Keep Calm and Carry On

Transcription

1 SEPTEMBER 2015 DRIEHAUS CREDIT COMMENTARY // AUGUST 31, 2015 DRIEHAUS ACTIVE INCOME FUND PERFORMANCE SUMMARY Keep Calm and Carry On The message Keep Calm and Carry On must speak to a lot of people because I see these Keep Calm shirts everywhere (particularly amongst my fellow yogis). If I could, I d give one to Janet Yellen and encourage her to keep calm, and get on with the first Fed rate hike in over nine years. Sadly though, my weekend reading tells me the consensus is that there will be no such rate hike this week. Many of these economists do point out that she will be particularly forceful in setting expectations for an October or December hike though! This sounds eerily familiar to the parent who consistently threatens the toddler to cease his poor behavior or risk losing his treat. Ultimately though, the threats go unheeded and the child still gets the ice cream cone. I think it s fairly crazy if the Federal Reserve doesn t hike this week. Honestly, how many chances are we going to get at this? Markets are quickly calming from the dust-up in August. Besides, I d argue that the selloff was largely an emerging markets and S&P 500 event. Neither is particularly concerning to me. Yes most of the BRICs are a hot mess, but emerging markets are almost always going to have a hard time as we approach a rate hike. I don t think any of their issues are big enough to derail the US economy. As for the S&P 500 it re-rated by a multiple or two. So what? After being one of the best performing indices for years on end, it s ok if it has a modest pullback occasionally. Most segments of the market agree with the Keep Calm and Carry On mantra. There are several data points indicating that there s no major market decline or global recession waiting in the months ahead. Here s what I ve noticed (see charts to the right and top of next page). High yield spreads are right back to where they were before the S&P 500 gapped down a reasonable level of ~580bps. Source: Bloomberg There has been virtually no change in the Treasury yield curve between the beginning of August and now (if anything, yields are mostly higher). Source: Bloomberg Both the Dollar Index (RHS, white) & the Currency Volatility Index (LHS, yellow), while elevated, remain at the same levels they ve experienced for most of Source: Bloomberg Page 1 of 16

2 There s no hint among CDS spreads of the largest US banks that financial contagion is a concern, as there was in The differential between Russell 2000 volatility (RVX) and S&P 500 volatility (VIX) has collapsed to almost zero typically you observe the spread blowing out when we have a growth problem. Source: Bloomberg Source: Bloomberg Given our views and the moves in the market, we ve been fairly busy in both funds. Here s a sample of what we ve been working on: LCMAX»» An attractive total return opportunity exists in betting on spread contraction or stabilization in 30-year investment grade bonds. Spreads have been leaking wider for the past year on new issuance, aggressive M&A and shareholder friendly activities, and fears of poor performance in a higher rate regime. At current levels though, some of these bonds represent good investment opportunities. Fifty basis points of spread tightening, coupled with some carry, can create a total return scenario in the high single-digits. We ll be hedging the embedded interest rate risk in these positions through swaptions on longdated Treasurys. To the right is a graph of the OAS of the ML 15+ Investment Grade Corporate Bond Index. Option-Adjusted Spreads of the BoA Merrill Lynch 15+ Investment Grade Corporation Bond Index Source: Bloomberg»» We ve hidden in a number of loans that have performed well through the weakness in credit over the past several months. In some cases, spreads on bonds in the same capital structures have widened enough to make a switch from a secured to an unsecured position appropriate. Page 2 of 16

3 DRSLX»» We ve been trading around many of our volatility-related positions over the past two months. Initially, we monetized many hedges on the extreme moves during mid- August. Since then we ve re-established some positions with rallies into strength and taken advantage of these positions on market choppiness.»» In both funds, we ve noted the strong opportunity in the event-driven space given the massive amount of deal activity and limited supply of capital chasing them. We ve been increasing exposure to this basket in both funds, and hope to have roughly 20% of our capital allocated there over the next several months.»» Earlier this summer we began the transition to a portfolio with less credit beta and more emphasis on idiosyncratic opportunities. This transition continues today, but thus far it s been helpful during the pockets of weakness over the past two months. Examples of these positions include capital structure, convertible arbitrage and risk arbitrage trades. Given the move recently in spreads, however, we ve added to a few long credit risk positions over the past two weeks. Finally, it s rare that we get to discuss a position in detail, but there is an event-driven position in LCMAX, DRSLX and DEVDX that we went public with the other day. We filed an Open Letter to Shareholders of Towers Watson & Company (TW) to oppose the company s take-under by Willis Holdings Group plc (WSH). Should you have an interest in our argument, you can view our white paper: Analysis of Proposed Combination with Willis Group Holdings plc & Standalone Alternative. Until next month, keep calm and carry on K.C., Cass & Adam K.C. Nelson Portfolio Manager Elizabeth Cassidy Assistant Portfolio Manager Adam Abbas Assistant Portfolio Manager Page 3 of 16

