DRIEHAUS SELECT CREDIT FUND

Transcription

1 DRIEHAUS SELECT CREDIT FUND April 2014 Summary Ticker: DRSLX Features Provides differentiated exposure within fixed income and alternative asset allocations Absolute return, long/short credit strategy Volatility managed, low correlation return objectives Hedging of interest rate exposure Liquid, transparent hedged mutual fund vehicle Inception Date September 30, 2010 When Words Fail You, Use Pictures Having written a few of these monthly commentaries over the years, I ve developed a lot of respect for the daily columnist. Coming up with something to say every day has to be difficult, particularly if your world isn t changing in the interim. Once every year or two I find myself with little to write about. This is one of those months. Credit is still priced rich. The Fed still seems to fear deflation more than inflation. Investors are still searching for any place to pick up another quarter point of yield. Instead of harping about these subjects again, I m turning to pictures this month. I ve compiled some of the charts for you that I ve come across during the past month that are worth a look. It s a random collection, with something in it for everyone. I ve included my Cliff notes on the graphs, for what it s worth. EXHIBIT 1: Yields on 10-Year Japanese, German and U.S. government bonds Fund Assets Under Management $1.3 billion Firm Assets Under Management $12.9 billion Portfolio Concentration Flexible, best ideas approach, generally trades Duration Target +/- 3 year U.S. German Japan Volatility Target Less than the BofA Merrill Lynch U.S. High Yield Master II Index (about 8%, annually) Distributions Quarterly dividends; annual capital gains Portfolio Managers K.C. Nelson Portfolio Manager 15 years experience Elizabeth Cassidy Assistant Portfolio Manager 14 years experience Adam Abbas Assistant Portfolio Manager 8 years Source: Bloomberg Yields on Japan (green), German (yellow) and U.S. (white) government bonds have fallen considerably over the past two months. Many traders are pointing to the falling yields of other developed market bonds as the reason for the most recent dip in U.S. Treasury yields. The logic is that investors should not get paid a 1% to 2% premium for buying Treasurys over other developed market sovereigns. It s important to note that there s almost a 1% differential in 10-year inflation breakeven rates between the U.S. (2.2%), Japan (1.4%) and Germany (1.3%). While I appreciate the argument for buying Treasurys, I d argue that it s short-sighted and risky. Core CPI/PPI are already running at a roughly 2% rate. What happens if that rises later this year? Further, won t easing by other central banks give our Fed room to be a bit more restrictive with its own policy (think of it as the opposite situation that Bernanke faced for much of his tenure)? I m guessing the taper ends in the fall, Fed funds start to rise in the first half of next year, and everyone is piled into the front half of the curve wondering what to do. It s like the market is a bunch of frogs in a pot and Ms. Yellen plans to gradually bring the water to a boil. Page 1 of 21

2 EXHIBIT 2: Risk premiums reflected in spreads across U.S. high yield, European credits and emerging market bonds JPM U.S. High Yield Index itraxx European Crossover Index JP Morgan Emerging Bond Market Index Source: Bloomberg The graph above shows the rapid decline in spreads over the past year in risk assets around the globe, namely the itraxx European Crossover Index (white), the JPM U.S. High Yield Index (yellow) and the JP Morgan Emerging Bond Market Index (green). The drop in European corporate credit spreads and emerging bond market spreads has accelerated in recent weeks. It wouldn t be surprising to see U.S. high yield spreads follow suit in the near term, particularly given the recent decline in Treasury yields. It s worth mentioning that all of these spreads are bumping up against all-time lows. Page 2 of 21

