Invesco Global Liquidity 35th Annual SoCal EXPO … · July 2014 . SEC votes and approves rules for...
Transcript of Invesco Global Liquidity 35th Annual SoCal EXPO … · July 2014 . SEC votes and approves rules for...
Invesco Global Liquidity 35th Annual SoCal EXPO
April 7, 2016
Laurie Brignac, CFA Head of Global Liquidity Portfolio Management
US3739
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Legal notice/important information
An investor should consider the investment objectives, risks, fees and expenses carefully before investing. Please read the prospectus or other offering documents carefully before investing. For this and more complete information, contact your financial advisor or visit invesco.com/fund prospectus.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a Fund.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This should not be relied upon as the sole factor in an investment making decision. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully before investing. Past performance is not indicative of future results. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. All data provided by Invesco, unless otherwise noted. The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
Invesco Distributors, Inc.
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Agenda
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History of Money Market Funds
Overview of Money Market Reform
Impact to Clients
Impact on Markets
Investment Solutions
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History of Money Market Funds
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History of Money Market Funds
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Early Years
The SEC promulgated Rule 2a-7 in 1983 to establish risk limiting provisions regarding fund maturity, quality and diversification
The first money market fund (MMF) launched in 1971, which ironically was The Reserve Fund, which was the largest fund to “break the buck”
Asset Growth
Money market funds experienced steady growth crossing over the $2 trillion asset level in early 2001
Rule 2a-7
Amendments to Rule 2a-7
Limited amendments occurred to the Rule in 1991 and 1996 and remained unchanged until after the Financial Crisis in 2008
Source: Invesco, 2016
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2,000
2,500
3,000
3,500
4,000
12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15
1Q 2009 – Industry assets peak at $3.9 trillion
Start of credit crisis 3Q 2007
Lehman bankruptcy
Current industry assets $2.8 trillion
Historical US money fund industry asset growth ($ Millions)
US Money Market Fund Assets MMFs remain a popular short-term investment vehicle
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Source: Investment Company Institute (ICI). Data as of 2/29/2016.
Industry assets as of March 2, 2016: $2.8 trillion
Industry assets have remained relatively stable at around this level since 2010 2Q
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Overview of Money Market Reform
Overview of Money Market Reform Regulators targeted four primary areas:
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Liquidity
MMFs are also required to maintain shorter weighted average lives and also have to manage to a new weighted average life limit (2010 reform)
Money market funds (MMFs) are required to hold specific minimum levels of daily and weekly liquidity and further restricted from holding illiquid securities
Transparency
Increased disclosure has been a hallmark for MMF reform both in the 2010 and 2014 requirements
Maturity
Structure
MMFs will now have to transact at a floating net asset value (FNAV) for certain portfolios, and must have policies to implement fees & gates if needed
Source: Invesco, 2016
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US Money Market Fund Reform Timeline
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Source: Securities Exchange Commission (SEC) and Investment Company Institute (ICI)
March 2009
ICI releases Working Group report proposing changes to strengthen Rule 2a-7
June 2009
SEC proposes changes to Rule 2a-7
September 2009
Expiration of U.S. Treasury Guarantee for MMFs
January 2010
SEC releases final rules for amendments to 2a-7
“Phase I Reforms”
May 2010
Effective date of Phase I Reforms amendments, implementation scheduled for 2010–2011
November 2008
Formal establishment of ICI’S Money Market Working Group
October 14, 2016
Compliance Date:
Conformation with FNAV, fees and gates
April 2016
Compliance Date:
Diversification, stress testing, and additional disclosure
July 2014
SEC votes and approves rules for “Phase II
Reforms”
June 2013
SEC proposes changes to Rule 2a-7, including floating NAV, fees & gates
“Phase II Reforms”
2008 2009 2014 2016 2010 ////
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US Money Market Fund Reform Evolution Portfolio liquidity, maturity and quality
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Topic Pre Crisis 2010 Reforms 2014 Reforms
Minimum Daily Liquidity N/A 10% No changes
Minimum Weekly Liquidity N/A 30% No changes
Maximum Illiquid Securities 10% 5% No changes
Weighted Average Maturity (WAM) Limits
90 day 60 day No changes
Weighted Average Life (WAL) Limits
N/A 120 day No changes
Periodic Stress Tests
N/A Managers must stress the funds’ NAV to shocks such as interest rate changes, redemptions and changes in credit quality
