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For professional investors only

Henderson

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Strategy review

The Henderson Euro High Yield Bond Strategy was launched in November 2012. Here we review performance since launch and the opportunities ahead.

The period in review

On a total return basis, the strategy rose 8.7% (annualised) since

launch on 19 November 2012 to 31 March 2016, outperforming the

6.1% (annualised) rise in the Bank of America Merrill Lynch European

Currency Non-Financial High Yield 2% Constrained Index.*

The market for European high yield bonds has been supportive

in recent years, thanks to a combination of moderate economic

growth, low infl ation and accommodative monetary policy by the

European Central Bank (ECB). Corrections in the market have

tended to accompany high profi le events such as the capital losses

for bondholders of Banco Espirito Santo in mid-2014, or refl ected

wider macroeconomic concerns such as in early 2016 when soft

Chinese data and US monetary tightening temporarily raised fears

that global growth could stall. Corporate bond markets have made

a robust recovery since February 2016, although the volatility earlier

this year demands that investors have a heightened awareness of the

idiosyncratic risks and strengths of individual issuers.

Performance

The strategy is designed to capture returns by exploiting the strength

of research conducted by Henderson’s credit team, with three key

drivers contributing to performance.

• Active benchmark management: Investment across EUR and

GBP high yield bonds. Conviction views across issuer and security

selection.

• Off-benchmark bonds: Up to 30% of the strategy can be invested

tactically off-benchmark in areas such as investment grade bonds

or non-European high yield bonds.

• Credit derivatives: Widens universe of issuers and provides

liquidity, together with the potential to benefi t from negative views

through short positions.

Summary

Annualised return to 31 March 2016 (%) Strategy Index

1 year 2.6 -0.2

2 year 4.7 2.7

3 year 7.7 5.1

Since strategy launch 8.7 6.1

Source: As per chart below, Index is BofA Merrill Lynch European Currency Non-Financial High Yield 2% Constrained Total Return Index, performance basis as below.

Metric Strategy Index

Yield % 4.9 5.3

Spread (basis points) 468 536

Average bond rating BB- BB-

No. of holdings 132 391

Source: Henderson Global Investors, at 31 March 2016.

Past performance is not a guide to future performance.

1

Past performance is not a guide to future performance.

Performance since launch to 31 March 2016

* Source for the performance and for the chart above: Morningstar, 19 November 2012 to 31 March 2016, total return, bid-bid, gross income, gross of fees, EUR.

-5

0

5

10

15

20

25

30

35

Mar 16Sep 15Mar 15Sep 14Mar 14Sep 13Mar 13

Henderson Horizon Euro Hi Yld Bd I2 EUR

BOFA ML Euro NF HY 2% Const HDGD

%

+21.9%

+32.5%

Investment approach in action

2

Short positioning in single name credit default swaps (CDS)There is no strong overriding theme to short positions since these

are typically on a company basis. We have recently increased our

short position in UK betting company Ladbrokes, as the business

continues to suffer from the structural decline in over-the-counter

betting, together with a potential further negative headwind from

increased regulation in fi xed-odds betting terminals. Another

example short position is Galapagos, a heat-exchanger manufacturer

with exposure to the oil & gas sector. With Galapagos the CDS is

trading in line with the senior bonds but the subordinated (CCC+)

bonds are deliverable into the CDS contract.

Selected use of investment grade An area of tactical interest for the strategy is insurance where we see

opportunities among investment grade stocks. This sector has been

under pressure because of concerns surrounding Solvency II capital

requirements. Insurers have been heavy issuers and this has caused

some re-pricing that has created value in the sector. The decision by the

ECB to include insurers within the scope of the Corporate Sector

Purchase Programme (CSPP) has increased interest in senior bonds

issued by insurers as well as creating spill-over demand for subordinated

debt within the sector. We particularly like NN Group, the Dutch life

insurer, which delivered strong results in 2015 and has a strong capital

position. Similarly, we like Phoenix, which in August 2015 acquired an

investment grade rating from Fitch, the credit rating agency.

The strategy is permitted to invest up to 30% outside of its European

high yield bond universe. Fig 1 indicates the weighting in the strategy

at each rating band at the end of April 2016.

Fig 1: Rating exposure

0

10

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30

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70

Cash &DerivativeBacking

NotRated

CCC &Below

BBBBBBAAA/AA/A

Index %

Strategy %

%

Source: Henderson Global Investors, at 30 April 2016

Focus on researchIt is part of our investment philosophy for all of our credit strategies

to be research-driven, hence our large team of credit analysts

covering developed and emerging, investment grade and high yield.