3 EXHIBIT 3: Rolling correlations of U.S. high yield to the five-year U.S. Treasury wk Trailing Correl to 5yr Trsy OAS Range: bp bp 600bp+ Source: Morgan Stanley Credit Research Exhibit 3 displays the correlations of the high yield market to the five-year Treasury. For a more insightful look, they ve subdivided the high yield universe by the spread at which it trades over a comparable Treasury security. If you re wondering what s wrong with your printer, you can stop wondering. There is no dark blue line for 2009 and much of 2010, as there was no high yield that traded zero to 400 basis points over Treasurys. As shown, correlations between high yield and the five-year Treasury are at their highest point since Moreover, correlation within all segments of the high yield market has lurched higher, not just the bonds that trade tightest to Treasurys. This makes the market even more susceptible to a rate shock than it was at this time last year. Page 3 of 21

4 EXHIBIT 4: Global leveraged loan issuance ($mm) 160, , , ,000 80,000 60,000 40,000 20, Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q1 Source: Morgan Stanley Credit Research This graph shows the surge in leveraged loan issuance during the past two years. Issuance surpassed $120 billion in the first quarter of 2014, marking only the fourth time that s happened in history. Record low interest rates, coupled with a frothy credit market and investors insatiable search for yield are just a few of the reasons for this spike in issuance. Though we like loans over bonds in many cases, one has to wonder how heavy the universe will trade if demand abates, given the massive amount of issuance since 2012 and the poor structure of much of this new issuance. Page 4 of 21

5 EXHIBIT 5: The distribution of use of proceeds from high yield bond and loan issuance 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Refies Equity monetization GCP Capex Acquisitions/LBOs Source: Morgan Stanley Credit Research Exhibit 5 shows the distribution of the use of proceeds for loan issuance since 1996, with GCP standing for general corporate purposes. As illustrated, the proportion of loans issued for acquisition and LBO financing has grown markedly during It appears that many corporates are now planning to grow earnings through M&A after having exhausted all earnings growth through cost-cutting and organic revenue growth over the past several years. Generically speaking, raising money for equity monetization (issuing debt to pay the owners a dividend) and LBO/M&A financing are the riskier alternatives for use of proceeds. Note the rise in these two categories pre-credit Crisis, as well as the trend that s occurring now. Page 5 of 21

6 Exhibit 6: A bunch of charts displaying the richness of the convertible bond market VXOA delta vs. long term avg VXOA premium vs. long term avg VXOA price vs. long term avg Stdev Stdev Stdev 0.5 Avg Avg Avg Stdev -1 Stdev Stdev Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Convert flow and performance Cumulative flows, $mn Jun-11 Nov-11 Apr-11 Sep-11 Feb-13 Jul-13 Dec ,500 3,000 2,500 2,000 1,500 1, ,000 Jun-11 Mar-12 Dec-12 Sep Flows $mn NAV % Cum (RHS) Flow Cum NAV % Cum (RHS) Source: BofA Merrill Lynch Global Research The charts above provide some useful statistics on the Merrill Lynch Convertible Bond Index (VXOA). Starting at the top left, we have a historical graph of the index s delta, premium, and bond price. On the second row, asset flows and performance data is presented. The average delta, premium and bond price of the index are all in excess of 1 standard deviation outside of the norms over the past 15 years. This tells you that the index is a very equity-sensitive product currently, much like it was prior to the tech bubble bursting in Further, convertible bond prices are high, so you have more points at risk in the event of a sell-off. Not surprisingly, fund flows are trending higher as the asset class continues to perform well, despite the increase in the aforementioned risk factors and the lack of new supply. Rising demand without new supply has caused valuations to rise meaningfully. Page 6 of 21

7 EXHIBIT 7: The MOVE Index Source: Bloomberg Shown above is 30 years of history on Merrill Lynch s MOVE Index. The MOVE Index measures implied volatility across a variety of maturities in the Treasury market. The index recently dipped below a reading of 60 for only the fifth time in the past 30 years. It strikes me that the index doesn t typically stay below 60 for long. Prior periods have lasted anywhere from days to weeks, but not months or quarters. Aside from 2005 to 2006, when one could argue that the Fed was asleep at the wheel (insert parallels here), reversals from these low levels have been quick and fairly dramatic. Page 7 of 21

