What is the Future for

Bond Funds?

Rod Davidson, Head of Fixed Income

Stuart Steven, Investment Manager

May 2013

For investment professionals only

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What is the future for bond funds?

• After 20 years of very strong returns from various bond strategies, should we be optimistic about

the future?

• Recently there has been a lot discussion about a flight to equities but we believe that there is still

plenty of room for bond fund investments, especially if the right strategies are chosen.

• Key to this is that bond funds and strategies that have delivered in the past may not be best placed

to do so in the future. With this in mind it has never been more important for investors to re-visit

their existing strategies.

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Alliance Trust Investments

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Alliance Trust PLC

• Diversified global investment company

• Managing investments since 1888 - one of the UK’s oldest investment trusts

• Largest UK generalist trust on London Stock Exchange

• PLC – Gross assets of £3.2billion*

• 46 years of uninterrupted dividend growth

Long-term strategic alignment between AT PLC and ATI

*Source: Alliance Trust PLC as at 31/03/2013

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Alliance Trust Investments

• Specialist investment company, established in 2009

– CEO Katherine Garrett-Cox

– Focused, committed, entrepreneurial spirit

• SRI team fundamental to ATI evolution

– Shared underpinning investment ethos

– Significantly develops ATI business

• Strategic alignment with Alliance Trust PLC

– FTSE 250 company, established in 1888

– Gross Assets of £3.2bn*

– Shared investment infrastructure with ATI

* Source: Internal as at 31/03/2013

** Includes Sustainable Future Pan European Fund assets of £75m under sub-advisement to Aviva Investors

AUM* (£m)

Global 195

North America 77

Europe 59

Fixed Income 713

SRI Equity** 1035

Holdings in bond funds versus yields

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Traditional bond funds exposed to market correction

• Bond markets have benefited from a 20 year rally

• Ownership has increased throughout this period

• Life funds

• Pension funds

• Retail investors

• Inflation is now a threat

£ Corporate Bond FUM Vs UK 10Yr Gilt yields

Source: IMA, Bloomberg, 31/12/2012

Target Return Funds versus traditional asset classes

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• Target attractive relative to long

term equity and bond returns

• Bond Yields still near historic lows

• 3.98% ML Corp Allstock

• 1.94% ML Gilt Allstock

• Benign growth outlook undermines

equity returns

• Targeting lower levels of volatility

6% return is historically attractive, particularly if delivered with low volatility

Index

20yr

Cap Rtn

20yr

Tot Rtn

16yr

Cap Rtn

16yr

Tot Rtn

FTSE 100 4.10% 7.97% 2.43% 6.18%

S&P 500 5.98% 8.07% 4.16% 6.06%

ML £ Non Gilts n/a n/a 0.62% 6.90%

ML £ Corps n/a n/a 0.50% 7.02%

ML Gilts n/a n/a 1.19% 6.85%

GBP 3mth n/a n/a n/a 4.17%

Source: Bloomberg/Merrill Lynch: 31/01/2013

Product positioning for today’s bond markets

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Bond market focused

• Global investment universe

• Physical assets and derivatives

Diversified sources of return

• Asset allocation to bond markets

• Relative value overlay trades

Low correlation to bond markets

Included in Absolute Return sector

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Key Requirements

• Long/Short Total Return Bond Fund

• Targeting attractive risk adjusted returns

• Through allocation AND relative value trades

• Low risk of negative returns over 12 month rolling periods

• Defined parameters, including

• Limitations on credit exposure

• Restrictions on interest rate sensitivity

• Clearly defined investable universe

A strategy that does not depend on yields/market conditions

Why fixed income is suited to total return

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Opportunities in all market conditions

• No risk on/off bias

Global opportunities

• Diverse range of investments

• Liquid markets/instruments

• Highly derivatised market

Low correlation to bond markets

Suited to delivering consistent returns

Long/Short does not necessarily mean hedge fund

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Consistent with market demand

