Portfolio and Positions

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  • 1. How do you measure liquidity of positions?

    Liquidity of a security is primarily defined by the size of the issue. In addition, the number of brokers
    dealing in the security and the bid ask spread can also be taken into consideration.

  • 2. What is the liquidity of the underlying assets and what is the appropriate time period to liquidate?

    It is estimated that the majority of the portfolios could be liquidated in a few days as the majority of assets
    fall into the category of very liquid or liquid.

  • 3. Do you use currency hedging, either at portfolio or share class level?

    Yes. The base currencies of the three funds are EUR, USD and GBP but assets held by the funds may be
    denominated in other non-base currencies. A substantial part of the assets of the funds will be
    denominated in or hedged back into the relevant base currency by the fund managers using currency
    forward contracts.
    There are two CHF share classes invested in the EUR fund which are not 100% hedged at all times given
    the cost of hedging and other considerations. The CHF share classes are usually hedged back circa 90%
    – 100% to CHF by the investment managers and this can occasionally go up to a maximum of 105% in
    order to hedge future coupons. There are AUD and SGD-denominated share classes in the USD fund
    which are hedged back by the administrator.

  • 4. Discuss your leverage exposure policy and its management.
  • 5. Describe your use of derivatives.

    The funds are non-sophisticated users of derivatives and will only use a limited number of simple
    derivative instruments for efficient portfolio management purposes (being the reduction of risk, the
    reduction of cost or the generation of additional capital or income for the funds with a level which is
    consistent with their risk profiles), as mentioned in the prospectuses. The derivative instruments which
    may be held by the funds comprise contracts for difference, convertible bonds, currency forwards,
    currency swaps, futures or options. Such derivatives may be traded over-the-counter or on a recognised
    market.
    In practice, the funds enter into certain currency-related transactions in order to hedge the currency
    exposure of the classes denominated in a currency other than the base currency, but derivatives have not
    been used to hedge interest rate risk. The variety of different bonds in the fund including fixed rate and
    floating rate bonds is designed to provide a natural hedge.
    The funds use the commitment approach to calculate the global exposure generated through the use of
    financial derivative instruments as part of their risk management process. It is not expected that the
    leverage generated through the use of financial derivative instruments will exceed 20% of net asset value
    of any of the funds when calculated using the commitment approach.

  • 6. Discuss the depth of diversification. Do you have formal position limits (sector, country etc.)?

    Portfolios are highly diversified. Individual positions are restricted to 10% of an issue and 10% of the fund,
    but in practice, individual positions are much lower.
    In terms of instruments, the fund has significant holdings in discounted floating rate notes (besides fixed
    dated bonds, perpetual, and fixed to floaters). These securities benefit from higher interest rates: the
    higher the interest rate, the higher the refix rate. As they are discounted, they are intended not only to
    provide a natural hedge for the fixed-rate holdings, but can achieve capital gains in themselves. The fund
    managers also take advantage of fixed-to-floater bonds, where the coupon is fixed until the first call date
    within five to 10 years and then is refixed on a floating rate note basis. Those securities limit the fund’s
    exposure to rising interest rates.
    The funds invest predominantly in investment grade issuers, but the fund managers are prepared to go
    down a company’s capital structure to find the best combination of yield, value and capital preservation.
    One feature of the strategy is the substantial holdings in financials. While many observers associate
    financials with universal banks, there are many differences in business models and balance sheets
    among the managers’ different holdings. They clearly distinguish between universal banks, investment
    banks, asset managers, brokers, life insurance and non-life insurance companies. Their holdings in nonfinancial
    companies include a wide variety of global names.

  • 7. What is your stop-loss policy?

    Fundamental stop-losses are used as part of the ongoing review of all positions held in the portfolios.
    They can be used either when a bond has reached estimated fair value after a rise in price or as a
    protection when a negative credit event results in a change assessment and it is decided that some or all
    bonds should be sold as a protective measure.

  • 8. Describe your use of cash in the portfolio.

    It is the normal policy of the fund to be close to fully invested however it is allowed to move substantially
    into cash should the managers deem it necessary. Such circumstances include (i) the holding of cash on
    deposit pending reinvestment, (ii) the holding of cash from subscriptions pending investment (iii) in order
    to meet redemptions and payment of expenses or (iv) in any extraordinary market circumstances such as
    a market crash or major crises which in the reasonable opinion of the fund manager would be likely to
    have a significant detrimental effect on the performance of the fund.

  • 9. Does the strategy have a long or short bias?

    The strategy is long only and does not short cash bonds.

  • 10. What is your average holding period for investments?

    Assets are managed on a medium-term basis. The fund is designed to withstand significant market
    turbulence and to minimise exposure to volatile trading situations through investing in a highly diversified
    set of securities from across the credit spectrum. The managers have a buy and hold mentality and build
    core positions gradually.

  • 11. What is your sell discipline?

    Positions are typically sold when a bond price has risen beyond a level of attractive future return to the
    fund and there are similar quality bonds at a higher yield to switch into.
    The team also uses “fundamental stop-losses” (as opposed to pure price stop-losses) as part of the
    ongoing review of all positions held in the portfolio, and as protection when a negative credit event results
    in a change in investment views and it is decided that some or all bonds should be sold as a protective
    measure. The team would look to sell out of their positions primarily due to an increased risk of default i.e.
    the deterioration of company fundamentals or if default looks imminent. The team will seek to exit losing
    positions as efficiently as possible.
    If the underlying fundamentals are intact, they prefer to be patient in the face of market volatility and wait
    for prices to recover.

  • 12. What is your buy discipline?

    The fund managers look for opportunities across the whole credit spectrum and seek to hold a highly
    diversified portfolio of issues on which they have a favourable view of both the absolute and relative value
    versus the potential risk of each one. This is based on their in-depth analysis of company fundamentals.
    They size positions to suit what they believe will best deliver consistently high income, capital preservation
    and capital appreciation against the current macroeconomic backdrop, independent of index weightings.
    Such companies tend to be profitable and cash generative with good growth prospects, strengthening
    balance sheets and increasingly disciplined management, for example companies with global franchises.
    These are currently issuing a steady stream of good quality, high income providing credit. This creates
    significant opportunities for investors who diversify their fixed income portfolios into corporates.

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