4 LCMAX Performance Review Features: Provides differentiated exposure within fixed income and alternative asset allocations Absolute return focused, long/short credit strategy Volatility managed, low correlation return objectives Hedging of interest rate exposure Liquid, transparent hedged mutual fund vehicle Inception Date: November 8, 2005* Fund Assets Under Management: $3.5 billion Firm Assets Under Management: $10.8 billion Portfolio Concentration: Flexible, best ideas approach, generally trades Duration Target: +/- 1 year Volatility Target: Less than the Barclays US Aggregate Index (about 5%, annually) Distributions: Quarterly dividends; annual capital gains Portfolio Managers: K.C. Nelson, Portfolio Manager 16 years experience Elizabeth Cassidy, Assistant Portfolio Manager 15 years experience Adam Abbas, Assistant Portfolio Manager 10 years experience *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 August 2015 Performance Recap August provided some of the most volatile returns across assets classes so far this year. The CBOE Volatility Index (VIX) crossed 40 for the first time since October 2011 on the heels of a sixyear low PMI release from China, an 8.5% drop in the Shanghai Composite, and increased fears about China s slowdown. The credit markets also touched their month wides with high yield reaching 614 basis points (+78bps MTD; 7.63% yield) and investment grade spreads reaching 172 basis points (+14bps MTD; 3.3% yield). West Texas Intermediate crude oil prices fell to a 13-year low of $38.24 per barrel before closing the month at $ Similarly, the S&P 500 Index fell 9% between August 20 and 24, but the yield on the 10-year Treasury fell only 0.13% over the same time period. Aside from the continued concerns about global growth and the decline in energy prices, other notable events in August included the release of the July 29 FOMC (Federal Open Market Committee) minutes, which were largely non-committal on the timing of an increase in interest rates. Meanwhile, the market implied probability of a September rate hike decreased from 48% on July 30 to 22% after the release of the meeting notes, leading to a slight flattening of the yield curve. There were also two additional credit defaults in August, affecting $6.1 billion of securities a YTD high. Excluding the TXU and Caesar s defaults in 2014, the August 2015 default volume was the highest monthly total since The high yield market returned -1.76% in August, its worst monthly performance YTD, and the third negative month in a row. Not surprisingly, high yield bond prices declined in 16 of 21 trading sessions during the month. At the end of August, the HY YTD return was 0.07%. Investment grade credit returned -0.67% in August, the third largest monthly decline YTD, and second monthly decline since June. At the end of August, investment grade bond YTD performance was -0.59%. Notably, as investment grade spreads have moved to multi-year wides, the spread between the high yield and investment grade markets has also been approaching multi-year wides as credit risk reprices. The leveraged loan market generated returns of -0.70%, which was the largest monthly decline since December The YTD return for leveraged loans is 2.10%. Page 4 of 16

5 YTD BB-rated loans have had the strongest performance (+3.32%), followed by B-rated (+2.38%). CCCs have been a laggard, posting just a 0.80% gain, while second lien loans have lost 0.70%. Finally, S&P 500 company bonds and emerging market bonds returned -6.03% and -1.08%, respectively, and have returned -2.88% and 1.08%, YTD. The Driehaus Active Income Fund returned -0.87% in August 1. This was primarily driven by the directional long (-0.45%) and pairs trade (-0.34%) strategies. The losses in the directional long strategy were driven by spread widening in a number of lower quality names across a variety of industries, including autos, energy, gaming, telecom, aerospace and defense, and leisure. The losses in the pairs trading strategy were driven by three trades that had exposure to energy prices or general widening in merger arbitrage spreads. 1 Performance Disclosure 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 for more current performance information. The convertible arbitrage and event-driven trades detracted 5 basis points each. Two of our convertible arbitrage trades are slightly long-leaning and the losses from these trades were not offset by the fund s neutral or short-leaning trades. The losses in the event trades were driven by several of the equity-sensitive names selling off with the broader equity market. Our hedging strategies had mixed results. On the positive side, our volatility trades, primarily focused on the S&P 500 Index, contributed 9 basis points to returns. Conversely, our interest rate hedge detracted 6 basis points from performance. No other strategy contributed meaningfully to performance this month. Page 5 of 16

