Even lower for longer: The grab for yield

1. This document is solely for the use of professionals and is not for general public distribution Even lower for longer: The grab for yield January 2013

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” Expensive Play middle ground:Sensible income Catching falling knives Source: Bank of America Merrill Lynch, as at 21 December 2012 Seeking out value without stretching for yield

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

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

6. Central banks complicit in funding government deficits Public Debt (% of GDP) % Source: Citi, as at 30 November 2012 Haven’t even started to de-lever yet!

7. Relative risk/reward profile Source:Bank of America Merrill Lynch and Credit Suisse, as at 21 December 2012 Effective yields shown

8. Relationship of “Blue Chip” 2025 Vodafone bond and the underlying gilt Vodafone and benchmark gilt prices % R2 over period = 0.73 R2 from 06/11 = 0.93 Source: Bloomberg, as at 6 December 2012 Are quality investment grade bonds now a gilt proxy?

9. Looking again at bonds Asset allocation within fixed income Asset allocation within fixed income % Source: Bloomberg, as at 30 November 2012 * Year to date return

10. Spreads by sector Indices breakout bp Source: Merrill Lynch, as at 3 December 2012

11. High yield spreads versus default rates High yield index spread % Source: Moody’s, CSFB, as at 30 November 2012 Red line is Moody’s default rate forecast 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 Source: J.P. Morgan, as at 19 November 2012 Market as a whole not yet showing signs of animal spirits

13. 6% distribution yield Source: Bloomberg, as at 21 December 2012 Note: Yields to worst * Yields to next call Sensible carry

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 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 Source: Henderson Global Investors, as at 21 December 2012 Effective yields shown 1 147bps, 16 April 2011 2 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 fragility 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 Fund Portfolio composition Credit breakdown Asset allocation Cash and derivatives 5.2% ABS/Mortgage 1.2% AA 2.8% NR 8.1% A 3.1% Government 2.4% Cash and derivatives 5.2% Loans 7.4% CCC & below 3.6% High yield corporate bonds 43.7% BBB 37.6% Investment grade financial corporate bonds 17.5% B 15.9% BB 23.7% Investment grade non-financial corporate bonds 22.6% Source: Standard & Poors, Moodys and Henderson Global Investors desk estimates, as at 30 November 2012

20. Henderson Strategic Bond Fund Country breakdown Canada 0.2% Denmark 0.5% France 3.3% Germany 6.8% Ireland 2.7% Jamaica 0.6% Luxembourg 2.5% United Kingdom 62.3% Netherlands 6.9% Sweden 0.6% Switzerland 3.7% United States 9.4% Belgium 0.5% Source: Standard & Poors, Moodys and Henderson Global Investors desk estimates, as at 30 November 2012

21. Long term performance Strategic Bond Fund performance since inception % Source: Morningstar, as at 21 December 2012 Note: Based on cumulative GBP midday pricing. Past performance is not a guide to future performance

22. Summary Sensible income Financial repression Managing risk 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 Pick your scenario! Source: Barclays, as at 13 February 2012 Returns are skewed to the downside

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*

27. Portfolio duration versus 10-year gilt yield Portfolio duration versus 10-year gilt yield Years % Source:Henderson, Bloomberg, as at 30 November 2012

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