the traditional role of fixed income may be challenged titlefor institutional use only - not for...

Title <Sub heading>

The Traditional Role of Fixed Income May Be Challenged

Investing Where It Counts

Shawn J. Mato, CFA, CAIA

Senior Vice President

Senior Portfolio Manager

For Institutional Use Only - Not for Public Distribution

Westwood

®

Source: Callan Associates, 2016.

Returns have become

increasingly costly when

measured per unit of risk

“

Estimates of what investors needed to earn 7.5%

100% Bonds

52%

12%

20%

5%

14%

5% 4%

33%

8%

22%

13%

12%

1995 2005 2015

Bonds

U.S. Large Cap

U.S. Small Cap

Non-U.S. Equity

Real Estate

Private Equity

7.5% 7.5%

8.9% 17.2%

7.5%

6.0%

Expected

return

Standard

deviation

The Challenge | The Traditional Role of Fixed Income May be Challenged

The Challenge | Rising Interest Rates

U.S. 10-Year Treasury Yield

The pro-growth implications

of the U.S. election result

may accelerate the trajectory

of interest rate normalization

1.30%

1.50%

1.70%

1.90%

2.10%

2.30%

2.50%

2.70%

Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

1.88%

Election Day

2.45%

Current

Source: Strategas, January 3, 2017

Definition of a Convertible

Generally speaking, a convertible is a security that can be

converted into a fixed number of common shares at the

option of the holder.

A convertible is a combination of a fixed income security

and an embedded equity option.

Bond

Equity Option

Convertible

+

=

Characteristics of Convertibles

Advantages

• Downside protection

• Upside participation

• Provides a yield advantage

over the underlying common

shares

• Ahead of common

shareholders in capital

structure

Disadvantages

• Provides a lower yield than the

straight corporate debt

• Potential for equity dilution

• Generally less liquid than

stocks

• More volatile than straight debt

Global Convertibles | Overview

7 Investing Where It Counts

Market size and Regional Allocation source: Nomura Research as of 3/17/2017.Credit Quality and Sector Breakdown are represented by the Thompson Reuters Global Focus Convertible Bond Index.

Data as of 12/31/2016. Data Source: © 2016 FactSet Research Systems Inc. All Rights Reserved.

Global Convertibles | A Diverse $335 Billion Market

Regional Market Cap Allocation (%)

17%

Asia & Other

53%

U.S.

30%

Europe

Sector Breakdown (%)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Credit Quality Breakdown (%)

60%

Not Rated 11.8%

Investment

Grade

19%

High Yield


Hypothetical Convertible Return vs. Equity Return


Current Beginning of 2008

Investor Base | Transformation

Source: Westwood, estimates as of 12/31/2016.

Long Only Investors Hedge Funds &

Proprietary Desks

An investor base shift from hedge funds and proprietary desks to more traditional investors

has reduced leverage, concentration and efficiency in the convertible asset class.


Insights

The recent downturn in the market

has disproportionately impacted

capital intensive companies.

Low duration; well positioned against

a short-term rise in interest rates.

Global opportunity set provides increased

diversification and greater breadth to

navigate market volatility.

Strategic Case for Global Convertibles Supported by Attractive Valuations

BAML G300 Index -

Composite

Source: Bank of America Merrill Lynch as of December 31, 2016

Global convertible valuations remain attractive relative to historical levels

10

-4

-2

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Market Outlook | Attractive

% D

iscount

Rela

tive t

o H

isto

rical A

vera

ge


With the global convertible market trading below fair value, it remains a fragmented market but

skewed to the cheap side

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

>5% +3 to 5% +1 to 3% +1 to -1% -1 to -3% -3 to -5% <-5%

11

Percentage Discount

Ma

rke

t W

eig

hti

ng

Cheap Expensive

Convertible Market Cheapness*

Below Fair Value/Cheap

*Using BAML G300 Index to represent the broader convertible market. Data as of 12/31/2016. Source: Bank of America Merrill.

Market Outlook | Attractive


Market Neutral Income | Overview


Absolute Return Target

Aims to achieve a 4-6% return

(net of fees) annualized over

a full market cycle.

