greater than, the risks associated with investing directly in the underlying assets. Derivatives can be highly volatile, illiquid and difficult to value, and there is a risk that changes in the value of a derivative held by the Fund will not correlate with the Fund s other investments. Further, the Fund may invest in derivatives for speculative purposes. Gains or losses from speculative positions in a derivative may be much greater than the derivative s original cost and potential losses may be substantial. The Fund may make short sales. Short sales expose the Fund to the risk of loss. It is anticipated that the Fund will experience high rates of portfolio turnover, which may result in payment by the Fund of above-average transaction costs. This is a nondiversified fund; compared to other funds, the Fund may invest a greater percentage of assets in a particular issuer or a small number of issuers. As a consequence, the Fund may be subject to greater risks and larger losses than diversified funds. No investment strategy, including an absolute return strategy, can ensure a profit or protect against loss. Additionally, investing in an absolute return strategy may lead to underperforming results during an upward moving market. When interest rates increase, bond prices decrease and bond funds become more volatile. Please consider the investment objectives, risks, fees and expenses of the Fund carefully prior to investing. The prospectus and summary prospectus contain this and other important information about the Fund. To obtain a copy of the prospectus and/or summary prospectus, please call us at (877) Please read the prospectus and summary prospectus carefully before investing. Driehaus Securities LLC, Distributor Page 7 of 15

8 LCMAX Portfolio Characteristics* Executive Summary excluding cash Assets Under Management (AUM) $1,552,172,161 Long $1,531,087,017 $1,394,392,131 Short $(468,580,433) $(468,580,433) Net $1,062,885,612 $925,811,698 Net /AUM 68.48% 59.65% Gross $2,000,048,785 $1,862,972,565 Gross /AUM 1.29x 1.20x Risk Summary Effective Duration Years Spread Duration 3.13 Years 30-day SEC Yield 4.36% Portfolio Yield-To-Worst % Average % of Par Longs % Average % of Par Shorts % Beta vs. S&P Day Volatility 2.47% Trading Strategy Type Gross % of Gross % Contrib. to Total Return Capital Structure Arbitrage 2 155,288, % 0.22% Convertible Arbitrage 2 75,288, % -0.01% Directional Long 2 1,178,840, % 0.56% Directional Short 2 37,598, % 0.00% Event Driven 2 90,959, % -0.08% Interest Rate Hedge 2 323,849, % 0.31% Pairs Trading 2 4, % 0.00% Volatility Trading 2 1,525, % 0.00% Cash** 136,694, % 0.00% Expenses*** -0.06% Total 2,000,048, % 0.93% Preliminary data. May differ from data shown by third-party providers because of rounding or for other reasons. Source: Bloomberg, Factset 1 Refers to credit only 2 A definition of this term can be found on page 15. *: please note exposure may be different than market value. For equities, bonds, and interest rate swap products, exposure is the same as market value. For options and foreign exchange forwards exposure represents greek-adjusted underlying exposure. For credit default swap and credit default swap indices, exposure represents bond-equivalent exposure. **This figure represents the fund s operating cash plus receivables for investments sold and minus payables for investments purchased, and includes USD and FX cash. ***Estimated expenses for the month (not annualized) as a percentage of the fund s net assets for the month. Note: A definition of key terms can be found on page 15 Page 8 of 15