6 LCMAX Performance Review Month-end Performance as of 8/31/15 Average Annual Total Return Fund/Index MTD YTD 1 Year 3 Year 5 Year Since Inception 1 Driehaus Active Income Fund % 0.56% -0.73% 1.90% 1.97% 3.89% Citigroup 3-Month T-Bill Index % 0.01% 0.02% 0.04% 0.06% 1.25% Barclays U.S. Aggregate Bond Index % 0.45% 1.55% 1.53% 2.98% 4.95% Calendar Quarter-end Performance as of 6/30/15 Average Annual Total Return Fund/Index QTR YTD 1 Year 3 Year 5 Year Since Inception 1 Driehaus Active Income Fund % 1.44% -0.23% 2.39% 2.33% 4.05% Citigroup 3-Month T-Bill Index % 0.01% 0.02% 0.05% 0.06% 1.27% Barclays U.S. Aggregate Bond Index % -0.10% 1.86% 1.83% 3.35% 4.99% Annual Fund Operating Expenses 4 Management Fee 0.55% Other Expenses Excluding Dividends and Interest on Short Sales 0.24% Dividends and Interest on Short Sales 0.35% Total Annual Fund Operating Expenses 1.14% 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 Citigroup 3-Month T-Bill Index is designed to mirror the performance of the 3-Month U.S. Treasury Bill. The Citigroup 3-Month T-Bill Index is unmanaged and its returns include reinvested dividends. 4 The Barclays U.S. Aggregate Bond 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. 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. Page 6 of 16 Driehaus Securities LLC, Distributor

7 LCMAX Portfolio Characteristics* Executive Summary excluding cash Assets Under Management (AUM) $3,414,757,873 Long $3,732,016,740 $3,427,879,182 Short $(1,135,853,492) $(1,135,853,492) Net $2,596,163,247 $2,292,025,690 Net /AUM 76.03% 67.12% Gross $4,867,870,232 $4,563,732,674 Gross /AUM 1.43x 1.34x Risk Summary Effective Duration 0.60 Years Effective Spread Duration 2.61 Years 30-day SEC Yield 2.94% Portfolio Yield-To-Worst 3.90% Average % of Par Longs % Average % of Par Shorts 97.67% Beta vs. S&P Day Volatility 1.89% Trading Strategy Type Gross % of Gross % Contrib. to Total Return % of Gross Change vs. Previous Month End Capital Structure Arbitrage 1 780,010, % -0.02% -0.6% Convertible Arbitrage 1 260,731, % -0.05% 0.6% Event Driven 1 488,677, % -0.05% 2.2% Pairs Trading 1 303,118, % -0.34% 1.2% Directional Long 1 2,143,654, % -0.45% -0.5% Directional Short 1 81,490, % 0.01% 0.0% Interest Rate Hedge 1 472,971, % -0.06% 1.2% Volatility Trading 1 33,077, % 0.09% -0.2% USD Cash 304,085, % 0.00% -3.7% FX Cash 52, % 0.00% 0.0% FX Hedge - 0.0% 0.00% 0.0% Total 4,867,870, % -0.87% 0.0% Market Capitalization BILLION Long % of Long Short % of Short $0-500mm 76,317, % - 0.0% $500mm - 2bn 110,357, % (4,457,238) 0.4% $2bn -10bn 538,611, % (151,614,979) 13.3% $10bn - 20bn 119,648, % (99,946,873) 8.8% >$20bn 418,507, % (132,589,087) 11.7% ABS/MBS/CMBS 2 102,479, % - 0.0% Private Companies 2 2,061,957, % (275,445,972) 24.3% Treasuries 2-0.0% (471,799,343) 41.5% Cash 2,3 304,137, % (0) 0.0% Total 3,732,016, % (1,135,853,492) 100.0% Source: Bloomberg 1 A definition of this term can be found on page Market capitalization information is unavailable for these securities. Credit Ratings and market capitalization information for Credit Default Swaps (CDS) and Interest Rate Swaps are from underlying securities. 3 This figure represents the fund s operating cash plus receivables for investments sold and minus payables for investments purchased. Page 7 of 16 *: please note exposure may be different than market value. For equities, bonds, foreign exchange forwards and interest rate swap products, exposure is the same as market value. For options, exposure represents delta-adjusted underlying exposure. For credit default swap and credit default swap indices, exposure represents bond-equivalent exposure. Note: A definition of key terms can be found on page 16

