Even lower for longer:The grab for yield

January 2013

This document is solely for the use of professionals and is not for general public distribution

2

Agenda

Sensible income

Repressing your returns

Is there any value left in the bond market?

Liquidity & derivatives

Managing through the cycle

Performance

3

Seeking out value: “Sensible yield in 2013”

Yield % Credit rating Our view

1.8 Gilts

3.2 AA

3.5 A

4.3 BBB

5.7 BB

7.4 B

10.8 CCC

Expensive

Play middle ground:Sensible income

Catching falling knives

Seeking out value without stretching for yield

Source: Bank of America Merrill Lynch, as at 21 December 2012

4

Major buyers of government bonds have had no value sensitivity

Federal Reserve – financial repression

Central banks globally – reserve accumulation

Pension funds – legal liability management

Insurers

Banks

Central banks reducing the supply of bonds whilst others have been forced to buy

Regulation

5

Central banks have amassed big stakes in their government bond markets

QE purchases of government bonds as % total issuance

Source: Bloomberg, European Central Bank, Debt Management Office, Bank of England as at 6 December 2012* Excludes index-linked

Asset price inflation is an explicit aim of QE

UK* US Eurozone0%

10%20%30%40%50%60%70%80%90%

100%

38.5%

10.1% 2.5%Free float Central bank owned

6

Central banks complicit in funding government deficits

Public Debt (% of GDP)

2001 2003 2005 2007 2009 2011 2013 20150

20

40

60

80

100

120

FranceGermanyUKUS

Haven’t even started to de-lever yet!

Source: Citi, as at 30 November 2012

%

7

Current yield Price Duration Breakeven

Gilts 1.8% 118.2 9.9 0.2%

Investment grade 3.5% 113.3 7.9 0.4%

European high yield 5.9% 101.2 3.2 1.8%

Source: Bank of America Merrill Lynch and Credit Suisse, as at 21 December 2012Effective yields shown

Relative risk/reward profile

8

Relationship of “Blue Chip” 2025 Vodafone bond and the underlying gilt

Jan-

04A

pr-0

4Ju

l-04

Oct

-04

Jan-

05A

pr-0

5Ju

l-05

Oct

-05

Jan-

06A

pr-0

6Ju

l-06

Oct

-06

Jan-

07A

pr-0

7Ju

l-07

Oct

-07

Jan-

08A

pr-0

8Ju

l-08

Oct

-08

Jan-

09A

pr-0

9Ju

l-09

Oct

-09

Jan-

10A

pr-1

0Ju

l-10

Oct

-10

Jan-

11A

pr-1

1Ju

l-11

Oct

-11

Jan-

12A

pr-1

2Ju

l-12

Oct

-12

708090

100110120130140

GiltVodafone

Source: Bloomberg, as at 6 December 2012

Vodafone and benchmark gilt prices

R2 over period = 0.73R2 from 06/11 = 0.93

Are quality investment grade bonds now a gilt proxy?

%

9

Looking again at bonds

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*-40

-20

0

20

40

60

80Merrill Lynch European High Yield Index (100% hedged to GBP)Merrill Lynch Sterling IGMerrill Lynch Gilt

Asset allocation within fixed income

Source: Bloomberg, as at 30 November 2012* Year to date return

Asset allocation within fixed income

%

10

Spreads by sectorJa

n-98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

0

500

1000

1500

2000

2500Financials IndustrialsUtilities Corporate IndexTelecoms High Yield

Indices breakout

Source: Merrill Lynch, as at 3 December 2012

bp

11

High yield spreads versus default rates

Source: Moody’s, CSFB, as at 30 November 2012Red line is Moody’s default rate forecast

Dec

-91

Dec

-92

Dec

-93

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

0

5

10

15

20CSFB High Yield Master IIMoodys 12 Month Speculative Grade Default Rate

High yield index spread%

The longer financial repression lasts the more risky assets investors are supposed to own

12

Issuance trends don’t signal animal spirits

European high yield new issue use of proceeds

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120%

10%

20%

30%

40%

50%

60%

70%Refinancing General Corp Purposes LBO / Div / M&A

Source: J.P. Morgan, as at 19 November 2012

Market as a whole not yet showing signs of animal spirits

13

6% distribution yield

Sensible carry

Source: Bloomberg, as at 21 December 2012Note: Yields to worst

* Yields to next call

Credit Country Coupon Maturity Yield

Nationwide UK 5.769% Perp (2026) 7.1*/6.6%

Bupa UK/Global 6.125% Perp (2020) 6.4*/6.3%

Legal & General UK/Global 6.385% Perp (2017) 5.0*/4.7%

Gala Senior Secured UK 8.875% 2018 7.0%

Levis USA 7.75% 2018 4.0%

Rexam UK/Global 6.75% 2067 (2017) 5.4*/5.3%

Lloyds UK/Global 6.461% Perp (2018) 8.3*/7.1%

BAA UK 7.125% 2024 4.7%

14

Avoiding the froth & maintaining discipline

Barclays CoCo: an insult to the capital structure

Peripheral Issuance: structural concerns remain

PIK Issuance: pure speculation

Be careful of tourists in the credit market

15

Focus on positive real income returnD

ec-8

5

Dec

-86

Dec

-87

Dec

-88

Dec

-89

Dec

-90

Dec

-91

Dec

-92

Dec

-93

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

0%

50%

100%

150%

200%

250%

300%Cumulative total returnCumulative income return

High yield total return and income return

Source: Credit Suisse, as at 30 November 2012

Clipping the coupon return

16

Scenario analysis for 2013

Scenario IG HY

Bull case Spreads return to post crisis tights 5.7%1 8.4%2

Neutral No change; just the carry 3.5% 5.9%

Bear 50bp rise in sovereign yields -0.5% 4.3%

Source: Henderson Global Investors, as at 21 December 2012Effective yields shown

1 147bps, 16 April 20112 471bps, 8 April 2011

Income to drive total return in 2013

17

Managing a bond fund in this environment

Core credits in core countries

Liquid derivatives used to manage tactical risk on / risk off An average monthly turnover of 6:1 in derivatives relative to cash bonds for the fund during 2012

