“I don’t mind being hated, but I hate being misunderstood.” – unknown.

Thoughts on the Market

“I don’t mind being hated, but I hate being misunderstood.” – unknown

Barely one week into the new year, two of the most respected investors of investment grade “plus” fixed income publicly singled out high yield corporate bonds as a particularly poor investment. When respected peers make it a point to bash our entire asset class it would be worthy of reflection…if we knew why. We hold both of these investors in high regard and they provided a timely lead in for our quarterly high yield update.

Seasoned high yield portfolio managers are quite accustomed to negative comments about their asset class. High yield seems to be the Ford Edsel of fixed income. High yield’s common moniker “junk bonds” is probably one reason for the “kick me” sign taped to the back of our asset class. Unfortunately, negative proclamations regarding high yield are rarely accompanied by tangible, supported reasoning. We can’t claim to be experts in why our asset class usually seems out of favor nor do we claim to be experts in all other fixed income alternatives; however, we will clearly explain our strongly held views regarding our high yield debt asset class. Beginning with the ending:

1. We currently view the broad high yield market, and the average high yield bond (or loan) as either fairly valued or overvalued relative to our estimates of their default risk. This fundamental assessment explains why our Broad High Yield composite currently owns debt issued by just 16% of all the high yield bond issuers comprising the benchmark index, the ICE BofAML US High Yield Constrained Index.

2. We have yet to experience a market environment where our investment process can’t identify a fully diversified high yield portfolio that overcompensates for estimated default risk; the current market posing no exception. Further, we don’t fear market volatility or downside corrections; we calmly welcome the opportunities they present. We explain the “why” behind these statements in this relatively brief commentary.

Now, beginning with the beginning: the modern high yield market was first “institutionalized” in the 1970’s based on the simple observation that investors were overcompensated for the average non-investment grade bond’s default risk. However, what was a simple observation some four decades ago is no longer always, or perhaps even usually, true of the broad high yield market.

Nevertheless, we still believe it can always be true of a portfolio constructed and managed via the successful implementation of our investment philosophy and process; a high yield investment process that has not changed since its origin in the 1990s: (1) mandatory minimum margin-of-safety requirements, and (2) requisite yields/spreads that over-compensate for estimated default risk.

In other words, our investment process seeks to lend to corporations, (1) at relatively conservative loan-to-values (LTVs) based on accurate, real-world asset appraisals, and (2) at rates of return that overcompensate for overall credit risk. Our investment process would have been very familiar to commercial loan officers at any bank once upon a time; circa pre-1980s!

High Yield Market Commentary

The high yield markets experienced a cumulative pause during the final quarter of 2017. In fact, the broad high yield market as represented by the ICE BofAML US Constrained High Yield index experienced a modest 1.1% price decline in 4Q17; the first such quarter since 4Q15. Nevertheless, after including income 4Q17 managed a +41 basis point total return.

Energy was the strongest performing industry sector in the overall high yield market during the fourth quarter, driven by strong oil prices as reflected in WTI crude closing up 16% for the quarter at $60.42 a barrel, a level last seen in mid-July 2015. The breakout of oil prices led to strength in the weaker quality E&P credits; many of which don’t fit our minimum margin-of-safety requirement of 1.5x asset coverage.

Telecommunications was the weakest performing industry sector in the overall High Yield market during the quarter. The primary credit drivers were wireless provider, Sprint Corp* & satellite operator, Intelsat S.A. Sprint sold off after merger discussions with T-Mobile were terminated; our portfolios were at a relative low‑point in weighting relative to the indexes. Intelsat sold off due to refinancing concerns at the Holding Co level.