8 Credit Rating* Long % of Long Short % of Short Gross % of Gross % of Gross Change vs. Previous Month End AAA 1 365,400, % (490,967,625) 43.2% 856,368, % -3.3% AA 17,516, % - 0.0% 17,516, % 0.0% A 2 103,514, % (156,277,886) 13.8% 259,792, % 0.7% BBB 660,755, % (222,508,468) 19.6% 883,263, % 1.3% BB 988,296, % (102,149,681) 9.0% 1,090,446, % -0.6% B 1,119,209, % (69,591,735) 6.1% 1,188,801, % 1.5% CCC 222,986, % (40,656,941) 3.6% 263,643, % 0.2% CC - 0.0% - 0.0% - 0.0% 0.0% C - 0.0% - 0.0% - 0.0% 0.0% D - 0.0% - 0.0% - 0.0% 0.0% Not Rated 254,336, % (53,701,156) 4.7% 308,038, % 0.1% Total 3,732,016, % (1,135,853,492) 100.0% 4,867,870, % Product Type Source: Bloomberg, Moody s, Standard & Poor s 1 All government bonds are rated AAA. 2 All agency Mortgage Backed Securities (MBS) are rated A. Credit Ratings: AAA and AA: A and BBB: BB, B, CCC, CC, C: Not Rated: Long % of Long High credit-quality investment grade Medium credit-quality investment grade Low credit-quality (non-investment grade), or junk bonds Bonds currently not rated Short Page 8 of 16 % of Short Gross *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 16 % of Gross % of Gross Change vs. Previous Month End ABS 28,249, % - 0.0% 28,249, % 0.0% Agency Mortgage ARM 571, % - 0.0% 571, % 0.0% Agency Mortgage CMO 10,710, % - 0.0% 10,710, % -0.7% Bank Loan 1,090,436, % - 0.0% 1,090,436, % -0.4% CDS Index 89,703, % - 0.0% 89,703, % 0.0% CMBS 17,516, % - 0.0% 17,516, % 0.0% Convertible 64,984, % - 0.0% 64,984, % 0.2% Corp CDS 183,268, % (236,399,378) 20.8% 419,668, % 0.0% Corp Credit 1,249,889, % (85,469,508) 7.5% 1,335,358, % 0.3% Equity 344,762, % (176,304,153) 15.5% 521,066, % 3.4% Equity Index Option - 0.0% (33,077,889) 2.9% 33,077, % -0.2% Equity Option - 0.0% (5,720,436) 0.5% 5,720, % 0.0% Equity Warrant 29,285, % - 0.0% 29,285, % -0.1% ETF - 0.0% (20,623,267) 1.8% 20,623, % 0.0% FX Cash 52, % (0) 0.0% 52, % 0.0% FX Forward 12,461, % (79,820,654) 7.0% 92,281, % 0.0% Govt Bond 19,244, % (1,691,892) 0.1% 20,936, % 0.4% IR Swaption - 0.0% (1,172,238) 0.1% 1,172, % 0.0% Mortgage CMO 45,432, % - 0.0% 45,432, % 0.0% Pfd 241,362, % - 0.0% 241,362, % 0.3% Sovereign Credit - 0.0% (23,774,733) 2.1% 23,774, % 0.0% Treasury Future - 0.0% (471,799,343) 41.5% 471,799, % 1.2% USD Cash 304,085, % - 0.0% 304,085, % -3.7% Total 3,732,016, % (1,135,853,492) 100.0% 4,867,870, %