9 Credit Rating* Long % of Long Short % of Short Gross % of Gross AAA % 0 0.0% 0 0.0% AA 0 0.0% 0 0.0% 0 0.0% A 2 45,471, % 0 0.0% 45,471, % BBB 19,963, % (41,690,850) 39.3% 61,654, % BB 196,345, % 0 0.0% 196,345, % B 708,720, % (26,926,098) 25.4% 735,646, % CCC 169,531, % 0 0.0% 169,531, % CC 0 0.0% 0 0.0% 0 0.0% C 8,554, % 0 0.0% 8,554, % D 0 0.0% 0 0.0% 0 0.0% Not Rated 122,877, % (37,596,859) 35.4% 160,476, % Total 1,271,465, % (106,213,807) 100.0% 1,377,681, % Credit rating data is shown only for the following asset classes: Bank Loan, Corporate CDS, Corporate Credit, Convertible Bonds and Preferred Stocks. Industry Sector GICS 3 Long % of Long Page 9 of 15 Short % of Short Gross % of Gross Consumer Discretionary 356,605, % (10,954,800) 2.3% 367,560, % Consumer Staples 33,750, % (16,557,006) 3.5% 50,307, % Energy 108,320, % (42,203,696) 9.0% 150,524, % Financials 332,141, % (10,369,092) 2.2% 342,510, % Health Care 46,717, % 0 0.0% 46,717, % Industrials 76,937, % 0 0.0% 76,937, % Information Technology 234,489, % (34,636,826) 7.4% 269,128, % Materials 10,145, % 0 0.0% 10,145, % Real Estate 15,654, % 0 0.0% 15,654, % Telecommunication Services 126,276, % 0 0.0% 126,276, % Utilities 10,547, % 0 0.0% 10,547, % Other 4 179,500, % (353,859,013) 75.5% 533,738, % Total 1,531,087, % (468,580,433) 100.0% 2,000,048, % Source: Bloomberg, Factset Moody s, Standard & Poor s, Global Industry Classification Standard *Credit ratings listed are subject to change. Credit quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). NR is used to classify securities for which a rating is not available. The Adviser receives credit quality ratings on underlying securities of the portfolio from the three major ratings agencies - Moody s Investors Service (Moody s), Fitch Ratings (Fitch), and Standard & Poor s (S&P). When calculating the credit quality breakdown, the Adviser utilizes Moody s and if Moody s is not available the manager selects the lower rating of S&P and Fitch. Note: A definition of key terms can be found on page 15 Credit Ratings: AAA and AA: A and BBB: BB, B, CCC, CC, C: Not Rated: High credit-quality investment grade Medium credit-quality investment grade Low credit-quality (non-investment grade), or junk bonds Bonds currently not rated 1 All government bonds are rated AAA. 2 All agency Mortgage Backed Securities (MBS) are rated A. 3 The Global Industry Classification Standard (GICS), a collaboration between Standard & Poor s and Morgan Stanley Capital International, is a system of classification that identifies a company according to its business activity. 4 The Other Industry Sector data is not categorized within the GICS classification system.

10 Product Type Long % of Long Short % of Short Gross % of Gross Bank Loan 482,443, % 1, % 482,444, % Convertible Bond 40,650, % 0 0.0% 40,650, % Convertible Preferred 0 0.0% 0 0.0% 0 0.0% Corporate 710,387, % (1,975,471) 0.4% 712,363, % Preferred 37,984, % 0 0.0% 37,984, % Sovereign 39,940, % (27,240,852) 5.8% 67,181, % Fixed Income 1,311,406, % (29,215,169) 6.2% 1,340,623, % ADR/GDR 0 0.0% 0 0.0% 0 0.0% Equity Common 74,866, % (46,105,626) 9.8% 120,972, % Exchange Traded Fund 0 0.0% 0 0.0% 0 0.0% Equity 74,866, % (46,105,626) 9.8% 120,972, % Credit Default Swap 0 0.0% (104,239,490) 22.2% 104,239, % Currency Forward 298, % (103,649) 0.0% 781, % Index Future 0 0.0% 0 0.0% 0 0.0% Index Options 0 0.0% 0 0.0% 0 0.0% Interest Rate Future 0 0.0% (288,916,500) 61.7% 288,916, % Residential Mortgage Backed 0 0.0% 0 0.0% 0 0.0% Securitized / Covered 0 0.0% 0 0.0% 0 0.0% Swaptions 1,036, % 0 0.0% 1,036, % Option on Stock Index Future 1,525, % 0 0.0% 1,525, % Total Return Swap 5,259, % 0 0.0% 5,259, % Derivatives 8,119, % (393,259,638) 83.9% 401,757, % Cash 136,694, % 0 0.0% 136,694, % Total 1,531,087, % (468,580,433) 100.0% 2,000,048, % Note: A definition of key terms can be found on page 15 Page 10 of 15

11 LCMAX Effective Duration (years) Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 LCMAX Spread Duration (years) Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Apr-18 LCMAX Average Yield-to-Worst LCMAX Net / AUM (Excluding Cash) 8% 7% 6% 5% 4% 3% 2% 1% 0% Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Apr-18 80% 70% 60% 50% 40% 30% 20% 10% 0% Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Apr-18 LCMAX Gross / AUM (Excluding Cash) 2.0x 1.5x 1.0x 0.5x LCMAX Monthly Return* 5% 3% 1% -1% -3% 0.0x -5% Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Apr-18 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Apr-18 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Apr-18 Sources: Driehaus Capital Management LLC, Bloomberg, Factset Note: A definition of key terms can be found on page 15 *The performance data shown represents past performance and does not guarantee future results. Current performance may be lower or higher than the performance data quoted. Principal value and investment returns will fluctuate so that investors shares, when redeemed, may be worth more or less than their original cost. Page 11 of 15