8 EXHIBIT 8: A global snapshot of implied volatility Source: J.P. Morgan, Bloomberg Implied volatility, as many of you know, is a measure of what the markets expect future volatility to be for a given asset. There s a pretty strong relationship between implied volatility and realized volatility (how volatile an asset actually has been over a given historical time period). Within Exhibit 8, the red dot depicts the current level of three-month implied volatility. The thick blue line represents the 25th to 75th percentile range for three-month implied volatility during the past year. The thin blue line illustrates the entire range of implied volatility over the past year. For all assets except for two (S&P 500, Euro Stoxx), the current level of implied volatility falls below the 25th percentile. For roughly half of the assets, implied volatility sits at or very near its low for the past year. It s worth noting that the high date for implied volatility of most of these assets occurred in June or July of In other words, the world is highly correlated to interest rates, regardless of how well you think you re diversified. Page 8 of 21

9 EXHIBIT 9: Cumulative fund flows as a % of asset class AUM by year 90% Floating-rate 70% 50% TIPS Gold EM debt Floating-rate MLP EXD MLP 30% Money-market HY LDM HY Hcare/biotech (annualized) 10% -10% Source: BofA Merrill Lynch Global Investment Strategy, EPFR The chart above shows the cumulative fund flows by selected asset classes since the start of the Fed s quantitative easing programs. I can t say it any better than the chart s author, Michael Hartnett, so I ll use his words. Hartnett states, New highs are likely to be aided and abetted by irrational exuberance in carry trades. Zero rates continue to induce asset manias (in gold, TIPS, HY, EM debt, MLPs, floating rate, biotech). When the end of zero rates is threatened, likely this autumn, both credit and stock markets should correct sharply. The recent drop in yields globally will likely continue to benefit many of these asset classes as investors continue to search for yield and carry trades that perform in this low-volatility regime. Page 9 of 21

10 EXHIBIT 10: Global activity by deal count and dollar volume Source: Bloomberg As shown above, the number and dollar value of M&A transactions globally are rising quickly. We expect this trend to continue, as large cap corporates seem to be running out of organic growth and cost-cutting options to fuel earnings growth. Consequently, they re now acquiring earnings growth with synergies serving as the catalyst for its continuation. Global deal volume only 45 days into the second quarter already has surpassed activity in every quarter over the past five years, with the exception of first quarter Along the same lines, Exhibits 11 & 12 from Credit Suisse do a nice job of illustrating the growth in share buyback and dividend activity across the S&P 500. Given the limited organic growth opportunities to grow equity holders return on equity, corporates are turning to buybacks and dividends to increase the shareholder s yield (shown in the last column of Exhibit 12). Exhibit 11: Share buyback and dividend activity Source: S&P Dow Jones Indices, Liang and Sharpe, Credit Suisse estimates. Page 10 of 21

11 Exhibit 12: Share buybacks and dividend payments for the S&P 500 ( ) Source: S&P Dow Jones Indices, Thomson Reuters Datastream, Liang and Sharpe, Credit Suisse estimates. Note: All dollar amounts in billions. So that s the month in pictures. We hope that you found a few of them informative. As always, thank you for your interest in our funds. Best of luck navigating these markets. K.C. Nelson, Portfolio Manager Page 11 of 21