9 Spread Distribution* ($M) >1000 Total Bank Loan Corp. Credit Convertible L. Exp. 191,549, ,562, ,373, ,636,498 45,521,202 12,254,999 18,538,467 1,090,436,000 S. Exp. Net Exp. 191,549, ,562, ,373, ,636,498 45,521,202 12,254,999 18,538,467 1,090,436,000 L. Exp. - 10,329, ,434, ,977, ,776, ,414, ,701,475 20,783,925 18,808,828 97,683,261 55,980,159 1,249,889,203 S. Exp. (6,553,341) - (33,312,853) (16,304,152) - (7,005,447) (22,293,715) (85,469,508) Net Exp. (6,553,341) 10,329, ,121, ,673, ,776, ,408,689 78,407,760 20,783,925 18,808,828 97,683,261 55,980,159 1,164,419,694 L. Exp. 58,393,394 6,591,453 64,984,846 S. Exp. Net Exp. 58,393,394 6,591,453 64,984,846 L. Exp. 44,426,477 62,540,117 38,922,413 56,953,783 38,520, ,362,999 Pfd S. Exp. Net Exp. 44,426,477 62,540,117 38,922,413 56,953,783 38,520, ,362,999 L. Exp. 31,376,821 88,320, ,516,298 34,288,570 73,260, ,762,464 Equity S. Exp. (64,229,848) (73,585,408) (34,031,658) (4,457,238) (176,304,153) Net Exp. 31,376,821 24,090,692 43,930, ,912 73,260,235 (4,457,238) 168,458,311 Treasury Future L. Exp. - - S. Exp. (471,799,343) (471,799,343) Net Exp. (471,799,343) (471,799,343) L. Exp. 29,285,311 29,285,311 Equity Warrant CDS Index Corp CDS S. Exp. - - Net Exp. 29,285,311 29,285,311 L. Exp. 29,457,993 42,880,644 17,365,280 89,703,917 S. Exp. - - Net Exp. 29,457,993 42,880,644 17,365,280 89,703,917 L. Exp. 183,268, ,268,799 S. Exp. (132,150,818) (51,220,996) (6,950,202) (2,280,042) (17,096,029) (26,701,291) (236,399,378) Net Exp. (132,150,818) (51,220,996) (6,950,202) 180,988,757 (17,096,029) (26,701,291) (53,130,579) L. Exp. - - ETF S. Exp. (20,623,267) (20,623,267) Net Exp. (20,623,267) (20,623,267) L. Exp. 234, ,705 27,829,842 28,249,145 ABS S. Exp. Net Exp. 234, ,705 27,829,842 28,249,145 Agency Mortgage ARM L. Exp. 571, ,045 S. Exp. Net Exp. 571, ,045 continues on page 10 Source: Bloomberg *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 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 16 Page 9 of 16

10 Spread Distribution* ($M) continued from page >1000 Total Agency Mortgage CMO L. Exp. 10,710,619 10,710,619 S. Exp. Net Exp. 10,710,619 10,710,619 Mortgage CMO L. Exp. 9,836,390 35,596,330 45,432,720 S. Exp. - Net Exp. 9,836,390 35,596,330 45,432,720 L. Exp. 17,516,392 17,516,392 FX Forward Equity Option FX Cash USD Cash CMBS S. Exp. - Net Exp. 17,516,392 17,516,392 L. Exp. 304,085, ,085,534 S. Exp. - Net Exp. 304,085, ,085,534 L. Exp. 52,024 52,024 S. Exp. (0) (0) Net Exp. (0) 52,024 52,024 L. Exp. S. Exp. (1,199,302) (4,521,134) (5,720,436) Net Exp. (1,199,302) (4,521,134) (5,720,436) L. Exp. 12,461,194 12,461,194 S. Exp. (79,820,654) (79,820,654) Net Exp. (67,359,461) (67,359,461) Sovereign Credit L. Exp. - S. Exp. (23,774,733) (23,774,733) Net Exp. (23,774,733) (23,774,733) IR Swaption Equity Index Option Govt Bond Combined L. Exp. S. Exp. (1,172,238) (1,172,238) Net Exp. (1,172,238) (1,172,238) L. Exp. S. Exp. (33,077,889) (33,077,889) Net Exp. (33,077,889) (33,077,889) L. Exp. 19,244,529 19,244,529 S. Exp. (1,691,892) (1,691,892) Net Exp. 17,552,637 17,552,637 L. Exp. 363,733,273 95,045, ,684,504 1,351,695, ,206, ,053, ,482,912 77,737,708 31,063,828 97,683, ,630,289 3,732,016,740 S. Exp. (613,367,632) (51,220,996) (40,263,055) (186,409,429) (91,880,739) (67,738,397) (26,814,849) (4,457,238) - - (53,701,156) (1,135,853,492) Net Exp. (249,634,359) 43,824, ,421,449 1,165,286, ,325, ,314, ,668,063 73,280,470 31,063,828 97,683,261 65,929,132 2,596,163,247 % -9.6% 1.7% 14.5% 44.9% 16.4% 14.3% 7.4% 2.8% 1.2% 3.8% 2.5% 100.0% Source: Bloomberg *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 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 16 Page 10 of 16