Last quarter we highlighted what we view as the most notable challenge presented by the high yield market: the narrowest “opportunity set” in our high yield market careers. The “opportunity set” is the pool of high yield securities that meet both our minimum margin-of-safety requirements, and overcompensate in yield and spread, for our estimates of their individual default risks. In fact, this market dynamic tightened somewhat further during the fourth quarter. Therefore, the ongoing disciplined implementation of our investment process continues to result in a Broad High Yield portfolio with issuer counts towards the lower end of the ranges we highlight as typical. This portfolio positioning is neither a positive or negative in the absolute as in our estimation our portfolios remain very comfortably fully diversified. Please see “Analysis: Opportunity Set” on page 3 for additional commentary on the high yield market.

 

* For illustrative purposes only. Reference to the names of companies within this communication is merely for explaining the investment strategy, and should not be construed as investment advice or an investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of First State Investments.

Portfolio Positioning

Most notable, is our issuer count remaining towards the lower boundary of our typical range, with 137 issuers in the Broad High Yield composite at year-end. In answer to a logical question related to our issuer count: we estimate our current Broad High Yield model portfolio would start to require more issuers around $4 billion in AUM. That is a dynamic estimate that will change with time; most notably, should the overall market experience any noticeable sell-off, and there will be an associated broadening of the opportunity set.

Another noteworthy portfolio characteristic is our ability to maintain a relative overweight in our top 10 holdings presenting greater yield and spread than the overall index. Specifically, in the Broad High Yield composite this overweight amongst our top 10 holdings accounts for 20.1% of the composite, with a 7.74% YTW. The benchmark weight in the same credits is 4.3%, making our active bet in high conviction, higher yielding credits a meaningful 15.8%. This is simply a reflection of calmly following our investment process and carefully managing all related portfolio risks.

Composite Performance Summary

 

Note: Past performance is not indicative of future performance. Performance figures do not reflect the deduction of investment advisory fees. A client’s return will be reduced by the investment fees. If a client placed $100,000 under management and a hypothetical gross return of 10% were achieved, the investment assets before fees would have grown to $259,374 in 10 years. However, if an advisory fee of 1% were charged, investment assets would have grown to $234,573, or an annual compounded rate of 8.9%. The assets within the Short Duration High Yield Composite and Quality High Yield Composite have been combined to create the FSI Defensive High Yield Composite. The assets within the Select High Yield Composite and the Quality High Yield Composite have been combined to create the Broad High Yield Composite.

*Source: BofAML Indices and First State Investments as of 12/31/17

Analysis: “Opportunity Set”

The Opportunity Set remains narrow...

Currently, the most challenging high yield market dynamic is the narrow opportunity set of high yield securities that we find attractive, based on our disciplined investment process.

We can’t emphasize enough the severe challenge this dynamic presents to high yield managers with $10 billion, $20 billion or more in high yield AUM.

Even more importantly, this market environment is one where managers that “closet-index” or lack an effective and disciplined investment process are heading towards a reckoning that will prove painful to disastrous for their investors. “Buyer Beware.”

The following bar graph quantifies the broad migration of credit spreads within the high yield market over the past two years (only weeks before the early February 2016 market low):

U.S. High Yield Market Spread Migration (Since year end 2015)

 

Source: BofAML as of 12/31/2017

The broad migration of credit spreads within the high yield market over the past two years highlight the dynamic behind the current market’s narrow opportunity set:

–– 80% decline in the number of issuers with STWs >800 bps

–– 76% & 65% declines in the number of issuers with STWs >600 bps & 400 bps, respectively

–– 73% of issuers now have STWs <400 bps (up from 35% at the end of 2015)

–– 27% of issuers now have STWs <200 bps (up from just 2% at the end of 2015)

The percentage of issuers offering a spread-to-worst, rate premium less than 200 basis points is one of the most transparent indications of the current market’s narrow “opportunity set.” This percentage is of particular interest to us because our investment process requires a minimum spread of +200 bps to invest in even our safest high yield bonds. In other words, the sub-200 bps segment of the market is largely eliminated from consideration by our investment process.

