ci062624 strat bond presentation - citywire 25 april electronic version

1

PERFORMANCE OVERVIEWCONSISTENT RETURNS DEMONSTRATED

Aviva Investors Strategic Bond

* *Since Inception: 22nd September 2008. Source: Date as of End March 2013: Retail Share Class 1 Inc.,Total Return, net income reinvested, net of management fees. Past performance is not a guide to the future

Aviva Investors Strategic Bond Fund

66.52% Fund vs. 38.89% Peer Group (since inception*)

-20

-10

0

10

20

30

40

50

60

70

80

Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13

Chris Higham, CFA

This document is for investment professionals only. It is not to be viewed by or used with retail clients.

AVIVA INVESTORS STRATEGIC BOND FUND

DISPELLING MYTHS & IDENTIFYING OPPORTUNITIES

Citywire Wealth Manager Retreat, April 2013

James Vokins, CFA

3

MYTH 1: THE GREAT ROTATIONDEMOGRAPHICS


Demographics continue to support bonds

Population in the age group 60+ (%)

0

5

10

15

20

25

30

35

1950 1975 2000 2025 2050

World More developed regions Less developed regions

Source: Deutsche Bank, October 2012Any future returns and opinions expressed are based on the internal forecasts of Aviva Investors and should not be relied upon as indicating any guarantee of return from an investment managed by Aviva Investors.

4

MYTH 1: THE GREAT ROTATIONDEMAND


Money still out of cash

Source: Deutsche Bank Investor Positioning and Flows as at 31 March 2013. Past performance is not a guide to the future.

5

MYTH 2: FEAR OF INTEREST RATES RISING


Source: ONS, OBR as at 31 March 2013Any future returns and opinions expressed are based on the internal forecasts of Aviva Investors and should not be relied upon as indicating any guarantee of return from an investment managed by Aviva Investors.

Budget deficit still high

Public Sector Net Borrowing (PSNB) fan chart

6

MYTH 2: FEAR OF INTEREST RATES RISING


Source: RBS, Bloomberg. Any future returns and opinions expressed are based on the internal forecasts of Aviva Investors and should not be relied upon as indicating any guarantee of return from an investment managed by Aviva Investors.

Market implied rates lower for even longer

7

MYTH 3: CORE INFLATION


Inflation is only a UK concern

-2

-1

0

1

2

3

4

5

6

Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

Ha

rmo

nis

ed

Ind

ex o

f C

on

su

me

r p

rice

s (%

)

US Inflation UK Inflation EU Inflation

Source: Bloomberg as at 31 March 2013. Past performance is not a guide to the future.

8

UK inflation protection is expensive

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2006 2007 2008 2009 2010 2011 2012

UK US Germany Italy

MYTH 3: CORE INFLATION


Source: Aviva Investors as at March 2013. Past performance is not a guide to the future.

9

MYTH 4: VALUATION – ARE CORPORATE BONDS EXPENSIVE?


Government bonds are expensive

0%

10%

20%

30%

40%

50%

60%

0

1

2

3

4

5

6

7

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

iBoxx Sterling Non-Gilts iBoxx Sterling Gilts % Yield Spread (RHS)

Source: Aviva Investors as at March 2013. Past performance is not a guide to the future.

Yie

ld (

%)

% Y

ield

Spre

ad

10



Note: Implied defaults calculated using 35 % recovery rate. Historic defaults calculated using Moody’s default data since 1970 and current index ratings composition. Source: Morgan Stanley Research, Bloomberg, Moody’s as at31 March 2013. Past performance is not a guide to the future.

Enough compensation for defaults

11



Source: Moody’s, based on trailing twelve-month speculative-grade corporate default rate forecasts . Past performance is not a guide to the future.

Defaults expected to remain at low levels

Global Speculative-Grade Default Rates (Actual and Forecast)

12

MYTH 4: VALUATION – UK VS. US AND EUROPE


Source: BofA Merrill Lynch indices. as at 31 March 2013. Past performance is not a guide to the future.

GBP much better value than Euro

13

MYTH 5: POSITIVE CREDIT SPREADS?EUROPEAN PERIPHERY



Negative credit spreads in Europe

-150

-100

-50

0

50

100

150

200

250

0

1

2

3

4

5

6

7

8

9

Ma

r 08

Sep

08

Ma

r 09

Sep

09

Ma

r 10

Sep

10

Ma

r 11

Sep

11

Ma

r 12

Sep

12

Telefonica 2033 Spain 2032 Spread

Yie

ld (

%)

Spre

ad (b

ps)

14

MYTH 5: POSITIVE CREDIT SPREADS?EMERGING MARKETS


Source: JPMorgan, Indices: CEMBI BROAD, EMBIGLOBAL astat 31 December 2012. Past performance is not a guide to the future.

A lesson from Emerging Markets?