12 DRIEHAUS SELECT CREDIT FUND PERFORMANCE RECAP Performance Commentary Much like March, risk asset price movements were relatively muted during April. U.S. large capitalization equities continued to perform well while small cap stocks underperformed. The risk-off sentiment and rotation out of small cap equities didn t transfer to bond markets, as spread tightening continued for high yield and investment grade bonds. While all segments of high yield witnessed spread tightening, CCC credit materially outperformed with spreads tightening by 29 basis points compared to BB and B spreads compressing only by 2 and 1 basis point respectively. The S&P 500 Index generated a total return of 0.74% during April and high yield bonds returned 0.69% as spreads compressed 6 basis points. From a macro perspective, nonfarm payroll numbers started the month on a weak note, confirming the effect of winter weather before bouncing sharply higher in early May. Home sales concerns have continued to weigh on the market and inflation data has remained muted, giving the Federal Reserve considerable breathing room to slowly wind down its quantitative easing program. As a result, Treasury rates continued to move tighter and finished the month at 2.64%. Driehaus Alternative Strategies Please visit our website or click a fund below to download a monthly commentary: Driehaus Active Income Fund (LCMAX) Driehaus Select Credit Fund (DRSLX) Driehaus Event Driven Fund (DEVDX) Driehaus Emerging Markets Small Cap Growth Fund (DRESX) The Driehaus Select Credit Fund returned 0.10% for the month, driven primarily by the capital structure arbitrage (+0.16%), directional long (+0.12%) and the directional short (+0.01%) trading strategies. Key detracting strategies for the month were the interest rate hedge (-0.14%), volatility trading (-0.03%) and the event driven strategy (-0.02%). 1 On a trade-specific basis, a directional long trade in a retail food chain added 9 basis points and was the most significant contributor to performance. A capital structure arbitrage trade in a payment processor was the second largest positive contributor, adding 5 basis points. All other fund contributors added 4 basis points or less to performance with the top 10 positive movers adding a collective 37 basis points to the fund in April. On the negative side, the biggest detractor was the interest rate hedge, which detracted 13 basis points as Treasurys moved higher and rates compressed across the yield curve. A directional long in a small retail company detracted 9 basis points and was the second largest detractor from fund performance. Finally, an eventdriven trade in a small upstream oil and gas company detracted 4 basis points from fund performance. Collectively, the 10 most significant detractors hurt fund performance by a combined 38 basis points during the month. 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. Page 12 of 21

13 DRIEHAUS SELECT CREDIT FUND PERFORMANCE RECAP MONTH-END PERFORMANCE AS OF 4/30/14 Average Annual Total Return Fund/Index April YTD 1 Year 3 Year 5 Year 10 Year Since Inception 1 Driehaus Select Credit Fund 0.10% 0.43% 4.50% 3.01% % Citigroup 3-Month T-Bill Index % 0.01% 0.04% 0.06% % BofA Merrill Lynch US High Yield Index % 3.71% 6.30% 8.41% % CALENDAR QUARTER-END PERFORMANCE AS OF 3/31/14 Average Annual Total Return Fund/Index QTR YTD 1 Year 3 Year 5 Year 10 Year Since Inception 1 Driehaus Select Credit Fund 0.33% 0.33% 5.03% 3.27% % Citigroup 3-Month T-Bill Index % 0.01% 0.05% 0.06% % BofA Merrill Lynch US High Yield Index % 3.00% 7.53% 8.71% % Annual Fund Operating Expenses 4 Management Fee 0.80% Other Expenses Excluding Dividends and Interest on Short Sales 0.33% Dividends and Interest on Short Sales 0.68% Total Annual Fund Operating Expenses 1.81% 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. 1 Inception Date: 9/30/ 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. 3 BofA Merrill Lynch US High Yield Index is an unmanaged index that tracks the performance of below-investment-grade, U.S.-dollar-denominated corporate bonds publicly issued in the U.S. domestic market. 4 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 Select Credit 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 contains 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 13 of 21