Expanded to include: Assessment of funds’ ability to maintain 10% weekly liquid assets under stress scenario
Second Tier Securities 5% maximum with a 1% per issuer limit
3% maximum with a 0.5% per issuer limit and a maximum maturity of 45 days
No changes
Source: Invesco, 2016
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US Money Market Fund Reform Evolution Portfolio transparency and structure
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Topic Pre Crisis 2010 Reforms 2014 Reforms
Portfolio Holdings Disclosure
No website posting required
No monthly reporting to SEC
Monthly holdings must be disclosed on public website and maintained for six months
Provide detailed monthly portfolio holdings to SEC
Expanded to include: Daily disclosure
of liquidity levels Net inflows and outflows Market-based NAVs
Client Transactional NAVs N/A Requires funds to be able to process client transactions at a price other than $1.00
Required floating NAV for institutional prime and tax exempt funds to four decimal places (i.e. $1.0000 or $0.9999)
Portfolio Liquidity Fees N/A N/A Permits a 2% liquidity fee assessment on redemptions if the funds’ Weekly Liquid Assets (WLA) <30%
Portfolio Redemption Gates Board of Directors must request an order from the SEC to suspend redemptions
Permits the Board to suspend redemptions if the fund is at risk of ‘breaking the buck’ and decides to liquidate the fund
Allows a MMF Board to temporarily suspend redemptions for up to 10 days in a 90 day period if WLA <30%
Source: Invesco, 2016
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US Money Market Fund Reform Key product features
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NAV Type by Strategy CNAV
Retail & Institutions CNAV
Natural Persons/Retail FNAV
Institutions
Government
Prime
Tax-Free
Features Government CNAV
Prime & Tax-Free FNAV
Prime & Tax-Free
99.5% Government Securities & Cash
Limited to Natural Persons
Floating NAV (FNAV)
Constant NAV (CNAV)
Liquidity Fees & Redemption Gates Optional
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Impact to Clients
Types of Money Market Funds
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For Illustrative Purposes Only
Investor Type
Portfolio Strategy Natural Person “Retail” Institutional
Government CNAV
Fees & Gates Optional
CNAV Fees & Gates
Optional
Prime CNAV Fees & Gates
FNAV Fees & Gates
Tax-Free CNAV Fees & Gates
FNAV Fees & Gates
Fund eligibility is determined by the portfolio strategy and the type of investor
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This list was included in the SEC’s release. It is not a comprehensive list. This is strictly an example of how different investors might qualify as a retail account. Source: SEC
Definition of Retail Accounts: Examples of Retail Accounts:
A retail money market fund is a fund that has policies designed to limit ownership to ‘natural persons’:
Expected that most fund groups will rely on social security numbers to confirm ownership by a natural person
Other acceptable proof would be any government-issued identification such as a passport
Natural persons invest through a variety of tax-advantaged accounts:
Participant-directed defined contribution (DC) plans
Individual retirement accounts
Simplified employee pension arrangements
Deferred compensation plans for government or tax-exempt organization employees
College savings plans
Health savings account plans
What is a Retail Investor?
How do different investors qualify as natural persons?
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Are Fees and Gates really new to money market funds?
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Potential for fees or gates is not new in money market funds
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Fees and Gates Current Policy Post Reform
Redemption Suspension and
Redemption Gates
Allows the fund’s board to suspend redemptions
Once board suspends redemptions, the fund must be liquidated
If “weekly liquid assets” fall below 30%, fund’s board may suspend redemptions up to 10 days in any 90-day period
Withhold Redemptions and
Liquidity Fees
No Liquidity Fees Ability to postpone paying
redemptions for up to 7 Days
If “weekly liquid assets” fall below 30%, fund’s board may impose up to a 2% fee on redemptions
If “weekly liquid assets” fall below 10%, fund’s board required to impose 1% fee (up to maximum of 2%) on redemptions but Board may choose not to implement
Note: Fees and Gates are always at the discretion of the Board within their judgment of the best interest of shareholders
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Do any other instruments have Fees and Gates?
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Fees and gates exist to a certain extent in other money market securities
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Examples of similar liquidity and withdrawal restrictions:
Fees Gates
Bank Time Deposits An early withdrawal penalty in a bank time deposit
Banks can fail and deposits can be withheld or “gated”
Treasury Bills Treasury bills redemption prices will be reflective of market conditions
During the crisis it was difficult to find a market for even treasury bills
Commercial Paper Liquidating commercial paper can be difficult if the issuer or secondary market is not offering a competitive price.