0

2

4

6

8

10

12

31-Dec-01 31-Dec-03 31-Dec-05 31-Dec-07 31-Dec-09 31-Dec-11

Yie

ld (

%)

EM Corporates EM Sovereign

15

MYTH 6: LIQUIDITY IN CREDIT MARKETS


Source: Morgan Stanley Research, Bloomberg, Trace as at 31 March 2013. Past performance is not a guide to the future.

Liquidity in other markets?

16

MYTH 6: LIQUIDITY IN CREDIT MARKETS


Source: Morgan Stanley Research, Bloomberg, Federal Reserve Bank of New York, Markit iBoxx, as at 31 March 2013. Past performance is not a guide to the future.

Liquidity unchanged for 4 years

17

MYTH 7: FUNDS VS. RETAIL CORPORATE BONDS


Inefficiency in Retail corporate bond market


1. New Beazley deal

Issuer Beazley plc

Maturity 09/28/2019

Coupon 5.375%

Rating BBB

Size £75million

Use of ProceedsBuy back more

expensive debt 80

85

90

95

100

105

Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13

2. Original Beazley issue: 7.25% 10/17/2026

Price

18

OPPORTUNITY 1: EVERY TIME IS DIFFERENT


Deposits

Covered

Senior

Subordinated

Equity

Deposits

Covered

Senior

Subordinated

Equity

BEFORE… …AFTER

Respecting the capital hierarchy

19

OPPORTUNITY 2: CORPORATE HYBRIDS EDF 6% 2026-2049


Source: Bloomberg as at April 2013.Any opinions expressed are Aviva Investors and are subject to change. They should not be relied upon as indicating any guarantee of return from an investment.

Better than equity return for a lower level of risk

Ticker

Currency

Coupon

Rating

F

T

V

R

EDF

GBP

6%

A3 / BBB+

4

3

3

+2

– Subordinated capital with 50% equity credit

– Strong likelihood of call

– Largest energy company in the world with a strong credit profile

4.9

5.2

5.5

5.8

6.1

Jan-13 Feb-13 Mar-13 Apr-13

Yield To Next Call

20

OPPORTUNITY 3: BANK CONTINGENT CAPITAL (COCO) BARCLAYS 7.625% 2022



Almost equity return for similar level of risk

Ticker

Currency

Coupon

Rating

F

T

V

R

BACR

USD

7.625%

BBB-

4

1

1

-1

– 100% write-down at PRA determined Tier 1 ratio of 7%

– Optional coupon deferral

– High yield coupon with final maturity

6.9

7.2

7.5

7.8

8.1

Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13

Yield To Maturity

21

OPPORTUNITY 4: PAYMENT IN KIND NOTES (PIK TOGGLE) SUNRISE COMMUNICATIONS 8.75% 2019



Equity like return for a lower level of risk

Ticker

Currency

Coupon

Rating

F

T

V

R

SUNCOM

EUR

8.75%

B-

4

3

3

+1

– Second largest Swiss mobile company with fundamentally solid business

– Issuer rationale to pay dividends to private equity owners

– Weak structure but significant value below bondholders

8.1

8.4

8.7

19-Mar-13 26-Mar-13 02-Apr-13 09-Apr-13 16-Apr-13

Mid Yield To Maturity

THE FUND

22

FIXED INCOME AND THE ECONOMIC CYCLE


Ability to asset allocate through the investment cycle

23

FIXED INCOME ASSET CLASS CORRELATION


Fund flexibility allows for greater diversification

Source: BofA Merrill Lynch indices - correlation is based on 10 year weekly data to end December 2012. Past performance is not a guide to the future.24

UK Gilts UK IL Gilts £ Non Gilt Euro Corp US Corp EUR HY US HY EMD

UK Gilts 1 0.7605 0.8445 0.476 0.5053 -0.2072 -0.1757 0.0213

UK IL Gilts 1 0.6812 0.4335 0.526 0.006 0.05 0.0665

£ Non Gilt 1 0.7528 0.6797 0.1345 0.109 0.1818

Euro Corp 1 0.7482 0.3948 0.3163 0.3047

US Corp 1 0.4166 0.4252 0.4358

EUR HY 1 0.9007 0.6058

US HY 1 0.6369

EMD 1

FUND CHARACTERISTICS


25

Aviva Investors Strategic Bond Fund

Investment policy / objective Aim to provide a high return through a combination of capital growth and income by

investing in global bonds issued by companies, governments and large international

organisations. The manager can invest across the fixed income spectrum and will aim to

position the fund to take advantage of market conditions.