The following table tracks the relative size of this “sub- 200 bps” market segment over time:

*Source: BofAML Indices and Bloomberg as of 12/31/17

At the market peak of May 2007, an eye-opening 42% of issues offered a STW<200 bps. However, in that market environment CASH was a viable alternative to “mispriced” high yield: with the 3-month T-bill offering a 4.73% coupon equivalent yield vs. the BB-rated, sub-sector of HUC0 offering a 6.77% YTW, +185 STW. It was a time when clients tolerated “cash” holdings of 15-20%.

At the next market peak around June 2014 a reasonable 12% of issues presented a STW <200 bps; a market environment where our investment process resulted in an issuer count more than twice the number today.

Near the early-2016 market low, after a 1.5 year market correction only 1% of issues breached 200 bps. At the beginning of 2017 it was back to the 12% level of sub-200 bp credits.

Over the next 9 months “the squeeze was on” and this troublesome segment of our market roughly doubled, to the present 27-28% of issuers.

In summary, currently upwards of 30% of high yield credit are priced at a sub-200 bp STW. Given that our investment process typically excludes 20-25% of the remaining high yield universe due to insufficient margins-of-safety, approximately half the high yield market is currently “out of play.” Given the overall high yield market is broadly fully valued our investment process results in the narrowest “opportunity set” in our high yield careers.

Note: All market information above sourced from Bloomberg

Broad High Yield¹

This strategy has the widest high yield market opportunity set. The benchmark is the ICE Bank of America Merrill Lynch US High Yield Constrained Index. The excess return target is 100bp².

Composite Performance

Broad High Yield returned 0.78% for 4Q17, which outperformed the ICE BofA Merrill Lynch US High Yield Constrained Index by 37bp. Since inception on May 1st, 2017, FSI Broad High Yield has outperformed its Index by 67 bps.

¹The assets within the FSI Select High Yield Composite and the FSI Quality High Yield Composite have been combined to create the FSI Broad High Yield Composite.

²Return target is solely intended to express an objective or target for a return on your investment and represents a forward-looking statement. It does not represent and should not be construed as a guarantee, promise or assurance of a specific return on your investment. Actual returns may differ materially from the performance objective, and there are no guarantees that you will achieve such returns. Please refer to the disclaimer page for additional information.

Top Positive Issuer Contributors:

Kindred Healthcare (KND): Performance bounced back in the quarter after having underperformed in the 3Q. Our conviction in the name was rewarded with a solid 3Q earnings report coupled with a major improvement in liquidity used to deleverage. Furthermore, late in the quarter it was announced that the company entered into definitive agreement to be purchased by Humana and private equity firms TPG and Welsh, Carson, Anderson & Stowe which drove the bond prices higher to near their yield to call and make whole prices.

Valeant Pharmaceuticals (VRXCN): Strong performance was driven by management’s continued execution of its operating turn-around plan. The company has delivered on de-leveraging commitments, stabilized earnings and has greatly improved its maturity schedule. An important milestone was achieved when the company was able to access the unsecured debt market in mid-December.

Cincinnati Bell (CBB): Cincinnati Bell rebounded off of its poor performance in the prior quarter. The market gained much needed confidence from the company’s 3Q earnings report which beat revenue and EBITDA expectations and showed favorable trends in its fiber centric broadband and video subscriber growth. Attention will turn to the integration of OnX and the closing of the Hawaiian Telecom acquisition in the 4Q17 and 2018, respectively.

Top Negative Issuer Contributors:

Rite Aid (RAD): Bonds were under pressure as the market was concerned that Amazon would enter the retail pharmacy space and threaten Rite Aid’s business model. In addition, there was general weakness in the retail sector due to uncertainty regarding how the holiday season would shape up. The company’s securities continue to lag due to a lack of disclosure regarding the use of proceeds from their large asset sale and ambiguity on their future operating results.

Frontier Communications (FTR): Bonds were under pressure as operating results which showed signs of sequential improvement but were not nearly enough to convince the market of an organic turn-around. Furthermore, the board’s decision to continue to pay a common stock dividend remains a source of contention in light of the company’s ensuing liquidity requirements.