12 Spread Distribution* ($M) Bank Loan Convertible Bond Convertible Preferred Corporate Credit Default Swap Preferred Total >1000 Total Long 42,920, ,698,131 76,824, ,443,602 Short 0 0 1, ,154 Net 42,920, ,698,131 76,825, ,444,755 Gross 42,920, ,698,131 76,825, ,444,755 Long 40,650, ,650,228 Short Net 40,650, ,650,228 Gross 40,650, ,650,228 Long Short Net Gross Long 390,509, ,520,064 63,391,276 8,967, ,387,828 Short (1,975,471) (1,975,471) Net 388,533, ,520,064 63,391,276 8,967, ,412,357 Gross 392,484, ,520,064 63,391,276 8,967, ,363,299 Long Short (68,063,478) 0 (16,557,006) (19,619,005) (104,239,490) Net (68,063,478) 0 (16,557,006) (19,619,005) (104,239,490) Gross 68,063, ,557,006 19,619, ,239,490 Long 0 37,984, ,984,107 Short Net 0 37,984, ,984,107 Gross 0 37,984, ,984,107 Long 474,080, ,202, ,216,043 8,967,112 1,271,465,765 Short (70,038,949) 0 (16,555,852) (19,619,005) (106,213,807) Net 404,041, ,202, ,660,191 (10,651,894) 1,165,251,958 Gross 544,119, ,202, ,774,203 28,586,117 1,377,681,880 Net % 34.7% 55.6% 10.6% -0.9% 100.0% Gross % 39.5% 47.1% 11.4% 2.1% 100.0% Regional Allocation Long % of Long Short % of Short Gross % of Gross Developed 191,699, % (48,656,462) 10.4% 240,734, % Emerging 88,459, % 0 0.0% 88,459, % United States 1,250,928, % (419,923,972) 89.6% 1,670,854, % Total 1,531,087, % (468,580,433) 100.0% 2,000,048, % Source: Bloomberg, Factset *Spread Distributions are shown only for the following asset classes: Bank Loan, Corporate CDS, Corporate Credit, Convertible Bonds and Preferred Stocks. Spread differential between the underlying securities and Treasury bonds in basis points. The chart above measures the excess yield (in basis points) that these securities provide over the yield offered by U.S. treasuries of comparable maturities according to Page 12 of 15 market prices at the end of the month. We then define the security type, as well as the Fund s long and short exposure, and plot these exposures based on current market values to show a more accurate view of where the Fund s capital is allocated than can be depicted by simply defining exposures by credit rating or security type. Note: A definition of key terms can be found on page 15

13 100-Day Volatility Driehaus Active Income Fund Bloomberg Barclays Aggregate Index 2 Correlation 1 Comparison 12-Month Rolling Correlations vs. Driehaus Active Income Fund S&P 500 Index 3 Bloomberg Barclays Aggregate Index 2 Sources: Driehaus Capital Management, Bloomberg, Factset Standards & Poor s ( S&P ) 500 Index total return data from Bloomberg. Bloomberg Barclays Aggregate Index data from Barclays The benchmarks for the Driehaus Active Income Fund are the FTSE 3-Month T-Bill and the Bloomberg Barclays Aggregate Index. The S&P 500 Index is shown for illustrative purposes only. 2 The Bloomberg Barclays Aggregate Index is a broad base index, maintained by Barclays, used to represent investment grade bonds being traded in the United States. 3 The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group. It is a market-weighted index (stock price times number of shares outstanding), with each stock s weight in the index proportionate to its market value. 1 Correlation is a statistical measure of how return sets move in relation to each other. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random. The S&P 500 Index and the Bloomberg Barclays Aggregate Index are recognized proxies for the U.S. fixed income market. Page 13 of 15

14 The Driehaus Active Income Fund (the Fund ), in addition to investing in unrated and investment grade bonds, may also invest in junk bonds, which involve greater credit risk, including the risk of default. The prices of high yield bonds are more sensitive to changing economic conditions and can fall dramatically in response to negative news about the issuer or its industry, or the economy in general. The use of derivatives involves risks different from, and possibly greater than, the risks associated with investing directly in the underlying assets. Derivatives can be highly volatile, illiquid and difficult to value, and there is a risk that changes in the value of a derivative held by the Fund will not correlate with the Fund s other investments. Further, the Fund may invest in derivatives for speculative purposes. Gains or losses from speculative positions in a derivative may be much greater than the derivative s original cost and potential losses may be substantial. The Fund may make short sales. Short sales expose the Fund to the risk of loss. It is anticipated that the Fund will experience high rates of portfolio turnover, which may result in payment by the Fund of above-average transaction costs. This is a nondiversified fund; compared to other funds, the Fund may invest a greater percentage of assets in a particular issuer or a small number of issuers. As a consequence, the Fund may be subject to greater risks and larger losses than diversified funds. No investment strategy, including an absolute return strategy, can ensure a profit or protect against loss. Additionally, investing in an absolute return strategy may lead to underperforming results during an upward moving market. When interest rates increase, bond prices decrease and bond funds become more volatile. This material is not intended to provide investment advice. Nothing herein should be construed as a solicitation or a recommendation to buy or sell securities or other investments. You should assess your own investment needs based on your individual financial circumstances and investment objectives. The opinions expressed are those of Driehaus Capital Management LLC ( Driehaus ) and are subject to change at any time due to changes in market or economic conditions. Driehaus does not guarantee the accuracy or completeness of this information. This data was prepared on May 17, 2018 and has not been updated since then. It may not reflect recent market activity. Driehaus assumes no obligation to update or supplement this information to reflect subsequent changes. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Driehaus to be reliable and are not necessarily all inclusive. Driehaus does not guarantee the accuracy or completeness of this information. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Please consider the investment objectives, risks, fees and expenses of the Fund carefully prior to investing. The prospectus and summary prospectus contain this and other important information about the Fund. To obtain a copy of the prospectus and/or summary prospectus, please call us at (877) Please read the prospectus and summary prospectus carefully before investing. Driehaus Securities LLC, Distributor Page 14 of 15