14 DRIEHAUS SELECT CREDIT FUND PORTFOLIO CHARACTERISTICS* PORTFOLIO SNAPSHOT (as of 4/30/14) Excluding Cash Assets Under Management (AUM) $1,286,940,294 Long $1,309,886,086 $883,655,117 Short $(343,441,368) $(343,441,368) Net $966,444,718 $540,213,748 Net /AUM 75.10% 41.98% Gross $1,653,327,454 $1,227,096,485 Gross /AUM 1.28x 0.95x RISK SUMMARY (as of 4/30/14) Effective Duration 0.68 Years Effective Spread Duration 1.50 Years 30-Day SEC Yield -0.31% Portfolio Yield-To-Worst 3.68% Average % of Par Longs % Average % of Par Shorts % Beta vs. S&P Day Volatility 1.41% TRADING STRATEGY TYPE (as of 4/30/14) Gross % of Gross % Contrib. to Total Return % of Gross Change vs. Previous Month End Capital Structure Arbitrage 1 216,276, % 0.16% -0.1% Convertible Arbitrage 1 64,707, % -0.01% -0.3% Event Driven 1 140,128, % -0.02% 0.6% Pairs Trading 1 7,418, % 0.00% -0.2% Directional Long 1 569,285, % 0.12% 1.8% Directional Short 1 37,177, % 0.01% -0.3% Interest Rate Hedge 1 156,034, % -0.14% 6.3% Volatility Trading 1 36,068, % -0.03% 0.4% Cash Equivalent 426,230, % 0.00% -8.2% Total 1,653,327, % 0.10% MARKET CAPITALIZATION (as of 4/30/14) BILLION Long ($) % of Long Short ($) % of Short $0-500mm 43,268, % - 0.0% $500mm - 2bn 96,025, % (9,363,108) 2.7% $2bn -10bn 79,773, % (46,044,098) 13.4% $10bn - 20bn 40,928, % (15,765,235) 4.6% >$20bn 53,099, % (13,211,116) 3.8% ABS/MBS/CMBS 2 13,319, % - 0.0% Private Companies 2 557,240, % (131,949,561) 38.4% Treasuries 2-0.0% (127,108,250) 37.0% Cash 2,3 426,230, % - 0.0% Total 1,309,886, % (343,441,368) 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 *: 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 21 Page 14 of 21

15 CREDIT RATING* (as of 4/30/14) Long ($) % of Long Short ($) % of Short Gross ($) % of Gross % of Gross Change vs. Previous Month End AAA 1 433,475, % (127,108,250) 37.0% 560,583, % -4.2% AA - 0.0% - 0.0% - 0.0% 0.0% A 2-0.0% - 0.0% - 0.0% 0.0% BBB 8,256, % (15,833,424) 4.6% 24,089, % -0.1% BB 91,799, % (21,222,862) 6.2% 113,022, % 0.7% B 365,639, % (22,657,094) 6.6% 388,297, % 1.0% CCC 293,241, % (55,480,419) 16.2% 348,721, % -0.2% CC - 0.0% - 0.0% - 0.0% 0.0% C - 0.0% - 0.0% - 0.0% 0.0% D - 0.0% - 0.0% - 0.0% 0.0% Not Rated 117,473, % (101,139,319) 29.4% 218,612, % 2.8% Total 1,309,886, % (343,441,368) 100.0% 1,653,327, % PRODUCT TYPE (as of 4/30/14) Long ($) % of Long Short ($) % of Short Gross ($) % of Gross % of Gross Change vs. Previous Month End Agency Mortgage CMO 13,319, % - 0.0% 13,319, % -0.1% Bank Loan 223,813, % - 0.0% 223,813, % 2.6% CDS Index - 0.0% (25,662,786) 7.5% 25,662, % -0.1% Commodity Option - 0.0% (20,876,116) 6.1% 20,876, % 0.0% Convertible 65,707, % - 0.0% 65,707, % -0.2% Corp CDS 23,729, % (68,421,868) 19.9% 92,150, % -0.1% Corp Credit 510,681, % (29,434,771) 8.6% 540,116, % -0.5% Equity 34,266, % (23,395,370) 6.8% 57,661, % 0.0% Equity Index Option - 0.0% (6,641,939) 1.9% 6,641, % 0.4% Equity Option 3,323, % (4,591,667) 1.3% 7,915, % -0.1% Equity Warrant 557, % - 0.0% 557, % 0.0% ETF - 0.0% (5,760,386) 1.7% 5,760, % 0.0% IR Swaption - 0.0% (28,925,907) 8.4% 28,925, % 1.7% Pfd 8,256, % - 0.0% 8,256, % 0.0% REIT - 0.0% (2,622,308) 0.8% 2,622, % 0.0% Treasury Future - 0.0% (127,108,250) 37.0% 127,108, % 4.5% USD Cash 426,230, % - 0.0% 426,230, % -8.2% Total 1,309,886, % (343,441,368) 100.0% 1,653,327, % 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: High credit-quality investment grade Medium credit-quality investment grade Low credit-quality (non-investment grade), or junk bonds Bonds currently not rated *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 21 Page 15 of 21