Issuers and dealers failing to place a bid is a “gate”
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How have clients reacted to money fund reform thus far?
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Many prime MMFs funds are converting to government funds
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Over $250 billion in money market funds have transitioned from prime funds to government funds
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
Jan-07 Nov-08 Sep-10 Jul-12 May-14 Mar-16
Prime MMF Net Assets Govt MMF Net Assets
US Money Fund Flows (trillions)
Source: Bloomberg L.P. As of March 17, 2016.
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300
400
500
600
700
800
60
80
100
120
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160
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Dec
-13
Dec
-14
Dec
-15
# o
f M
oney
Mar
ket
Fun
ds
# o
f M
oney
Fu
nd
Com
ple
xes
# of Complexes (LHS)
# of Funds (RHS)
Number of fund complexes and money market funds
The combination of high fee waivers and money fund reform have resulted in a wave of industry consolidation
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Source: As of February 23, 2016; iMoneyNet, Inc.; data as of December 31 each year
• 53% of providers have exited the industry
• There are 44% fewer funds in the market
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Impact to Markets
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Regulation and historically low interest rates have changed the landscape for both issuers and money market funds
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Onerous Regulation
Low interest rates for 8 years have distorted the economics of issuing and buying the front end of the curve
Institutional investors are required to hold more liquidity, increasing demand for dwindling short term supply
Post reform regulation has impacted banks, dealers, money market funds and securities settlement platforms
Zero-Interest Rate Policy
Supply Demand
Issuers are discouraged or penalized for issuing short paper and low interest rates have encouraged longer dated funding
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Regulation has impacted issuers and funds
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Source: Invesco, 2016
Issuers Banks forced to term out funding and reduce
reliance on short-term funding
Banks penalized for funding of 90 days or less
Leverage Ratio penalizes banks for facilitating funding transactions such as repos backed by government securities
Banks reducing higher-cost capital markets activities
Industrials and other non-financials are taking advantage of lower-cost financing options in the short-term market
Money Market Funds Higher daily & weekly liquidity levels while
issuers discouraged from issuing short-term paper
Increased transparency requirements beneficial to shareholders but costly to implement and maintain
Greater consolidation in the industry
Increased operating costs has resulted in smaller fund complexes selling their business or choosing to liquidate
Banks discouraging non-operating deposits has and will result in money moving from banks to money funds
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70
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2006
Q2
2006
Q4
2007
Q2
2007
Q4
2008
Q2
2008
Q4
2009
Q2
2009
Q4
2010
Q2
2010
Q4
2011
Q2
2011
Q4
2012
Q2
2012
Q4
2013
Q2
2013
Q4
2014
Q2
2014
Q4
2015
Q2
Perc
enta
ge
Deposits/Assets (%)
US Banks: Additional regulation is causing reduced reliance on wholesale funding
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Source: SNL Financial. Data as of 12/31/2015.
US Banks have significantly reduced reliance on wholesale funding in favor of higher quality deposit funding
We expect this trend to continue due to regulations which penalize short-term funding reliance
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$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
2008
-01
2008
-07
2009
-01
2009
-07
2010
-01
2010
-07
2011
-01
2011
-07
2012
-01
2012
-07
2013
-01
2013
-07
2014
-01
2014
-07
2015
-01
2015
-07
2016
-01
Asset-backed CP Financial CP Nonfinancial CP
2008-2015 CAGR ABCP: -14% Financial: -6% Nonfinancial: +5%
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
2001
-12
2002
-09
2003
-06
2004
-03
2004
-12
2005
-09
2006
-06
2007
-03
2007
-12
2008
-09
2009
-06
2010
-03
2010
-12
2011
-09
2012
-06
2013
-03
2013
-12
2014
-09
2015
-06
Commercial Paper Outstanding ($millions) CP Outstanding, 2008–2015 ($millions)
Investable universe continues to evolve Commercial Paper
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ABCP issuance has contracted 78% since its 2007 peak, with more complex structures falling out of favor with investors
Likewise, stricter regulation on funding sources has driven financial issuance down 40% since 2008
Nonfinancial CP, however, has grown at a steady 5% CAGR as corporate issuers take advantage of attractive funding rates
Source: Federal Reserve, January 2016
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Weighted Average Maturity of US Treasury Debt US Treasury Bills Outstanding, 2007–2015 ($millions)
Investable universe continues to evolve US Treasury Debt
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The demand for Treasury bills remains strong and is expected to increase through FY2016
The Treasury believes it is prudent to increase the level of bills over the coming quarters
In order to accomplish this, the Treasury will gradually reduce issuance size of coupon and TIPS auctions
Source: Treasury.gov, SIFMA. Data as of 12/31/2015.