The need to focus on research is moving fi rmly into the spotlight as

idiosyncratic risk increases. The strategy is running with an overall

credit quality that is higher than the index as refl ected by the

strategy’s aggregate yield and spread being lower than the

benchmark (see summary on front page), but at the same time it has

an overweight positioning in CCC rated bonds where good research

can unearth pricing anomalies. The strategy’s size (€187m at 30

April 2016) allows it to be nimble in terms of trading cash bond

positions, with credit derivatives potentially offering more rapid

portfolio alterations.

Finmeccanica – potential rising starFinmeccanica is a global player in aerospace, defence and security

based in Italy, where the company is involved in the high technology

sector. Political reluctance to allow the company to dispose of

underperforming heavy industry subsidiaries had been a drag on

earnings and effi cient use of cash but the political climate has

recently become friendlier towards restructuring.

Potential • The company appointed a new CEO in May 2014 who publicly

stated a target of achieving investment grade status by 2017

and is committed to deleveraging.

• He has made good headway on asset disposals, selling the non-

core rail division in 2015.

Opportunity • Currently rated BB+ by Standard & Poor's, we believe the

company has the potential to be a ‘rising star’ – a company that

moves up from high yield to investment grade.

Grupo Antolin – designs on an upgradeGrupo Antolin is a leading supplier of automotive interiors, mainly

headliners/ceiling panels and door trim panels with a smaller position

in seating and a growing interior lighting business. The company is

based in Spain with production facilities around the world and in

August 2015 acquired Magna’s interiors business.

Potential • Strong management demonstrated by sound fi nancial

performance and strong margins in a competitive segment.

• Magna acquisition completes product portfolio (adding cockpits)

and improves diversifi cation by customer & geography.

• Signifi cant opportunity to improve the profi tability of Magna’s

business which has been run on a highly decentralised model.

Opportunity • Rising profi tability and cash generation we believe should see

leverage (net debt/EBITDA) fall to around 2x by 2018. This

should support a one-notch upgrade from Moody’s to Ba3 and

compression of spreads relative to other similarly rated auto bonds.

EBITDA = earnings before interest, tax, depreciation and amortisation.

Holdings in focus

Current themes

Identifying opportunities within high yield bonds

3

• Default rates are anticipated to remain relatively low in Europe,

aided by ongoing accommodative monetary policy from the ECB

(see Fig 2).

Fig 2: European sub-investment grade 12m trailing default rate, %

0%

2%

4%

6%

8%

10%

12%

14%

Mar17

Mar15

Mar13

Mar11

Mar09

Mar07

Mar05

Mar03

Mar01

Europe – Actual Europe – Baseline (forecast)

Source: Moody’s, 31 March 2001 to 31 March 2016, 12 months trailing default rate; forecast: year to 31 March 2017

• European economic indicators are suggesting improvement in

the corporate outlook for European companies, with purchasing

manager indices among key indicators in strong territory. Infl ation

remains subdued (allowing for loose ECB monetary policy) but

economic growth is surprising positively (see Fig 3).

Fig 3: Eurozone GDP growth, % qoq

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

Q12016

Q12015

Q12014

Q12013

Source: Thomson Reuters Datastream, Eurostat, Q1 2013 to Q1 2016, gross domestic product (GDP) growth, quarter-on-quarter % change, seasonally adjusted

• Spreads and yields at the end of April 2016 were higher than at the

same point a year earlier. The recovery in prices since the sell-off

in early 2016 has been rapid, however, so expectations for further

spread tightening need to be tempered accordingly (see Fig 4).

Fig 4: Spreads and yields remain attractive

3.0

4.0

5.0

6.0

7.0

Apr16

Jan16

Oct15

Jul15

Apr15

300

350

400

450

500

550

600

650

Yie

ld %

Basis

po

ints

Yield to Worst

Spread (rhs)

Source: Bloomberg, 30 April 3015 to 30 April 2016, BofA Merrill Lynch European Currency High Yield Index (HP00), yield to worst, option-adjusted spread over govt.

• Supply is also manageable given that Europe has been able to

absorb gross annual issuance of around €80bn (see Fig 5) without

creating heavy indigestion. Morgan Stanley is expecting non-

fi nancial gross annual high yield issuance in Europe in 2016 to be

similar to 2015 at around €87bn (estimate correct at 31 December

2015).