✔ Daily liquidity

✔ Full transparency to clients

✔ Attractive fee

✔ UCITS regulated

✖ Monthly or quarterly liquidity

✖ Restricted portfolio transparency

✖ Expensive fee structures

✖ Offshore structures

Dynamic Bond Fund Hedge Funds

✔ Multiple investment skills required

✔ Risk management processes critical

✔ Sophisticated investment strategies

….but does share some positive hedge fund characteristics

Investment philosophy

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Philosophy

• Macro orientated process

• Team based approach

• Diversified sources of return

Objectives

• Targeting returns over the cycle

• Aim to minimise volatility of returns

Focus on macro orientated strategies

Security Risk

• Structure & Covenants

• Liquidity

• Multi-currency

Market Risk

• Duration

• Assets Allocation

• Cross Market

Credit Risk

• Business & industry

• Financials

• Sustainability

• Premium Volatility

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Risk Budgeting

Defined aggregated VaR Limit

* Source: Barra 28 Mar 2013

VaR Positions (bps)

0

20

40

60

80

100Govt

Inflation

RelativeValue

Credit

Rates

• Limits set by strategy type

• Diversified portfolio

• Ensures risk is consistent with fund

objectives

• Risk allocation will vary over time

• Scenario and stress tests used to

validate risks

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Extending the efficient frontier

• Total Return Bond Funds can

improve the efficient frontier

• Higher returns than gilts with

lower levels of volatility

• Alternative for traditional bond

allocations

• Particularly compelling in a

very low yield world

• Mitigates the risk of a “bubble

in bond markets”

Attractive risk adjusted returns

Alliance Trust Dynamic

Bond Fund

Efficient Frontier Since Launch

Source: Internal as (28/09/2012 to 11/04/2013)

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70% 0.80%

FTSE + GILTS + DBF

FTSE + GILTS

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Performance

Strategy complements existing/planned product

* Source: Bloomberg 30 /04/2013 Past Performance is not a guide to future performance

Total Return – Normalised Since Inception

96.00

98.00

100.00

102.00

104.00

106.00

108.00

Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13

Dynamic Gilt Allstock GBP Corp Allstock

Dynamic Bond Fund characteristics

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• 6% Target Return over rolling three year periods (gross)

• Risk and Volatility management central to proposition

• Diversified, liquid portfolio investing across global bond markets

Fund Managers Stuart Steven & Juan Valenzuela

Inception Date 28th September, 2012

Fund Size £57.5m as at 30/04/2013

Benchmark No Benchmark (Absolute Return Global Bond Asset Class)

Performance Objective 6.0% p.a. over rolling three year periods (gross of fees)

Expected Volatility <5%

Investable Universe Global Fixed Income Markets (Clearly defined parameters)

Derivatives Mainstream Fixed Income derivative instruments

Structure OEIC

Credit Leverage 75% max (normal range +/-35%)

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Summary

• No reliance on market conditions or

yield backdrop

• An alternative to traditional bond

mandates

• Product is consistent with team

size/skills and boutique investment

house

• High levels of capacity

Strategy consistent with market demands

Total Return Bond Fund

Threats to Traditional

Bond Funds

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Important information

• This presentation is intended for investment professionals only. It must not be distributed to, or relied upon by, retail investors.

• Past performance is not a guide to future performance. The value of investments may go down as well as up and is not guaranteed. You may not get back the amount invested.

• Some of the funds have underlying holdings which are denominated in currencies other than Sterling and therefore may be affected by movements in exchange rates. Consequently, the value of these investments may rise or fall in line with exchange rates.

• Where a fund invests in derivatives, this may lead to greater volatility in the price of a fund as the value of these instruments can fluctuate significantly.

• Where annual management charges or performance fees are taken from capital, this may have the effect of constraining capital growth and may lead to capital erosion. Investors may be subject to tax on distributions.

• Whilst care has been taken in compiling the content of this presentation, no representation or warranty, express or implied, is made by Alliance Trust Investments as to its accuracy or completeness. Some slides may been compiled from external sources. Whilst these sources are believed to be reliable, the information has not been independently verified and therefore no representation is made as to its accuracy or completeness.

• The opinions expressed are those held by Alliance Trust Investments at date of issue and are subject to change. This presentation is for information only. It does not represent an inducement to buy or sell investments and does not constitute investment advice.

• Alliance Trust Investments Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC330862, registered office, 8 West Marketgait, Dundee DD1 1QN; is authorised and regulated by the Financial Conduct Authority, firm reference number 479764. Alliance Trust Investments gives no financial or investment advice.

Alliance Trust Investments

8 West Marketgait, Dundee DD1 1QN

T 01382 321000

www.alliancetrustinvestments.com