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Investment Solutions
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Liquidity solution decision process Some considerations before moving forward
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Identify investment objectives:
Principal stability
Credit quality
Interest rate risk
Liquidity needs
Risk Tolerances
Determine yield and return goals:
Money market yields
Libor plus additional spread
1-3 year benchmarks
Return Goals
Identify specific product requirements:
Separate account
Pooled vehicles
Registered funds
Product Needs
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Liquidity solution decision process Determine investment strategy based on return versus risk budget
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For Illustrative Purposes Only. Source: Invesco. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Not all products are available in all jurisdictions or to all investors.
Ultra-Short
Customized Product Solutions
2a-7 Money Funds
Private Funds
Bond Funds
Separately Managed Accounts
Sub-Advised
Short-Term
Cash Plus
Prime Tax-Exempt
Govt/Treasury
Volatility of Returns
Pote
ntia
l Yie
ld/R
etur
n
Core Fixed Income
Average maturity of less than 60 days.
Average maturity between 60 and 90 days.
Average duration between 90 days and one year.
“1-3 year” or “1-5 year” benchmark.
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Liquidity solution decision process Products available in the market
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Additional Requirements
Available Products Product Outcome
Individual Securities Separate Account
Unregistered ERISA Money Pooled Vehicle Collective
Investment Fund**
Registered with the SEC Pooled Vehicle Mutual Funds
Unregistered Non-qualified Pooled Vehicle Private Placements*
* Private funds are excluded from the definition of an investment company under the Investment Company Act of 1940 and private placements are unregistered securities offerings under Regulation D of the Securities Act
** Collective investment funds are comingled trusts that meet the criteria established by 12 CFR 9.18 This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Not all products are available in all jurisdictions or to all investors.
Investment Management Agreement and Custodian
For illustrative purposes only
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Liquidity solution decision process Specific product structure considerations
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Mutual Funds
Private Placements*
Collective Investment Fund
Separate Account
Primary Regulator SEC Unregistered
Office of the Comptroller of the Currency (OCC)
None
Pricing Method CNAV or FNAV CNAV or FNAV CNAV CNAV or FNAV
Shareholder Requirements
Per Prospectus Minimums
Accredited Investor AND
Qualified Purchaser
Qualified Plan (ERISA) Only None
Number of Shareholders Unlimited Limited to 2,000 Unlimited N/A
Tax Reporting Form 1099 Limited Partnership K-1
Exempt Form 5500 N/A
Pros Full portfolio
transparency More liquidity
Lower costs Potentially higher
yields Lower costs
Lower costs Ability to
customize
Cons
Higher costs FNAV for some
money market funds
Generally less liquidity
Limited to ERISA assets only
Minimum thresholds
* There are several types of private placements or unregistered offerings such as 3(c)7 that are exempt from registration with the SEC. Some of these investments are not registered and are offered to qualified investors via private placements. Some products are available via affiliates of Invesco Distributors, Inc.. Not all products are available in all jurisdictions or to all investors.
For illustrative purposes only
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Liquidity solution decision process Potential security selection tool kit
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For Illustrative Purposes Only. Source: Invesco. Please see slide 39 for important information on credit ratings. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Not all products are available in all jurisdictions or to all investors.
Credit Quality
Money Market Cash Plus Ultra-Short Short-Term
US Government Securities AA+ to AAA √ √ √ √
Repurchase Agreements Collateral Dependent √ √ √
Commercial Paper & Certificates of Deposit
A-1 √ √ √
A-2 or A-3 √ √
Corporate Bonds (Domestic & Foreign)
Investment Grade √ √ √
High Yield √
Asset Backed Securities (ABS) A-AAA √ √ √
Mortgage Backed Securities (MBS) A-AAA √ √
Security selection is defined by client’s investment policy. Securities typically available in a managers “tool kit” are highlighted in table below.