16 SPREAD DISTRIBUTION* ($M) (as of 4/30/14) USD Cash Agency Mortgage CMO Bank Loan Corp. Credit Convertible Pfd Equity Equity Option Equity Warrant Equity Index Treasury Future Corp. CDS CDS Index ETF Comodity Option IR Swaption REIT Combined >1000 Total L. Exp. 426,230, ,230,969 S. Exp Net Exp. 426,230, ,230,969 L. Exp. 6,075,686 7,244, ,319,862 S. Exp Net Exp. 6,075,686 7,244, ,319,862 L. Exp ,429,533 65,210,751 74,485,106 9,981,717 14,655,799 27,140,144 13,910, ,813,996 S. Exp Net Exp ,429,533 65,210,751 74,485,106 9,981,717 14,655,799 27,140,144 13,910, ,813,996 L. Exp. 49,033,803-21,637,449 70,323, ,842,822 33,976,017 34,651,170 14,132,385 24,214,705 7,927,135 59,942, ,681,477 S. Exp. - (5,463,268) (7,564,863) (9,629,912) (3,081,209) - - (3,695,518) (29,434,771) Net Exp. 49,033,803 (5,463,268) 14,072,586 60,693, ,761,613 33,976,017 34,651,170 10,436,866 24,214,705 7,927,135 59,942, ,246,706 L. Exp. 38,687, ,020,428 65,707,660 S. Exp Net Exp. 38,687, ,020,428 65,707,660 L. Exp ,256, ,256,387 S. Exp Net Exp ,256, ,256,387 L. Exp. - 8,045,206-21,105,843 1,124,500 1,851,203 2,139, ,266,001 S. Exp. (8,724,538) (1,398,647) - - (13,272,185) (23,395,370) Net Exp. (8,724,538) 8,045,206-21,105,843 1,124,500 1,851,203 2,139,249 (1,398,647) - - (13,272,185) 10,870,631 L. Exp ,323, ,323,706 S. Exp (4,591,667) (4,591,667) Net Exp ,323,706 (4,591,667) (1,267,961) L. Exp , ,010 S. Exp Net Exp , ,010 Exp S. Exp (6,641,939) (6,641,939) OptionL. Net Exp (6,641,939) (6,641,939) L. Exp S. Exp. (127,108,250) (127,108,250) Net Exp. (127,108,250) (127,108,250) L. Exp ,783,240-11,292,591-7,653,185 23,729,016 S. Exp. (4,391,651) (14,225,217) - (7,964,461) (9,257,085) (32,583,455) (68,421,868) Net Exp. (4,391,651) (14,225,217) - (7,964,461) (9,257,085) - 4,783,240-11,292,591 - (24,930,270) (44,692,852) L. Exp S. Exp. - - (17,112,413) - (8,550,373) (25,662,786) Net Exp. - - (17,112,413) - (8,550,373) (25,662,786) L. Exp S. Exp (5,760,386) (5,760,386) Net Exp (5,760,386) (5,760,386) L. Exp S. Exp (20,876,116) (20,876,116) Net Exp (20,876,116) (20,876,116) L. Exp S. Exp. - (28,925,907) (28,925,907) Net Exp. - (28,925,907) (28,925,907) L. Exp S. Exp (2,622,308) (2,622,308) Net Exp (2,622,308) (2,622,308) L. Exp. 520,027,691 15,289,383 21,637,449 91,986, ,653, ,361, ,058,766 24,114,102 50,163,095 35,067, ,526,835 1,309,886,086 S. Exp. (140,224,439) (48,614,392) (24,677,276) (17,594,372) (23,510,976) - (4,591,667) (5,094,166) - - (79,134,081) (343,441,368) Net Exp. 379,803,252 (33,325,010) (3,039,827) 74,392, ,142, ,361, ,467,099 19,019,936 50,163,095 35,067,279 29,392, ,444,718 % 39.30% -3.45% -0.31% 7.70% 20.61% 10.80% 11.53% 1.97% 5.19% 3.63% 3.04% % 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 21 Page 16 of 21