Sprint (S): Sprint was very much in the spotlight and underperformed as a result of its decision to discontinue merger discussions with T-Mobile. A merger and anticipated credit and operating improvements resulting from the combined entity had become partially priced into Sprint bonds. When the deal was surprisingly called off, Sprint bonds re-priced lower to more accurately reflect its stand-alone credit profile.

Note: Securities discussed are the largest positive and negative contributors for the specific sectors.

Select High Yield

This is a more concentrated strategy in high conviction ideas. The benchmark is the ICE Bank of America Merrill Lynch US High Yield Constrained Index. The excess return target is 150bp³.

Composite Performance

Select High Yield returned 0.66% for 4Q17 which outperformed the ICE BofA Merrill Lynch US High Yield Constrained Index by 37 bps. Since inception on May 1st, 2017, FSI Select High Yield has outperformed its Index by 64 bps.

³Return target is solely intended to express an objective or target for a return on your investment and represents a forward-looking statement. It does not represent and should not be construed as a guarantee, promise or assurance of a specific return on your investment. Actual returns may differ materially from the performance objective, and there are no guarantees that you will achieve such returns. Please refer to the disclaimer page for additional information.

Top Positive Issuer Contributors:

Kindred Healthcare (KND): Performance bounced back in the quarter after having underperformed in the 3Q. Our conviction in the name was rewarded with a solid 3Q earnings report coupled with a major improvement in liquidity used to deleverage. Furthermore, late in the quarter it was announced that the company entered into definitive agreement to be purchased by Humana and private equity firms TPG and Welsh, Carson, Anderson & Stowe which drove the bond prices higher to near their yield to call and make whole prices.

Valeant Pharmaceuticals (VRXCN): Strong performance was driven by management’s continued execution of its operating turn-around plan. The company has delivered on de-leveraging commitments, stabilized earnings and has greatly improved its maturity schedule. An important milestone was achieved when the company was able to access the unsecured debt market in mid-December.

Cincinnati Bell (CBB): Cincinnati Bell rebounded off of its poor performance in the prior quarter. The market gained much needed confidence from the company’s 3Q earnings report which beat revenue and EBITDA expectations and showed favorable trends in its fiber centric broadband and video subscriber growth. Attention will turn to the integration of OnX and the closing of the Hawaiian Telecom acquisition in the 4Q17 and 2018, respectively.

Top Negative Issuer Contributors:

Endo International (ENDP): Despite reporting better than expected 3Q earnings and reaffirmation of its 4Q17 revenue and EBITDA projections the company’s performance was hampered by very negative investor sentiment hanging over the generic drug sector. Industry wide pricing pressure along with the opioid drug abuse epidemic have been heavily covered by the media, raising investor anxieties.

Frontier Communications (FTR): Bonds were under pressure as operating results which showed signs of sequential improvement but were not nearly enough to convince the market of an organic turn-around. Furthermore, the board’s decision to continue to pay a common stock dividend remains a source of contention in light of the company’s ensuing liquidity requirements.

Rite Aid (RAD): Bonds were under pressure as the market was concerned that Amazon would enter the retail pharmacy space and threaten Rite Aid’s business model. In addition, there was general weakness in the retail sector due to uncertainty regarding how the holiday season would shape up. The company’s securities continue to lag due to a lack of disclosure regarding the use of proceeds from their large asset sale and ambiguity on their future operating results.

Note: Securities discussed are the largest positive and negative contributors for the specific sectors.

Quality High Yield

This strategy is focused on the higher quality segment of the high yield market. The benchmark is the ICE Bank of America Merrill Lynch US High Yield BB-B Constrained Index. The excess return target is 100bp⁴.

Composite Performance

Quality High Yield returned 0.76% for 4Q17 which outperformed the ICE BofA Merrill Lynch BB-B US High Yield Constrained Index by 37bps. Since inception on May 1st, 2017, FSI Quality High Yield has outperformed its Index by 83bps.