15 FUND INFORMATION The Fund invests primarily in U.S. fixed income and floating rate securities, of both investment and non-investment grade credit quality, as well as equities and derivative instruments. The Fund intends to pursue its fundamental opportunistic bottom-up trading approach using the following investment strategies: Capital Structure Arbitrage attempt to exploit pricing inefficiencies between two securities of the same company. Example: buying a debt instrument that is believed to be undervalued while simultaneously shorting a subordinated debt instrument of the same issuer that is believed to be overvalued. Convertible Arbitrage attempt to profit from changes in a company s equity volatility or credit quality by purchasing a convertible bond and simultaneously shorting the same issuer s common stock. Directional Trading taking long or short positions in equity or corporate debt instruments in anticipation of profiting from movements in the prices of these assets. Event Driven attempt to profit from the consummation of a given event, e.g. a takeover, merger, reorganization or conclusion of material litigation, or based upon the perceptions of a potential pending corporate event. Pairs Trading attempt to exploit pricing inefficiencies between the securities of two similar companies by buying the security of one company and shorting the security of the other. Interest Rate Hedging attempt to reduce the performance impact of rising or falling interest rates. Volatility Hedging attempt to profit from extreme market volatility. DEFINITIONS OF KEY TERMS Agency Mortgage-Backed Security - A mortgage-backed security issued and guaranteed by a government agency such as the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. Asset-Backed Security (ABS) - A security whose value and income payments are derived from and collateralized (or backed ) by a specified pool of underlying assets. Average % of Par-Longs - The average dollar price of a bond the Fund is long as a percentage of par. Average % of Par-Shorts - The average dollar price of a bond the Fund is short as a percentage of par. Credit Default Swap (CDS) - A contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) goes into default. In its simplest form, a credit default swap is a bilateral contract between the buyer and seller of protection. Equity Beta - A measure describing the relation of a portfolio s returns with that of the financial market as a whole. A portfolio with a beta of 0 means that its price is not at all correlated with the market. A positive beta means that the portfolio generally follows the market. A negative beta shows that the portfolio inversely follows the market; the portfolio generally decreases in value if the market goes up and vice versa. Effective Duration - A duration calculation for bonds with embedded options. Effective duration takes into account that expected cash flows will fluctuate as interest rates change. Spread Duration - The sensitivity of the price of a bond to a 100 basis point change to its option-adjusted spread. As the rate of the Treasury security in the option-adjusted spread increases, the rate of the optionadjusted spread also increases. Mortgage-Backed Security (MBS) - An asset-backed security or debt obligation that represents a claim on the cash flows from mortgage loans, most commonly on residential property. Portfolio Coupon - The annualized interest earned for the portfolio. Portfolio Current Yield - The annual income (interest or dividends) divided by the current price of the security, aggregated to the portfolio level. Portfolio Yield-to-Worst - The lowest potential yield that can be received on a bond without the issuer actually defaulting, aggregated to the portfolio level. The yield to worst is calculated by making worst-case scenario assumptions on the issue by calculating the returns that would be received if provisions, including prepayment, call or sinking fund, are used by the issuer. Sharpe ratio - A measure of return per unit of risk, it is calculated by finding the portfolio s excess return and then dividing by the portfolio s standard deviation. Stock Vega - The change in the price of an option that results from a 1% change in volatility. Vega changes when there are large price movements in the underlying asset and Vega falls as the option gets closer to maturity. Vega can change even if there is no change in the price of the underlying asset (e.g., if there is a change in expected volatility). Swap - A derivative in which two counterparties exchange certain benefits of one party s financial instrument for those of the other party s financial instrument. Page 15 of 15