Fig 5: European currency high yield issuers and annual issuance

0

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60

80

100

0

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150

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250

300

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1514131211100908070605040302

Issuers

Issuance (EUR, bn) (RHS)

EU

R, b

n

No

. o

f is

su

ers

Source: BofA Merrill Lynch, Barclays Research, Bloomberg, as at 31 December 2015. Note: Issuers based on numbers of issuers in HP00 as at end of each calendar year.

Stock examples are intended for illustrative purposes only and are not indicative of the historical or future performance of any particular strategy. References made to individual securities do not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Individual stock positions mentioned on these pages were correct at 30 April 2016.

Past performance is not a guide to future performance. Yields may vary and are not guaranteed.

Where are the current opportunities?

4

Markets have largely retraced the sell-off earlier this year as yield

hungry investors were drawn to some attractive yields in the asset

class. Policy moves by the ECB to extend its asset purchases

programme to corporate bonds has also translated into greater

interest in the crossover region of high yield and the inclusion of

senior insurance bonds in the CSPP has resulted in some incremental

demand shifting into the subordinated debt of this sector.

While there is some positive momentum in the market, we are minded

to fade the rally (gradually reduce risk) as prices become richer. The

link between oil/commodity prices and US high yield performance

has been marked of late and may be vulnerable to a correction in the

oil price. Although energy makes up just 5.4%1 of the European high

yield market compared to 13.8%1 of the US high yield market, we are

mindful of the potential for any correction to ripple across the Atlantic

as experienced earlier this year. The US Federal Reserve meeting on

14-15 June, together with the EU referendum in the UK on 23 June

also have the potential to generate volatility in markets that we would

seek to exploit on both the long and short side.

The new issuance market could also provide opportunities. The sell-

off earlier this year delayed issuance, although this picked up again

in April. Cumulative high yield non-fi nancial issuance in the fi rst four

months of 2016, however, was below the levels of the last four years

and with May and July historically the heaviest months for European

high yield issuance, we anticipate being able to put cash to use in the

primary market as a backlog of issuers emerges.

1 Source: BofA Merrill Lynch European (HP00) and US (H0A0) High Yield Indices at 30 April 2016.

Identifying opportunities within high yield bonds

Fig 6: Monthly share of HY non-fi nancials issuance

Source: Morgan Stanley Research, Dealogic, 1995 to 2015. Issuance refers to European HY issuance less expected maturities, and does not account for calls.

Summary

0%

2%

4%

6%

8%

10%

12%

14%

DecNovOctSepAugJulJunMayAprMarFebJan

Average between 1995 and 2015

Henderson Euro High Yield Bond Strategy

Strategy benefi ts at a glance

• High yield bonds tend to offer useful diversifi cation within a fi xed

income portfolio due to their low correlation with government

bonds and greater sensitivity to corporate conditions.

• Variety in European bond issuers together with new companies

entering the market makes for an under-researched market that

can reward good credit selection.

• Offers exposure to the European high yield market, which

is undergoing a period of long-term structural expansion as

companies reduce their reliance on bank funding.

• Selective exposure to derivatives within the portfolio provides

opportunities to profi t from both positive and negative credit events.

• Utilises Henderson’s well-resourced and award winning

credit team, where a global presence allows for thorough

understanding of relative value in European high yield.

Stephen Thariyan

Global Head of Credit13 years of experience in managing Global Credit portfolios, 24 years of investment experience.

Tom Ross, CFA

Portfolio Manager, Absolute Return Credit,

European Credit13 years of investment experience, 9 years managing pan-European absolute return portfolios

Portfolio manager

Henderson has a 48-strong Global Credit Team based in the UK and the US. The team includes investment grade, high yield and emerging

market credit portfolio managers and analysts, who are led by Stephen Thariyan, as well as a dedicated team of traders. It also includes

secured credit portfolio managers and analysts, led by Colin Fleury. The Credit Team is supported by Henderson’s wider Fixed Income Team,

including specialists in government debt, interest rates and currencies, and benefi ts from cross-collaboration with Henderson’s equity teams.

Henderson manages €35.0bn in fi xed income assets*.

*Source: Henderson Global Investors at 31 December 2015

Henderson Global Credit Team*

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.

Important InformationThis document is intended solely for the use of professionals, defi ned as Eligible Counterparties or Professional Clients, and is not for general public distribution. 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. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. Nothing in this document is intended to or should be construed as advice. Security examples are intended for illustrative purposes only and are not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy. Henderson Global Investors, one of its affi liated advisors, or its employees, may have a position in the securities mentioned in this document. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no. 2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered offi ce at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored. Ref: 34S H023135/0516

Contact usGeneral enquiries: +44 (0)207 818 4444Email: european.institutional@henderson.comWebsite: henderson.com/institutional