Cazenove Capital Management Limited 12 Moorgate London EC2R 6DA Telephone +44 (0) 20 7155 5600 www.cazenovecapital.com

Registered Office 12 Moorgate London EC2R 6DA Registered in England No 3017060 Authorised and rregulated by the Financial Services AuthorityCazenove Capital Management Limited provides independent advice

Credit where credit’s due

Peter Harvey

Cazenove Strategic Bond Fund

2

Is there any value?

3

How low can you go?

European BB-B Spread over SwapsEuropean BB-B Spread over Swaps

Spread contraction, robust earnings and low default rates

Source: Merrill LynchSource: Merrill Lynch

%

0

1

2

3

4

5

6

7

8

Dec-01 Apr-02 Aug-02 Dec-02 Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06

BB/B long term loss rate 2.4%

1.7%

4

As good as it gets?

Default rates at a record lowDefault rates at a record low

0

2

4

6

8

10

12

14

Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07

De

fau

lt ra

te (

12

m tr

aili

ng

issu

er

we

igh

ted

)

High Yield Default RatesHigh Yield Default Rates

Source: Moody’s, DatastreamSource: Moody’s, Datastream

1.7%

recession

Enron/Worldcom

5

Will earnings remain supportive?

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

Jan-60 Jan-66 Jan-72 Jan-78 Jan-84 Jan-90 Jan-96 Jan-02

Ma

rgin

(%

)

US Corporate Sector EBIT Margin (%)

US Corporate Sector MarginsUS Corporate Sector Margins

Source: CitigroupSource: Citigroup

18.5%

Corporate earnings highest since 1960s

6

2

3

4

5

6

2000 2001 2002 2003 2004 2005 2006

Europe US

Is leverage too high?

LBO Debt / EBITDA ratio (x)LBO Debt / EBITDA ratio (x)

Source: MSCISource: MSCI

Leverage makes companies unstable

5.8x

7

A liquidity boom?

US Real Interest RatesUS Real Interest Rates

Three years of loose monetary policy from 2002-2004

Source: Datastream, CCMSource: Datastream, CCM

-4

-2

0

2

4

6

8

10

Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06

Fe

d F

un

ds

rate

ad

just

ed

fo

r C

PI

infla

tion

8

A pocket guide to CDOs

Take a £10 stake

Borrow £90 from Megabank at Libor

Buy £100 of corporate bonds at Libor

+0.5%

Make Libor +5% per annum

Invent snappy acronym

£10

£100

9

The credit bubble

Collateralised Debt ObligationsCollateralised Debt Obligations

Structured products were the main source of liquidity and demand in 2006

0

50

100

150

200

250

300

350

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

$ b

illio

n

$497 bn

400

450

500

Source: Morgan StanleySource: Morgan Stanley

10

So where do you go?

Adopt absolute return approach

Minimise net exposure to High Yield

Focus on BB instruments, the defensive end of high yield

Emphasis on maturities below 5 years

Stay senior where possible; avoid PIKs and CCC

A defensive approach approach to high yield debt

11

-0.10.1

2.7

3.7

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

March 06 March 07e

net debt mktcap

Cable & Wireless: 5yr Libor +2.5%

Finding value through fundamental analysis

Stable industry

Balance sheet

Senior debt

BB rating

≤5 years

Equity Coverage

Enterprise Value £3.8bnEnterprise Value £3.8bn

£bn

12

What’s that coming over the hill?

1. Where are we now? Danger zone

5. How are we positioned? Defensively

2. Will earnings remain supportive? Unlikely

3. Is leverage too high? Yes

4. Will the liquidity boom continue? Until it doesn’t

13

Disclaimer

The onshore services described are provided by Cazenove Capital Management Limited (Cazenove Capital) and its connected companies. These services are authorised and regulated by the Financial Services Authority.

Cazenove Capital provides portfolio management, independent advisory services, dealing, settlement, client money and safe custody. Cazenove Investment Fund Management Limited (CIFM) is the manager of collective

investment schemes. CIFM is the product company and promotes only its own products and services. Off-shore services are provided by Cazenove Capital Management Jersey Limited which is regulated by the Jersey

Financial Services Commission. This document is issued by Cazenove Capital. It is for information purposes only and does not constitute an offer to enter into any contract/agreement nor a solicitation to buy or sell any

investment or to provide any services referred to therein.

None of the Funds referred to herein are registered under the Securities Act 1933 of the USA, nor are they registered under the Investment Company Act of 1940.

The contents of this document are based upon sources of information believed to be reliable, however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or

implied) is given as to its accuracy or completeness, and Cazenove Capital or connected companies, directors, officers and employees do not accept any liability or responsibility in respect of the information or any

recommendations expressed herein which, moreover, are subject to change without notice.

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Where reference is made to unregulated collective investment schemes, these may be

operated in offshore centres that are unlikely to offer a level of investor protection equivalent to the UK. Such schemes may deal infrequently and may limit redemption. They use gearing as an investment strategy, and we

may invest in other investment companies which use gearing as an investment strategy. Gearing is a strategy which can involve borrowing, and/or investing in warrants and derivatives and other similar investments. The

strategy which the issuer of such securities uses or proposes to use may result in movements in the price of the securities being more volatile than the movements in the price of underlying investments. Such securities may

be subject to sudden and large falls in value and you may get back nothing at all if there is a sufficiently large fall. Past performance should not be seen as an indication of future performance. Values may fall as well as rise

and you may not get back the amount you invested. Income from investments may fluctuate. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. The levels and bases of,

and relief from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment. You should be aware that investments in higher yielding bonds issued by

borrowers with lower credit ratings may result in a greater risk of default and have a negative impact on income and capital value. Income payments may constitute a return of capital in whole or in part. Income may be

achieved by foregoing future capital growth. Fund charges may be applied in whole or part to capital, which may result in capital erosion. You should be aware of the additional risks associated with investment in emerging

and developing markets. Some of the investments we may make on your behalf could be in investment companies which use gearing as a strategy or invest in other investment companies which use gearing, such as

investment trusts. The strategy which the issuer of such securities uses or proposes to use may result in movements in the price of the securities being more volatile than the movements in the price of underlying investments.

Such investments may be subject to sudden and large falls in value and you may get back nothing at all if there is a sufficiently large fall.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results

could differ materially from those anticipated in the forward-looking statements.

The source of the data is Cazenove Capital unless otherwise stated.