11 LCMAX Effective Duration LCMAX Effective Spread Duration (years) Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 (years) Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 LCMAX Average Yield LCMAX Net / AUM (Excluding Cash) 8% 100% 7% 6% 5% 4% 3% 2% 1% 0% Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 80% 60% 40% 20% 0% Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 LCMAX Gross / AUM (Excluding Cash) 1.5% 1.2% 0.9% 0.6% 0.3% LCMAX Monthly Return* 5% 3% 1% -1% -3% 0.0% Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15-5% Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Sources: Driehaus Capital Management LLC, Bloomberg Note: A definition of key terms can be found on page 16 *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 16

12 Industry Group GICS 1 Long % of Long Page 12 of 16 Short % of Short Gross % of Gross Automobiles & Components 114,148, % - 0.0% 114,148, % Banks 222,191, % - 0.0% 222,191, % Capital Goods 148,470, % (48,776,554) 4.3% 197,246, % Commercial & Professional Serv 91,608, % (30,258,471) 2.7% 121,867, % Consumer Durables & Apparel 26,236, % - 0.0% 26,236, % Consumer Services 342,896, % (3,404,336) 0.3% 346,301, % Diversified Financials 144,539, % (56,851,889) 5.0% 201,390, % Energy 370,615, % (142,472,563) 12.5% 513,087, % Food & Staples Retailing 169,696, % - 0.0% 169,696, % Food Beverage & Tobacco 48,635, % - 0.0% 48,635, % Health Care Equipment & Servic 176,564, % (26,772,476) 2.4% 203,337, % Household & Personal Products 37,374, % - 0.0% 37,374, % Insurance 19,734, % - 0.0% 19,734, % Materials 112,938, % (21,680,987) 1.9% 134,619, % Media 131,674, % (15,717,256) 1.4% 147,391, % Pharmaceuticals, Biotechnology 89,586, % (26,577,250) 2.3% 116,163, % Real Estate 36,039, % (10,121,017) 0.9% 46,160, % Retailing 240,212, % (56,025,959) 4.9% 296,238, % Semiconductors & Semiconductor 70,168, % (26,861,722) 2.4% 97,030, % Software & Services 300,885, % (6,733,552) 0.6% 307,619, % Technology Hardware & Equipmen 64,525, % - 0.0% 64,525, % Telecommunication Services 199,964, % (13,055,250) 1.1% 213,020, % Other 2 Agency Collat CMO 10,710, % - 0.0% 10,710, % Brazil Sovereign - 0.0% (26,054,775) 2.3% 26,054, % CDX HY Index 17,790, % - 0.0% 17,790, % Commercial MBS 17,516, % - 0.0% 17,516, % Debt ETF - 0.0% (20,623,267) 1.8% 20,623, % EUR Currency 6,977, % (25,080,259) 2.2% 32,057, % FHLMC Collateral 571, % - 0.0% 571, % GBP Currency 5,535, % (54,740,395) 4.8% 60,275, % Holding Companies-Divers 45,280, % - 0.0% 45,280, % Home Equity ABS 304, % - 0.0% 304, % itraxx Crossover Index 42,455, % - 0.0% 42,455, % itraxx SubFin Index 29,457, % - 0.0% 29,457, % Other ABS 27,944, % - 0.0% 27,944, % SPX Index - 0.0% (33,077,889) 2.9% 33,077, % US Government 19,244, % (489,795,387) 43.1% 509,039, % USD Currency 304,085, % - 0.0% 304,085, % USD IR Swap - 0.0% (1,172,238) 0.1% 1,172, % WL Collateral CMO 45,432, % - 0.0% 45,432, % Total 3,732,016, % (1,135,853,492) 100.0% 4,867,870, % Sources: Bloomberg, Global Industry Classification Standard, Driehaus Capital Management Industry sector information for CDS and Interest Rate Swaps is from underlying securities. 1 The Global Industry Classification Standard (GICS), a collaboration between Standard & Poor s and Morgan Stanley Capital International, is system of classification that identifies a company according to its business activity. 2 The Other Industry Group data is not categorized within the GICS classification system. Note: A definition of key terms can be found on page 16