17 Data as of 4/30/14 DRSLX EFFECTIVE DURATION DRSLX EFFECTIVE SPREAD DURATION (years) 2.5 (years) Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 DRSLX AVERAGE YIELD DRSLX NET EXPOSURE / AUM (Excluding Cash) 15% 12% 9% 6% 3% 0% Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 80% 70% 60% 50% 40% 30% 20% 10% 0% Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 DRSLX GROSS EXPOSURE / AUM (Excluding Cash) DRSLX MONTHLY RETURN* 1.5% 1.2% 0.9% 0.6% 0.3% 0.0% Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Sources: Driehaus Capital Management LLC, Bloomberg Note: A definition of key terms can be found on page 21 *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 17 of 21

18 INDUSTRY GROUP (as of 4/30/14) GICS 1 Long ($) % of Long Short ($) % of Short Gross ($) % of Gross Automobiles & Components 21,662, % - 0.0% 21,662, % Banks 32,564, % - 0.0% 32,564, % Capital Goods 26,207, % (2,026,755) 0.6% 28,233, % Commercial & Professional Services 16,956, % - 0.0% 16,956, % Consumer Durables & Apparel 1,851, % - 0.0% 1,851, % Consumer Services 87,545, % (5,935,559) 1.7% 93,481, % Diversified Financials 40,758, % (5,024,908) 1.5% 45,783, % Energy 102,539, % (21,886,208) 6.4% 124,426, % Food & Staples Retailing 70,097, % (7,964,461) 2.3% 78,062, % Food Beverage & Tobacco 35,179, % - 0.0% 35,179, % Health Care Equipment & Services 41,126, % (8,434,350) 2.5% 49,560, % Holding Companies-Divers 13,352, % - 0.0% 13,352, % Household & Personal Products - 0.0% (3,081,209) 0.9% 3,081, % Materials 54,456, % (9,996,848) 2.9% 64,453, % Media 28,782, % (2,326,854) 0.7% 31,109, % Pharmaceuticals, Biotechnology & Life Sciences 9,043, % - 0.0% 9,043, % Real Estate 8,256, % (2,622,308) 0.8% 10,878, % Retailing 84,793, % (33,848,274) 9.9% 118,641, % Semiconductors & Semiconductor 22,002, % (13,272,185) 3.9% 35,274, % Software & Services 91,637, % (12,046,064) 3.5% 103,683, % Technology Hardware & Equipment 15,019, % - 0.0% 15,019, % Telecommunication Services 66,502, % - 0.0% 66,502, % Other 2 Agency Collateral CMO 13,319, % - 0.0% 13,319, % Debt ETF - 0.0% (5,760,386) 1.7% 5,760, % Interest Rate Swap - 0.0% (28,925,907) 8.4% 28,925, % itraxx Crossover Index - 0.0% (8,550,373) 2.5% 8,550, % itraxx SubFin Index - 0.0% (17,112,413) 5.0% 17,112, % Sovereign - 0.0% (127,108,250) 37.0% 127,108, % SX7E Euro STOXX Bank Index - 0.0% (6,641,939) 1.9% 6,641, % USD Currency 426,230, % - 0.0% 426,230, % WTI Crude Oil - 0.0% (20,876,116) 6.1% 20,876, % Total 1,309,886, % (343,441,368) 100.0% 1,653,327, % Sources: Bloomberg, Global Industry Classification Standard, Driehaus Capital Management LLC 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. *Markit itraxx Crossover Index (XOVER) Often written Xover, is a credit index comprising a mixture of high yield and higher yielding investment grade names. Note: A definition of key terms can be found on page 21 Page 18 of 21