Low Volatility

Seeks to achieve low volatility profile for

asset allocators who require an emphasis

on loss limitation regardless of the market

environment.

Uncorrelated Returns

Potential for uncorrelated returns

and attractive diversification

benefits with traditional equity and

fixed income allocations.

Low Equity Beta

Neutralizes systematic equity risk with

the potential to generate positive results

regardless of market direction.

Westwood Market Neutral Income | Potential Investor Benefits


Primary sources of

return consist of

combining three

portfolios that aim

to neutralize

systematic risk.

50-60%

30-40%

0-5%

Yield

Focused

40-60%

Arbitrage

30-50%

Macro

0-10%

Yield + Equity Optionality

Mispriced Convertibles

+ Yield + Gamma Capture

Macro Hedging

Investment | Process


A market-neutral

approach utilizing

convertible bonds

can potentially serve

as a complement to

fixed income.

Yield

Focused Arbitrage

Macro

0-5%

Macro

Long-Yield-Focused Opportunities (40-60%)

o Short maturity and high credit conviction

o Discount to implied fair value

o Attractive yields

o Good liquidity and issue size

Long-Short Convertible Arbitrage Opportunities (30-50%)

o Pure convertible arbitrage: price of bond relative to fair value

o Gamma strategies

o Market directional within equity and credit markets

Macro Hedging (0-10%)

o Equity and Credit Risks – Partially hedged

o Interest Rate Risk and Volatility – Partially hedged

o Currency – Hedged to USD

Portfolio | Construction


4.3% Annualized Net Return Since Inception

Absolute return target of 4-6% with 1/3 equity

volatility

-0.02 Correlation Since Inception

vs. Bloomberg Barclays U.S. Aggregate

Bond Index

7+ Year Strategy Track Record

Portfolio team with a history of creating

leading-edge absolute return strategies

2.0% Current Yield

1.6 years effective duration

All data as of 12/31/2016 with an inception date of 1/1/2010. Frequency: Monthly. Equity volatility defined as the standard deviation relative to the MSCI World-ND. Annualized Return and Correlation

calculated using FactSet. Current Yield, Duration and Implied Credit Rating represent that of a representative account. Data Source: © 2016 FactSet Research Systems Inc. All Rights Reserved. Past

performance is not indicative of future results. Performance provided is net of management fees. As with any investment strategy, this strategy involves risk of loss. Please see appendix for full

performance disclosures. The disclosures provided are considered an integral part of this presentation.

Why Westwood Market Neutral Income | Alternative Income Focus


Net Delta (%) 17.00

Global Equity Beta1 SI 0.22

Sharpe Ratio2 SI 0.93

Max Drawdown SI -7.90

VaR (%) 2.76

Rate of Return (%) 4.27

Standard Deviation 4.49

Annualized

Returns and Volatility

Westwood Market Neutral Income*

Evaluation

Measures

1 Market Proxy: MSCI World Index Net* ($US). 2 Risk Free Proxy: 3 Month T-Bill ($US). *All statistics reflect composite statistics except Net Delta and VaR, which reflect that of a representative account.

Data as of 12/31/2016; Inception date: 1/1/2010; Frequency: Monthly. Past performance is not indicative of future results. Performance provided is net of management fees. Data Source: © 2016

FactSet Research Systems Inc. All Rights Reserved. The information presented is shown as supplemental information to the GIPS compliant disclosure included in the appendix. Please see appendix

for full performance disclosures. The disclosures provided are considered an integral part of this presentation.

Portfolio | Statistics Market Neutral Income Composite, Since Inception (SI) | As of December 31, 2016

Correlation to Bloomberg

Barclays U.S. Agg SI -0.02


0

2

4

6

8

10

12

14

16

1 Year 3 Year 5 Year

Drawdown for the Market

Neutral Income composite has

exceeded 5% only once since

inception with a recovery rate of

three months.