Performance target Top Quartile IMA £ Strategic Bond Sector

Interest frequency Quarterly

Max in governments 100%

Max in investment grade 100%

Max in high yield 100%

Max in emerging markets 50%

Max currency exposure 20% non £

Max cash position 10%

Max exposure to single issuer 5% for corporate issuer

Max exposure to any issue 3%

Source: Aviva Investors as at 31 March 2013

26

AVIVA INVESTORS STRATEGIC BOND FUNDFUND CHARACTERISTICS


Characteristics

Portfolio Market Value £128 million

Duration 5.05 years

Gross Redemption Yield 4.38%

Holdings 106

Benchmark Total Return vs. Peer Group

Sector Allocation

Rating Allocation No. of Holdings Fund Weight

AAA 1 1.35%

AA 11 23.35%

A 14 9.01%

BBB 30 26.80%

BB 25 18.47%

12%

13%

20%

11%2%

21%

5%

10%5% ABS

Consumer

Financials

Industrials

Non-Sovereigns

Property

Sovereigns

Telecoms

Utilities

Other inc. Cash

Rating Allocation No. of Holdings Fund Weight

B 15 10.73%

CCC 5 3.29%

<CCC 0 0.00%

Unrated 5 1.80%

Cash & Other - 5.20%


CREDIT TEAM


27

Chris Higham, CFAPortfolio Manager

Quin Casey, CFAHY InvestmentAnalyst

James Vokins, CFAPortfolio Manager

Paul SimmonsPortfolio Analyst

Nancy Utterback, CFACredit Analyst -TMT, Retail

London

Equity investment (9)

Alessandro RovelliCredit Analyst –Industrials, Utilities

Gaurav Koolwal, CFACredit Analyst –Consumer, Telecoms

Reto BachmannCredit Analyst - ABS

Oliver JuddCredit Analyst - Financials

Paarus ShahCredit Analyst –Financials

Mumbai (8), Chicago (12), Paris (4), Singapore (3)

Emerging MarketDebt(6)

Quantitative research(4)

Rates (12)Strategy(23)

Skilled and experienced team

Source: Aviva Investors as at 31 March 2013.

AVIVA INVESTORS STRATEGIC BOND FUNDASSET ALLOCATION EVOLUTION


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13

IG HY Government Unrated Cash

Active asset allocation decision is made using FTV


PERFORMANCE OVERVIEWCONSISTENT RETURNS DEMONSTRATED

-20

0

20

40

60

80

100

Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13-20

-10

0

10

20

30

40

50

60

70

80

Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13

-20

-10

0

10

20

30

40

50

Mar 08Sep 08 Mar 09 Sep 09 Mar 10Sep 10 Mar 11 Sep 11Mar 12 Sep 12 Mar 13-30

-20

-10

0

10

20

30

40

50

Mar 08 Sep 08 Mar 09 Sep 09Mar 10 Sep 10 Mar 11 Sep 11Mar 12 Sep 12 Mar 13

Aviva Investors High Yield Bond74.30% Fund vs. 48.27% Peer Group (since inception*)

Aviva Investors Strategic Bond Fund66.52% Fund vs. 38.89% Peer Group (since inception*)

Aviva Investors Distribution Fund44.23% fund vs. 24.26% Peer Group (5 years)

Aviva Investors Corporate Bond Fund42.7% Fund vs. 34.95% Peer Group (5 years)

Quartile Ranking since inception* 1st

Quartile Ranking over 5 years 2nd Quartile Ranking over 5 years 1st

Quartile Ranking since inception* 1st


*Since Inception: 22nd September 2008. Source: Date as of End March 2013: Total Return, net income reinvested, net of management fees. Past performance is not a guide to the future.

29

Solid track record across all IMA sectors

30

IMPORTANT NOTES


This document is intended for investment professionals and experienced advisors only. It is not to be viewed by or used with retail clients. Private investors and scheme members should seek professional advice before making an investment decision.

Except where stated as otherwise, the source of all information is Aviva Investors as at 31 March 2013.

Any opinions expressed are based on the internal forecasts of Aviva Investors and are subject to change. They should not be relied upon as indicating any guarantee of return from an investment managed by Aviva Investors. Any underlying research or analysis has been procured by Aviva Investors for its own purposes and may have been acted on by Aviva Investors or an associate for its or their own purposes. No part of this document is intended to constitute advice or recommendations of any nature.

Performance figures sourced from Lipper and illustrated on a bid to bid, gross income reinvested basis in the currency shown. Other information sourced from Aviva Investors. The value of an investment in the fund can go down as well as up and can fluctuate in response to changes in exchange rates. Past performance is not a guide to the future.

The distribution and offering of shares may be restricted by law in certain jurisdictions. This document should not be taken as a recommendation or offer by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. Full terms and conditions of the Aviva Investors products and services are available on request.

Aviva Investors UK Funds Limited, the ISA Manager and Aviva Investors UK Fund Services Limited, the Authorised Fund Manager. Registered in England Nos. 2503054 and 1973412 respectively. Authorised and regulated by the Financial Services Authority. Registered addresses: No.1 Poultry, London EC2R 8EJ. Both are Aviva companies. www.avivainvestors.co.uk

CI062624 04/2013

ci062624 strat bond presentation - citywire 25 april electronic version

Economy & Finance