13 Industry Sector GICS 1 Long % of Long Short % of Short Gross % of Gross Consumer Discretionary 855,167, % (75,147,551) 6.6% 930,315, % Consumer Staples 255,706, % - 0.0% 255,706, % Energy 370,615, % (142,472,563) 12.5% 513,087, % Financials 422,505, % (66,972,906) 5.9% 489,478, % Health Care 266,151, % (53,349,726) 4.7% 319,501, % Industrials 240,078, % (79,035,025) 7.0% 319,114, % Information Technology 435,579, % (33,595,274) 3.0% 469,174, % Materials 112,938, % (21,680,987) 1.9% 134,619, % Telecommunication Services 199,964, % (13,055,250) 1.1% 213,020, % Other 2 Asset Backed Securities 28,249, % - 0.0% 28,249, % CDS Index 89,703, % - 0.0% 89,703, % Diversified 45,280, % - 0.0% 45,280, % Equity Index - 0.0% (33,077,889) 2.9% 33,077, % ETF - 0.0% (20,623,267) 1.8% 20,623, % Foreign Sovereign - 0.0% (26,054,775) 2.3% 26,054, % FX Currency 12,513, % (79,820,655) 7.0% 92,333, % Interest Rate Swap - 0.0% (1,172,238) 0.1% 1,172, % Mortgage Securities 74,230, % - 0.0% 74,230, % US Government 19,244, % (489,795,387) 43.1% 509,039, % USD Currency 304,085, % - 0.0% 304,085, % Total 3,732,016, % (1,135,853,492) 100.0% 4,867,870, % Country Allocation Long % of Long Page 13 of 16 Short % of Short Gross % of Gross Brazil 107,477, % (48,348,489) 4.3% 155,825, % Cayman Islands 44,426, % - 0.0% 44,426, % China 97, % - 0.0% 97, % Europe 78,890, % (25,080,259) 2.2% 103,971, % Germany 24,423, % - 0.0% 24,423, % Ireland 16,848, % (26,701,291) 2.4% 43,549, % Italy 124,637, % - 0.0% 124,637, % Luxembourg 91,354, % (7,005,447) 0.6% 98,359, % Mexico 49,850, % (4,521,134) 0.4% 54,371, % Spain 91,713, % - 0.0% 91,713, % Switzerland 18,672, % - 0.0% 18,672, % Ukraine 4,636, % - 0.0% 4,636, % United Kingdom 81,327, % (59,999,548) 5.3% 141,326, % United States 2,997,662, % (964,197,323) 84.9% 3,961,859, % Total 3,732,016, % (1,135,853,492) 100.0% 4,867,870, % Sources: Bloomberg, Global Industry Classification Standard 1 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. 2 The Other Industry Group data is not categorized within the GICS classification system. Industry group information for Credit Default Swaps and Interest Rate Swaps is from underlying securities. Note: A definition of key terms can be found on page 16

14 100-Day Volatility 10.00% 9.00% 8.00% 7.00% Barclays U.S. Aggregate Bond Index % 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Driehaus Active Income Fund Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Feb-15 Apr-15 Jun-15 Aug-15 Correlation 1 Comparison 12-Month Rolling Correlations vs. Driehaus Active Income Fund S&P 500 Index 3 Barclays U.S. Aggregate Bond Index 2 Sources: Standards & Poor s ( S&P ) 500 Index total return data from Bloomberg. Barclays U.S. Aggregate Bond Index data from Barclays The benchmarks for the Driehaus Active Income Fund are the Citigroup 3-Month T-Bill and the Barclays U.S. Aggregate Bond Index. The S&P 500 Index is shown for illustrative purposes only. 2 The Barclays U.S. Aggregate Bond 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 Barclays U.S. Aggregate Bond Index are recognized proxies for the U.S. fixed income market. Page 14 of 16

15 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 be relied upon as a forecast or research. The opinions expressed are those of Driehaus Capital Management LLC ( Driehaus ) as of September 8, 2015 and are subject to change at any time due to changes in market or economic conditions. The commentary has not been updated since September 10, 2015 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. 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 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. Driehaus does not guarantee the accuracy or completeness of this information. This data was prepared on August 10, 2015 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. DRIEHAUS CAPITAL MANAGEMENT Page 15 of 16

16 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. 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. Effective 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 option-adjusted 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. 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. Average % of Par-Shorts - The average dollar price of a bond the Fund is short as a percentage of par. Page 16 of 16