⁴Return target is solely intended to express an objective or target for a return on your investment and represents a forward-looking statement. It does not represent and should not be construed as a guarantee, promise or assurance of a specific return on your investment. Actual returns may differ materially from the performance objective, and there are no guarantees that you will achieve such returns. Please refer to the disclaimer page for additional information.

Top Positive Issuer Contributors:

Kindred Healthcare (KND): Performance bounced back in the quarter after having underperformed in the 3Q. Our conviction in the name was rewarded with a solid 3Q earnings report coupled with a major improvement in liquidity used to deleverage. Furthermore, late in the quarter it was announced that the company entered into definitive agreement to be purchased by Humana and private equity firms TPG and Welsh, Carson, Anderson & Stowe which drove the bond prices higher to near their yield to call and make whole prices.

Cincinnati Bell (CBB): Cincinnati Bell rebounded off of its poor performance in the prior quarter. The market gained much needed confidence from the company’s 3Q earnings report which beat revenue and EBITDA expectations and showed favorable trends in its fiber centric broadband and video subscriber growth. Attention will turn to the integration of OnX and the closing of the Hawaiian Telecom acquisition in the 4Q17 and 2018, respectively.

Valeant Pharmaceuticals (VRXCN): Strong performance was driven by management’s continued execution of its operating turn-around plan. The company has delivered on de-leveraging commitments, stabilized earnings and has greatly improved its maturity schedule. An important milestone was achieved when the company was able to access the unsecured debt market in mid-December.

Top Negative Issuer Contributors:

Rite Aid (RAD): Bonds were under pressure as the market was concerned that Amazon would enter the retail pharmacy space and threaten Rite Aid’s business model. In addition, there was general weakness in the retail sector due to uncertainty regarding how the holiday season would shape up. The company’s securities continue to lag due to a lack of disclosure regarding the use of proceeds from their large asset sale and ambiguity on their future operating results.

Sprint (S): Sprint was very much in the spotlight and underperformed as a result of its decision to discontinue merger discussions with T-Mobile. A merger and anticipated credit and operating improvements resulting from the combined entity had become partially priced into Sprint bonds. When the deal was surprisingly called off, Sprint bonds re-priced lower to more accurately reflect its stand-alone credit profile.

Frontier Communications (FTR): Bonds were under pressure as operating results which showed signs of sequential improvement but were not nearly enough to convince the market of an organic turn-around. Furthermore, the board’s decision to continue to pay a common stock dividend remains a source of contention in light of the company’s ensuing liquidity requirements.

Note: Securities discussed are the largest positive and negative contributors for the specific sectors.

Short Duration High Yield

This is a more defensive strategy with limited interest rate exposure. The benchmark is the ICE Bank of America Merrill Lynch 1-5 Year BB-B Cash Pay High Yield Constrained Index. The excess return target is 100bp⁵.

Composite Performance

Short Duration High Yield returned 0.39% for 4Q17 which outperformed the ICE BofA Merrill Lynch 1-5 yr BB-B US Cash Pay High Yield Constrained Index by 6bps. Since inception on May 1st, 2017, FSI Short Duration High Yield has outperformed its Index by 18bps.

⁵Return target is solely intended to express an objective or target for a return on your investment and represents a forward-looking statement. It does not represent and should not be construed as a guarantee, promise or assurance of a specific return on your investment. Actual returns may differ materially from the performance objective, and there are no guarantees that you will achieve such returns. Please refer to the disclaimer page for additional information.

Top Positive Issuer Contributors:

Kindred Healthcare (KND): Performance bounced back in the quarter after having underperformed in the 3Q. Our conviction in the name was rewarded with a solid 3Q earnings report coupled with a major improvement in liquidity used to deleverage. Furthermore, late in the quarter it was announced that the company entered into definitive agreement to be purchased by Humana and private equity firms TPG and Welsh, Carson, Anderson & Stowe which drove the bond prices higher to near their yield to call and make whole prices.

