Aberdeen Asset Management

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1 Aberdeen Asset Management Fixed income overview March 2016 David Lloyd-Nolan, Senior Fixed Income Product Specialist Aberdeen Asset Management For professional investors only Not for public distribution

2 United States Unemployment Goldman Sachs financial conditions index 11 CBO* Natural Rate of Unemployment Civilian Unemployment Rate Tightening financial conditions Easing financial conditions Source: Economic Research Division, Federal Reserve Bank of St. Louis and United States Department of Labor. CBO Congressional Budget Office estimate. 31 Dec 15 Past performance is not a guide to future results Source: Goldman Sachs Financial Conditions index, Dec 15 Economy nearing potential 1

3 Europe PMI data ECB staff forecasts for Eurozone France Germany Italy 1,8 Growth CPI inflation , ,4 48 1, , jan 13 jul 13 jan 14 jul 14 jan 15 jul 15 jan 16 0,8 mrt 14 jun 14 sep 14 dec 14 mrt 15 jun 15 sep 15 dec 15 Source: Bloomberg, For illustrative purposes only. No assumptions regarding future performance should be made, Markit, 31 Dec 15 Source: Bloomberg, For illustrative purposes only. No assumptions regarding future performance should be made Dec 15 Sluggish growth and declining inflation 2

4 European high yield 3

5 European HY market has developed Rating 31 Dec Dec Jan 16 European HY Market Size ( bn) Number of issues Number of issuers Top 50 issuers 87.6% 71.7% 54.8% Countries of risk Non Euro countries of risk Duration (years) Average quality BB3 B1 BB3 Source: BofA Merrill Lynch, HE00 4

6 Divergences created by sovereign stress, monetary policy, and energy exposure Correlation of Euro and Dollar High Yield Returns Correlation of Euro High Yield and 10Y Bund Returns 100% Return correlation Beta of EUR HY to USD HY (RHS) % 75% % % 25% 50% 0.8 0% % 25% % % 0% Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan % Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Source: JP Morgan, 6 Jan 16. Rolling 52 week correlation 5

7 Why invest in High Yield now? Spread (basis points) Euro High Yield Source: Bloomberg. For Illustrative purposes only. No assumptions regarding future performance should be made, Merrill Lynch (HE00 index), 29 Jan 16 European High Yield average credit rating BB BB- B+ B Source: JP Morgan, 31 Jan 16. For illustrative purposes only 6

8 Defaults to remain low High Yield default rates 16% FY Default Rate - Europe FY Default Rate - US EU Forecast* US Forecast 12% 8% 4% 0% * JPM forecasts for Europe in 2016 No assumptions regarding future performance should be made Source: JP Morgan, S&P and Moody s Investor Services, Nov 15 7

9 Performance Aberdeen Global Select Euro High Yield Bond Fund % Annualised performance 3 months 6 months 1 year 2 years 3 years 5 years Fund* Sector average Quartile * net of annual charges, EUR Past Performance is not a guide to future results Source: Morningstar, 31 Jan 16 Outperformed: Top quartile Manager: 9 of last 13 calendar years 7 of last 13 calendar years ^ EHY Universe As at 31 Dec 15 Source: Lipper to 31 Dec 14, Morningstar thereafter Standing out from the crowd 8

10 Positioning: credit rating Benchmark Q4 15 Relative exposure Q4 15 Number of holdings and exposure to B rated bonds 0.0% BBB or above 64.8% BB 29.7% B 5.5% CCC or below 0.0% Unrated 0.0% Cash Number of holdings (LHS) % Exposure to B (RHS) % -40% -20% 0% 20% 40% 0 20 Q4 11 Q4 12 Q4 13 Q4 14 Q4 15 Benchmark: BofA Merrill Lynch Euro High Yield Constrained (HEC0). Cash includes cash at bank, outstanding settlements, call account cash, fixed deposits, cash used as margin and profit/losses on both derivative positions and forward currency contracts. The portfolio and benchmark data shown uses S&P where available, if not, Moody's, then Fitch. This may differ from the ratings used by the benchmark provider detailed in the IMA Source: Aberdeen Asset Management, 31 Dec 15 9

11 Positioning: sector and geography Benchmark Q4 15 Relative exposure Q4 15 Benchmark Q4 15 Relative exposure Q % Automotive 21.2% Banking 14.0% Basic Industry 1.8% Austria 12.5% France 8.9% Capital Goods 0.0% Cash 1.7% Consumer Goods 5.6% Energy 15.3% Germany 1.3% Greece 2.3% Ireland 1.0% Financial Services 3.9% Healthcare 2.1% Insurance 19.1% Italy 3.0% Netherlands 2.5% Leisure 6.1% Media 0.4% Real Estate 0.9% Poland 6.5% Spain 3.5% Retail 5.0% Services 0.7% Tech and Electronics 1.4% Sweden 9.3% UK 10.6% Telecommunicatios 2.0% Transportation 3.4% Utility 5.4% US -20% -10% 0% 10% 20% 30% -20% -10% 0% 10% Benchmark: BofA Merrill Lynch Euro High Yield Constrained (HEC0) Sector allocations are subject to change and are provided for informational purposes only Source: Aberdeen Asset Management, 31 Dec 15 10