19 INDUSTRY SECTOR (as of 4/30/14) GICS 1 Long ($) % of Long Short ($) % of Short Gross ($) % of Gross Consumer Discretionary 224,635, % (42,110,688) 12.3% 266,746, % Consumer Staples 105,277, % (11,045,670) 3.2% 116,322, % Energy 102,539, % (21,886,208) 6.4% 124,426, % Financials 81,579, % (7,647,216) 2.2% 89,226, % Health Care 50,169, % (8,434,350) 2.5% 58,603, % Industrials 43,163, % (2,026,755) 0.6% 45,190, % Information Technology 128,658, % (25,318,249) 7.4% 153,977, % Materials 54,456, % (9,996,848) 2.9% 64,453, % Telecommunication Services 66,502, % - 0.0% 66,502, % Other 2 Cash Equivalent 426,230, % - 0.0% 426,230, % CDS Index - 0.0% (25,662,786) 7.5% 25,662, % Commodity - 0.0% (20,876,116) 6.1% 20,876, % Diversified 13,352, % - 0.0% 13,352, % Equity Index - 0.0% (6,641,939) 1.9% 6,641, % ETF - 0.0% (5,760,386) 1.7% 5,760, % Government - 0.0% (127,108,250) 37.0% 127,108, % Interest Rate Swap - 0.0% (28,925,907) 8.4% 28,925, % Mortgage Securities 13,319, % - 0.0% 13,319, % Total 1,309,886, % (343,441,368) 100.0% 1,653,327, % COUNTRY ALLOCATION (as of 4/30/14) Long ($) % of Long Short ($) % of Short Gross ($) % of Gross Canada 35,864, % - 0.0% 35,864, % China 400, % - 0.0% 400, % Europe - 0.0% (25,662,786) 7.5% 25,662, % France 21,453, % - 0.0% 21,453, % Germany 10,731, % (6,641,939) 1.9% 17,373, % Guatemala 10,111, % - 0.0% 10,111, % Luxembourg 35,590, % - 0.0% 35,590, % Mexico 43,778, % (4,591,667) 1.3% 48,370, % Spain 9,143, % - 0.0% 9,143, % Switzerland 2,230, % - 0.0% 2,230, % United Arab Emirates 22,397, % - 0.0% 22,397, % United Kingdom 42,592, % - 0.0% 42,592, % United States 1,075,591, % (306,544,976) 89.3% 1,382,136, % Total 1,309,886, % (343,441,368) 100.0% 1,653,327, % 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 21 Page 19 of 21

20 100-DAY VOLATILITY (as of 4/30/14) 10.00% 9.00% 8.00% BofA Merrill Lynch US High Yield Index % 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Driehaus Select Credit Fund Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 Sources: Bloomberg, Driehaus Capital Management LLC 1 BofA Merrill Lynch US High Yield Index is an unmanaged index that tracks the performance of below-investment-grade, U.S.-dollar-denominated corporate bonds publicly issued in the U.S. domestic market. The Driehaus Select Credit 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 contains 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. This snapshot 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 May 7, 2014 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. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Driehaus to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. 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. Driehaus Securities LLC, Distributor Page 20 of 21

21 DEFINITIONS OF KEY TERMS 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. 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. Page 21 of 21