Keeping the fund nimble Size of fund Flexibility of mandate

Monitoring investor positioning

Source: Henderson Global Investors desk estimate, as at 31 October 2012

18

Managing a bond fund given this fragilityJa

n-06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

-60%

-40%

-20%

0%

20%

40%

60%

Net CDSNet interest rate futures

Henderson Strategic Bond Fund synthetic allocation

Source: Henderson Global Investors desk estimates, as at 30 November 2012 Note: Quarterly data points up to September 2009, monthly data points thereafter

19

Henderson Strategic Bond FundPortfolio composition

Asset allocationCredit breakdown

BBB 37.6%

BB 23.7%

B 15.9%

Cash and derivatives 5.2%

High yield corporate bonds 43.7%

Investment grade financial corporate

bonds 17.5%

Loans 7.4%

Cash and derivatives 5.2%

Source: Standard & Poors, Moodys and Henderson Global Investors desk estimates, as at 30 November 2012

AA 2.8% ABS/Mortgage 1.2%NR 8.1%

Investment grade non-financial corporate bonds 22.6%

CCC & below 3.6%

A 3.1% Government 2.4%

20

Henderson Strategic Bond Fund

Country breakdown

United Kingdom 62.3%

Belgium 0.5%

Switzerland 3.7%

France 3.3%

Canada 0.2%Denmark 0.5%

Germany 6.8%

Ireland 2.7%Jamaica 0.6%Luxembourg 2.5%

Netherlands 6.9%

Sweden 0.6%

United States 9.4%

Source: Standard & Poors, Moodys and Henderson Global Investors desk estimates, as at 30 November 2012

21

Long term performance

Source: Morningstar, as at 21 December 2012Note: Based on cumulative GBP midday pricing.

Past performance is not a guide to future performance

Strategic Bond Fund performance since inception

8090

100110120130140150160170180

Henderson Strategic Bond A Inc (SB) GBP 74.02%Mstar (IMA) £ Strategic Bond (NX) GBP 57.09%

%

22

Summary

Financial repression Sensible income Managing risk

2001

2003

2005

2007

2009

2011

2013

2015

0%

20%

40%

60%

80%

100%

120%

FranceGermanyUKUS

1985 1991 1997 2003 20090%

50%

100%

150%

200%

250%

300%

Cumulative total return

2006 2008 2010 2012-80%

-60%

-40%

-20%

0%

20%

40%

60%

Net CDSNet interest rate futures

Source: Citi, as at 30 November 2012 Source: Credit Suisse, as at 30 November 2012 Source: Desk estimate, as at 30 November 2012

23

Appendix

24

Inflation forecast

UK Consumer Prices (%YOY)

Source: Henderson Global Investors, as at 17 October 2012

25

Index linked 1 year return scenarios

Inflation

-2 0 2 4 6 8

Real Yield

-1.5 7.0 9.1 11.2 13.2 15.3 17.3

-0.5 -2.2 -0.3 1.6 3.5 5.4 7.3

0.5 -10.5 -8.8 -7.0 -5.3 -3.6 -1.9

1.5 -18.0 -16.4 -14.8 -13.3 -11.7 -10.1

2.5 -24.8 -23.4 -21.9 -20.5 -19.0 -17.6

Pick your scenario!

Returns are skewed to the downside

Source: Barclays, as at 13 February 2012

26

2012 attribution

Strategic Bond Fund YTD performance

Source: Desk estimate, as at 20 December 2012* Performance is understated due to positive FX/Cash management contribution not accounted for by desk attribution system

Over 17% return YTD*

02-Jan 02-Feb 02-Mar 02-Apr 02-May 02-Jun 02-Jul 02-Aug 02-Sep 02-Oct 02-Nov 02-Dec-200-100

0100200300400500600700

DerivativesHY FinsHY Non-FinsIG

27

Portfolio duration versus 10-year gilt yieldJa

n-07

Mar

-07

May

-07

Jul-0

7S

ep-0

7N

ov-0

7Ja

n-08

Mar

-08

May

-08

Jul-0

8S

ep-0

8N

ov-0

8Ja

n-09

Mar

-09

May

-09

Jul-0

9S

ep-0

9N

ov-0

9Ja

n-10

Mar

-10

May

-10

Jul-1

0S

ep-1

0N

ov-1

0Ja

n-11

Mar

-11

May

-11

Jul-1

1S

ep-1

1N

ov-1

1Ja

n-12

Mar

-12

May

-12

Jul-1

2S

ep-1

2

1.0

2.0

3.0

4.0

5.0

6.0

024681012

10 year giltStrategic Bond Fund (RHS)

Source: Henderson, Bloomberg, as at 30 November 2012

Portfolio duration versus 10-year gilt yield

% Years

28

Henderson Global Investors201 Bishopsgate, London EC2M 3AETel: 020 7818 1818 Fax: 020 7818 1819

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[Past performance is not a guide to future performance.] The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

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