12 European convertible bonds 11

13 Convertibles compared to other asset classes Equities Bonds Convertibles Upside potential Unlimited Limited Unlimited Income Dividends Fixed Fixed but lower than bonds Risk Worst case scenario: the issuer defaults The investor can lose everything Recovery value (depends on the value of assets) Recovery value (similar to bonds) Source: Aberdeen Asset Management 12

14 Which risk to favour in order to increase the performance potential of a traditional Fixed Income portfolio? Securitisation products Financial Subordinated Correlation Emerging Debt Debt Subordination Currency or Geopolitical Default Government Bonds and Investment Grade Portfolio Equity High Yield Duration Convertibles Risk Source: Aberdeen Asset Management Long Term Debt Asset Class 13

15 Convertible performance in 2015: an illustration of convertibles benefits Convertibles returns in line with equities in 2015, but with much less volatility Benefits of the asset class illustrated 125 Thomson Reuters Europe Stoxx Europe 600 (Total Return) dec 14 jan 15 feb 15 mrt 15 apr 15 mei 15 jun 15 jul 15 aug 15 sep 15 okt 15 nov 15 dec 15 Source: Aberdeen Asset Management, Bloomberg 14

16 Convertible bonds have a fixed income risk profile One year rolling volatility for asset classes 45% Convertibles Equities Investment Grade High Yield Government bonds 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Aberdeen Asset Management, Retail Share price (A) net of fees, Peer group is Lipper Global Bond Convertible Europe Cash is EONIA compounded daily 15

17 Convertible profile categories Four main regimes Equity-sensitive Distressed Very low parity Very high premium Falling bond floor Low cash price Credit/rate-sensitive, bond-like Low parity High premium Low delta Out-of-themoney Balanced, new issue-like Moderate parity Moderate premium Moderate delta At-the-money High parity Low premium High delta In-the-money Share price Source: Aberdeen Asset Management 16

18 jan 99 jul 99 jan 00 jul 00 jan 01 jul 01 jan 02 jul 02 jan 03 jul 03 jan 04 jul 04 jan 05 jul 05 jan 06 jul 06 jan 07 jul 07 jan 08 jul 08 jan 09 jul 09 jan 10 jul 10 jan 11 jul 11 jan 12 jul 12 jan 13 jul 13 jan 14 jul 14 jan 15 jul 15 jan 16 Equity sensitivity over time Share sensitivity 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Thomson Reuters Datastream, Aberdeen Asset Management 17

19 Aberdeen Global II European Convertibles Bond Fund Performance in EUR gross of fees Performance % Account Benchmark Account: Aberdeen Global II European convertibles bond fund Benchmark: 100% Thomson Reuters Europe convertible bond index Reporting currency: EUR Return type: Gross Inception date: 11 May 01 Reporting date: 31 Jan 16 1,50 6,08 4,34 7,01 6,84 8,25 8,08 5,73 5,44 5,11 4, ,09-4,18-3,88-2,83-3,09-5,51-5,13-4,18-0,65 1Mo. 3Mo. 6Mo. YTD 1Yr. 2Yrs (ann.) 3Yrs (ann.) 4Yrs (ann.) 5Yrs (ann.) Retrun since inception (ann.) Returns since inception (cumulative) Return % Account Benchmark Past performance is not a guide to future performance As the Fund invests overseas, its value may fluctuate as a result of currency exchange rates Source: The price of units and income from them may fall as well as rise and is not guaranteed. The investor may not get back the amount originally invested Account: Aberdeen Global II European Convertibles Bond Fund. Benchmark: 100% Thomson Reuters Europe Convertible Bond Index. Reporting Currency: EUR. Return type: Gross Inception date: 11 May 01. Reporting date: 31 Jan 16 18

20 Emerging markets 19

21 Sovereign spreads provide an attractive entry point JPM EMBI Global Diversified Index Sovereign Spread (bps) Source: Bloomberg, JP Morgan, 31 Jan 16 20

22 But FX concerns remain JP Morgan emerging markets currency Source: JP Morgan, Bloomberg, 12 Feb 16 21

23 The emerging debt yield pick up is compelling Yield (%) EM Local Currency (BBB+) EM Corporates (BBB) EM Hard Currency (BBB-) GE 10 yr (AAA) Spain 10 yr (BBB+) % investment grade* 54% investment grade* * Investment grade portion of the JP Morgan EMBI GD EM Local currency index: JPM GBI-EM GD, EM Hard currency index: JPM EMBI GD, EM Corporate index: JPM CEMBI BD, US IG Corporates index: JPM JULI index. Standard & Poor s credit ratings are expressed as letter grades that range from AAA to D to communicate the agency s opinion of relative level of credit risk. Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. The investment grade category is a rating from AAA to BBB- For illustrative purposes only. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. Individuals cannot invest directly in an index Source: JP Morgan, S&P, Bloomberg, 19 Feb 16 Value across emerging markets 22