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Invesco Ltd. Solely dedicated to investment management for the benefit of clients
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Global Reach Client Focus High Performance Culture
Over 750 investment professionals in more than 20 countries
US$775.6 billion in assets under management for clients globally
Global profile that spans nine of the world’s ten largest markets
Business focused exclusively on investment management
We’re relentless in our pursuit of achieving more for clients
Our global support platform eliminates distractions and empowers our distinct investment teams with the potential to produce strong, long-term investment results
A culture of accountability and collaboration focused on helping clients achieve their investment objectives
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Source: Invesco Ltd. Client-related data, investment professional, employee data and AUM are as of December 31, 2015, and include all assets under advisement, distributed and overseen by Invesco. Invesco PowerShares Capital Management LLC is the sponsor for the PowerShares QQQ and BLDRS products. ALPS Distributors, Inc. is the distributor of PowerShares QQQ, BLDRS Funds and the PowerShares DB Funds. Invesco PowerShares Capital Management LLC and Invesco Distributors, Inc. are indirect, wholly owned subsidiaries of Invesco Ltd. Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products. Invesco Ltd. is not affiliated with ALPS Distributors, Inc. or Deutsche Bank. The listed centers do not all provide products or services that are available in all jurisdictions, nor are their products and services available on all platforms. The entities listed are each indirect, wholly owned subsidiaries of Invesco Ltd., except ALPS Distributors Inc., Deutsche Bank and Invesco Great Wall in Shenzhen, which is a joint venture between Invesco and Great Wall Securities, and the Huaneng Invesco WLR Investment Consulting Company Ltd. in Beijing, which is a joint venture between Huaneng Capital Services and Invesco WLR Limited. Please consult your Invesco representative for more information.
Our global perspective and local market knowledge help us uncover investment opportunities
36
Scope of fixed income platform: US$233.8 billion AUM
Depth of resources: 161 investment professionals 223 professionals Global footprint: 11 locations in key markets
Rates 19 Currency 14 Credit 72 PM 77
London
Hong Kong Tokyo
We have a well-resourced investment team with a strong global perspective
San Diego
New York
Atlanta
London
Hong Kong
Chicago Louisville
Shenzhen Mumbai Palm Harbor
Source: Invesco, as of December 31, 2015. Subject to change without notice.
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Toronto
Invesco Global Liquidity Competitive advantage
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Commitment Global liquidity is a core business of Invesco
Invesco has been managing liquidity for more than 30 years
Well defined fundamental research discipline and investment process
Scale and Reach A US $69.3 billion global liquidity franchise – US $62.6 billion in money markets – US $6.6 billion in short liquidity products
A wide range of customized products including:1
– Separate accounts – Sub-advised accounts – Private trusts – Other short-term strategies and local currencies
Knowledge Senior investment professionals have worked together since 2006
History Maintained strategy objectives through multiple credit cycles
Provided solid performance through different economic cycles
Pure Focus Invesco is solely focused on asset management
No distractions from other businesses
Data as of February 29, 2016. Subject to change without notice. 1 Some products are available via affiliates of Invesco Distributors, Inc. Not all products are available in all jurisdictions or to all investors.
Some products in various currencies may not be available to US residents. Some of these investments are not registered and are offered to qualified investors via private placements.
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Invesco’s Long-term Approach to Short-term InvestingSM
Disciplined Investment Process Focus on safety and liquidity while seeking to deliver a competitive yield Comprehensive approach incorporating a top-down assessment of the market
environment and bottom-up issuer-level credit analysis High bar for evaluating minimal credit risk
High-quality products US-based prime, government and Treasury, and tax-free/exempt funds Global institutional money market funds that operate under the same
disciplined investment process1
Ability to meet the evolving liquidity needs of our clients
Distinguished Client focus Dedicated support and service groups for institutional clients Direct access to our investment team Committed to ongoing regular client communication 1 Non-US money market products may not be offered or sold directly or indirectly in the United States, its territories or possessions to US
citizens or residents, as further described in the prospectus. The Funds and the units of the Funds are not registered with the United States Securities and Exchange Commission and they are sold in the United States only in reliance on exemptions from regulation. The information contained in this publication does not constitute an offer of invitation to apply for units.
38 FOR INSTITUTIONAL INVESTOR USE ONLY
Important information
A credit rating is an assessment provided by Nationally Recognized Statistical Ratings Organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Long-term ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Short-term credit ratings are measured on a scale that generally ranges from A-1 (highest) to SP-3 (lowest) for Standard & Poor's. S&P ratings will also denote those securities that possess extremely strong safety characteristics with a plus sign (+) designation. Ratings are subject to change without notice. For more information on rating methodologies, please visit the following NRSRO websites: http://www.standardandpoors.com and select ‘Understanding Ratings’ under Rating Resources on the homepage.
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Thank you
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