“

Risk (as Measured by Annualized Standard Deviation)

4.49

Standard

Deviation

1/3 Equity

Risk

Westwood Market

Neutral Income

LIBOR-1 Month MSCI World-ND

Westwood Market Neutral Income | Emphasis on Low Volatility

Data as of 12/31/2016; Inception date is 1/1/2010; Frequency: Monthly. Data Source: © 2016 FactSet Research Systems, Inc. All Rights Reserved. Past performance is not indicative of future results.

As with any investment strategy, this strategy involves risk of loss. Please see appendix for full performance disclosures. The disclosures provided are considered an integral part of this presentation.


4Q16 YTD 1-Year

Trailing

3-Years

Trailing

5-Years

Trailing

Since

Inception

Market Neutral Income Net of Fees (Inception: 1/1/2010) -0.10% 6.67% 6.67% 2.63% 5.20% 4.27%

LIBOR USD 1 Month 0.15% 0.50% 0.50% 0.28% 0.26% 0.25%

Westwood Market

Neutral Income

Composite, Net

LIBOR USD 1 Month

Past performance is not indicative of future results. Prior firm performance returns and benchmark returns are subject to change. The performance data for the period from 1/1/2010 to 9/30/2014

reflects the performance of a registered investment company managed by the portfolio management team members while at a prior employer. During that period, the portfolio management team

members primarily responsible for the Market Neutral Income strategy were primarily responsible for the management of the registered investment company. Returns reflect the deduction of transaction

costs and other administrative fees. Net returns prior to 10/1/2014 reflect the deduction of actual investment advisory fees. Westwood maintains the records that document and support the performance,

which are available upon request. Data Source: © 2016 FactSet Research Systems Inc. All Rights Reserved. Please see appendix for full performance disclosures. Disclosures are also available online

at http://westwoodgroup.com/disclaimers.pdf. The disclosures provided are considered an integral part of this presentation.

Performance | Update As of December 31, 2016

-0.10

6.67 6.67

2.63

5.20

4.27

0.15 0.50 0.50

0.28 0.26 0.25

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

4Q16 YTD 1 Year 3 Year 5 Year Since Inception

Composite Performance (%)


Westwood Market Neutral Income | Strategy Summary

Objective

Our objective is to produce absolute returns

of 4-6% (net of fees), on an annualized basis

over a full market cycle, with low volatility.

Expected Volatility

1/3 equity volatility over a full market cycle.

Philosophy

Convertible bonds within an absolute return

framework can provide superior risk-adjusted

returns.

Strategy

Actively managed, utilizing a market-neutral approach to

investing in convertible securities. Incorporates a shorter-dated,

yield-oriented portfolio and a convertible arbitrage strategy while

reducing volatility through macro hedging.

Dedicated Team

Our team has over 60 years of combined experience in

convertible bonds, options, equity and credit analysis. The

team is dedicated to the asset class and has developed

expertise within their field.

Liquidity

Daily

As of January 31, 2017


Market Neutral Income | Compliant Presentation


Past performance is not indicative of future results. The information contained herein represents the views of Westwood Management

Corp. at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the

accuracy or completeness of any data compiled herein. Any statements non-factual in nature constitute only current opinion, which is subject to

change. Any statements concerning financial market trends are based on current market conditions, which will fluctuate. All information

provided herein is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or

recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. In addition, there can be no

guarantee that any projection, forecast or opinion in these materials will be realized. These materials are provided for informational purposes

only.

The charts, data and statistics where indicated herein show portfolio characteristics, evaluation measures and delta and regional, sector, credit,

and/or currency breakdown for the representative account as of the period end date. The representative account was selected by the firm

as it was deemed to best represent this strategy. Portfolio characteristics, evaluation measure and delta, regional, sector, credit, and currency

breakdown, and holdings may vary from account to account, subject to any client-imposed restrictions. Westwood’s analysts closely monitor

the securities held in our portfolios. Should a company’s underlying fundamentals or valuation measures change, Westwood may re-evaluate

its position and may sell part or all of its positions. Data Source: Westwood Management Corp., Bloomberg, FactSet Research Systems, Inc.

and KYNEX. All Rights Reserved.

Disclosures

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