24 Comparison of indices Hard Currency 1 Hard Currency Corporates 2 Hard Currency Frontiers 3 Local Currency 4 Market capital US$662bn US$770bn US$74bn US$804bn Average rating (Moody s/s&p) Baa3/BB+ Baa2/BBB B1/B+ Baa2/BBB+ Investment Grade (%) Number of countries Number of issuers Number of issues Yield (%) Modified duration (years) JPM EMBI Global Diversified Index 2 JPM CEMBI Broad Diversified Index 3 JPM NEXGEM Index 4 JPM GBI-EM Global Diversified Index Standard & Poor s credit ratings are expressed as letter grades that range from AAA to D to communicate the agency s opinion of relative level of credit risk. Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. The investment grade category is a rating from AAA to BBB- Source: JP Morgan, Aberdeen Asset Management, 31 Jan 16 23

25 Benefits of a blended approach Thirteen years benchmark risk and returns Benchmark annualised returns USD (%) 11 AG Select EM Bond 10 Frontier 9 EM HC Sovereign EM Corporates EM LC Sovereign Annualised volatility (%) Source: Aberdeen Asset Management, JP Morgan, 31 Jan 16. Past performance is not indicative of future results. For illustrative purposes only Benchmarks used: EM Corporate = JPM CEMBI BD, EM HC Sovereign = JPM EMBI GD, EM LC Sovereign = JPM GBI-EM GD, EM Frontier = JPM NEXGEM Fund used: Aberdeen Global Select Emerging Markets Bond Fund 24

A strong reform-oriented mindset established Narendra Modi leading the BJP and Raghuram Rajan the central bank make a powerful team Narendra Modi Prime

economy Raghuram Rajan Governor Reserve Bank of India Restore credibility to RBI Establish inflation targeting framework Create capacity on bank balance

26 A strong reform-oriented mindset established Narendra Modi leading the BJP and Raghuram Rajan the central bank make a powerful team Narendra Modi Prime Minister of India Deliver far reaching reforms Empower the states Increase investment Alleviate supply bottlenecks Increase productive capacity of the economy Raghuram Rajan Governor Reserve Bank of India Restore credibility to RBI Establish inflation targeting framework Create capacity on bank balance sheets Reduce country risk premium Structural decline in inflation Lower policy rates, yields and cost of capital Structural support for bond markets, stability in FX 25

27 mrt 10 sep 10 mrt 11 sep 11 mrt 12 sep 12 mrt 13 sep 13 mrt 14 sep 14 mrt 15 sep 15 mrt 16 sep 16 mrt 17 sep 17 mrt 18 Outlook: giving room for RBI to ease Indian CPI and RBI Policy rate 16 Consumer Price Index: YoY Policy Rate: Month End: Repo Rate Mar 2016 Inflation Target at 6.0% Mar 2017 Inflation Target at 5.0% Mar 2018 Inflation Target at 4.0% Note: New CPI series from Feb 15 onwards, base year updated to 2012 from 2010 and weights for food and fuel lower Source: Aberdeen Asset Management, Dec 15 26

28 Outlook Central bank policy remains key and divergence expected Low growth and low inflation should prove supportive of bonds Bond market is large and diverse always opportunities: European High Yield Credit risk favourable with default rates set to remain low European Convertibles A more cautious way of gaining exposure to equity markets with fixed income protection Emerging Market Debt Longer term opportunities despite weak sentiment India Largely untapped bond market undergoing positive structural change Source: Aberdeen Asset Management, 31 Jan 16 27

29 For professional investors only Not for public distribution Past performance is not a guide to future returns. The value of investments, and the income from them, can go down as well as up and your clients may get back less than the amount invested. The views expressed in this presentation should not be construed as advice on how to construct a portfolio or whether to buy, retain or sell a particular investment. The information contained in the presentation is for exclusive use by professional customers/eligible counterparties (ECPs) and not the general public. The information is being given only to those persons who have received this document directly from Aberdeen Asset Management (AAM) and must not be acted or relied upon by persons receiving a copy of this document other than directly from AAM. No part of this document may be copied or duplicated in any form or by any means or redistributed without the written consent of AAM. The information contained herein including any expressions of opinion or forecast have been obtained from or is based upon sources believed by us to be reliable but is not guaranteed as to the accuracy or completeness. Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. FTSE International Limited ( FTSE ) FTSE FTSE is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. RAFI is a registered trademark of Research Affiliates, LLC. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis, should not be taken as an indication or guarantee of any future performance analysis forecast or prediction. The MSCI information is provided on an as is basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the MSCI Parties) expressly disclaims all warranties (including without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages ( Subscriptions for investment in Aberdeen Global may only be made on the basis of the relevant prospectus, relevant Key Investor Information Document (KIID) and most recent annual financial statements, and semi-annual financial statements if published thereafter. These documents and the articles of incorporation are available free of charge from Aberdeen Asset Managers Limited, 10 Queens Terrace, Aberdeen, AB10 1YG, Scotland and are also available on 28

Emerging Market Debt: Smoke but no fire

Emerging Market Debt: Smoke but no fire November 2014 Edwin Gutierrez, Head of Emerging Market Sovereign Debt Aberdeen Asset Management For Professional Investors only Not for public distribution Smoke