Dominion Diamond (NORACQ): Strong performance for the quarter was driven by participation in the new issue that the company brought to market in October. The deal priced attractively relative to bonds issued by its major peer, Petra Diamonds, and outperformed due to its operations in more favorable mining jurisdictions, equity contribution from its new sponsor implying sizable asset value underpinning the bonds, and the sponsor’s track record of extending mine life at previous investments which it plans to pursue at Dominion.

Consol Energy (CNX): The company was able to effectuate the spin of their coal business to shareholders in the fourth quarter. In concert with that, investors have recognized the prospects for medium-term deleveraging of the standalone natural gas business, as well as the lower volatility of the business. In addition, the bonds are likely to be called in the first half of 2018, and the bond price has moved to reflect yield to call levels.

Top Negative Issuer Contributors:

Rite Aid (RAD): Bonds were under pressure as the market was concerned that Amazon would enter the retail pharmacy space and threaten Rite Aid’s business model. In addition, there was general weakness in the retail sector due to uncertainty regarding how the holiday season would shape up. The company’s securities continue to lag due to a lack of disclosure regarding the use of proceeds from their large asset sale and ambiguity on their future operating results.

Frontier Communications (FTR): Bonds were under pressure as operating results which showed signs of sequential improvement but were not nearly enough to convince the market of an organic turn-around. Furthermore, the board’s decision to continue to pay a common stock dividend remains a source of contention in light of the company’s ensuing liquidity requirements.

Endo International (ENDP): Despite reporting better than expected 3Q earnings and reaffirmation of its 4Q17 revenue and EBITDA projections the company’s performance was hampered by very negative investor sentiment hanging over the generic drug sector. Industry wide pricing pressure along with the opioid drug abuse epidemic have been heavily covered by the media, raising investor anxieties.

Note: Securities discussed are the largest positive and negative contributors for the specific sectors.

Defensive High Yield⁶

This is a defensive strategy that focuses on the higher quality segment of the high yield market with more limited interest rate exposure. The benchmark is the ICE Bank of America Merrill Lynch BB-B US High Yield Constrained Index. The excess return target is 100bp⁷.

Composite Performance

Defensive High Yield returned 0.69% for 4Q17 which outperformed the ICE BofA Merrill Lynch BB-B US High Yield Constrained Index by 30bps. Since inception on May 1st, 2017, FSI Defensive High Yield has outperformed its Index by 38bps.

⁶The assets within the FSI Short Duration High Yield Composite and FSI Quality High Yield Composite have been combined to create the FSI Defensive High Yield Composite.

⁷Return target is solely intended to express an objective or target for a return on your investment and represents a forward-looking statement. It does not represent and should not be construed as a guarantee, promise or assurance of a specific return on your investment. Actual returns may differ materially from the performance objective, and there are no guarantees that you will achieve such returns. Please refer to the disclaimer page for additional information.

Top Positive Issuer Contributors:

Kindred Healthcare (KND): Performance bounced back in the quarter after having underperformed in the 3Q. Our conviction in the name was rewarded with a solid 3Q earnings report coupled with a major improvement in liquidity used to deleverage. Furthermore, late in the quarter it was announced that the company entered into definitive agreement to be purchased by Humana and private equity firms TPG and Welsh, Carson, Anderson & Stowe which drove the bond prices higher to near their yield to call and make whole prices.

Dominion Diamond (NORACQ): Strong performance for the quarter was driven by participation in the new issue that the company brought to market in October. The deal priced attractively relative to bonds issued by its major peer, Petra Diamonds, and outperformed due to its operations in more favorable mining jurisdictions, equity contribution from its new sponsor implying sizable asset value underpinning the bonds, and the sponsor’s track record of extending mine life at previous investments which it plans to pursue at Dominion.

Cincinnati Bell (CBB): Cincinnati Bell rebounded off of its poor performance in the prior quarter. The market gained much needed confidence from the company’s 3Q earnings report which beat revenue and EBITDA expectations and showed favorable trends in its fiber centric broadband and video subscriber growth. Attention will turn to the integration of OnX and the closing of the Hawaiian Telecom acquisition in the 4Q17 and 2018, respectively.

Top Negative Issuer Contributors:

Rite Aid (RAD): Bonds were under pressure as the market was concerned that Amazon would enter the retail pharmacy space and threaten Rite Aid’s business model. In addition, there was general weakness in the retail sector due to uncertainty regarding how the holiday season would shape up. The company’s securities continue to lag due to a lack of disclosure regarding the use of proceeds from their large asset sale and ambiguity on their future operating results.

Sprint (S): Sprint was very much in the spotlight and underperformed as a result of its decision to discontinue merger discussions with T-Mobile. A merger and anticipated credit and operating improvements resulting from the combined entity had become partially priced into Sprint bonds. When the deal was surprisingly called off, Sprint bonds re-priced lower to more accurately reflect its stand-alone credit profile.

Frontier Communications (FTR): Bonds were under pressure as operating results which showed signs of sequential improvement but were not nearly enough to convince the market of an organic turn-around. Furthermore, the board’s decision to continue to pay a common stock dividend remains a source of contention in light of the company’s ensuing liquidity requirements.

 

Note: Securities discussed are the largest positive and negative contributors for the specific sectors.

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Disclaimer

This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940, as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933, and as qualified eligible persons as defined under CFTC Regulation 4.7. It is not to be distributed to the general public, private customers or retail investors in any jurisdiction whatsoever.

The information included within this presentation and any supplemental documentation is for informational and illustrative purposes, is furnished on a confidential basis, is intended only for the use of the authorized recipient, and should not be copied, reproduced or redistributed without the prior written consent of First State Investments (US) LLC (“FSI US”) or any of its affiliates (together with FSI US, “First State Investments”). This document is not an offer for sale of funds to US persons (as such term is used in Regulation S promulgated under the 1933 Act).

Any investment with First State Investments should form part of a diversified portfolio and be considered a long term investment. Prospective investors should be aware that returns over the short term may not match potential long term returns. Investors should always seek independent financial advice before making any investment decision. The value of an investment and any income from it may go down as well as up. Currency movements may affect both the income received and the capital value of investments in overseas markets. Where a fund invests in fixed income securities changes in interest rates will affect the value of any securities held. If rates go up, the value of fixed income securities fall; if rates go down, the value of fixed income securities rise. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

All reasonable care has been taken in relation to the preparation and collation of this presentation. The information is taken from sources which are believed to be accurate but First State Investments and its directors, officers and employees accept no liability of any kind to any person who relies on the information contained in it. No representation or warranty, express or implied is made as to the truth, fairness, accuracy, or completeness of the information herein. Data, opinions, and estimates may be changed without notice. The copyright of this presentation and any documents supplied with it and the information therein is vested in First State Investments.

Any discussion of a performance objective is solely intended to express an objective or target for a return on your investment and represents a forward-looking statement. It does not represent and should not be construed as a guarantee, promise or assurance of a specific return on your investment. Actual returns may differ materially from the performance objective, and there are no guarantees that you will achieve such returns. We cannot and do not warrant the accuracy or the validity of the performance objective and are not liable if actual returns differ in any way from such performance objective.

Certain statements, estimates, and projections in this document may be forward-looking statements. These forward-looking statements are based upon First State Investments’ current assumptions and beliefs, in light of currently available information, but involve known and unknown risks and uncertainties. Actual actions or results may differ materially from those discussed. Readers are cautioned not to place undue reliance on these forward-looking statements. There is no certainty that current conditions will last, and First State Investments undertakes no obligation to publicly update any forward-looking statement.

The comparative benchmarks or indices referred to herein are for illustrative and comparison purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different from the funds managed by FSI US.

For more information please visit www.firststateinvestments.com/us. Telephone calls with First State Investments may be recorded.

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