Low Yields. HIGH STRESS.

Winter 2013

Picton Mahoney Asset Management - Canada’s trusted hedge fund source

At Picton Mahoney Asset Management (PMAM) we manage over $7.0 billion in assets for investors through three lines of investment solutions

• Authentic hedge fund strategies

• Sub-advisory services

• Institutional long-only mandates

Our Founding Principles:

• Authenticity

• Transparency

• Capacity2

Investors need to ask themselves some “what if” questions regarding their portfolio

• What if stock markets continue to rally?

• What if interest rates rise?

• What if stock/sector leadership change continues?

If you don’t like the answers you are getting to these questions then it is time to reconsider your positioning and/or the investment tools you are using to build your portfolio

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Investment OutlookInvestment Outlook

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Low Yields. HIGH STRESS.

The price of perfection. What happens when the era of low, low rates comes to an

end!?

Market Summary – top 3 calls for 2013

• Inflection point for interest rates

• Rotation trade out of bonds into stocks

• Return of the credit pickers market

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Business case for hedged income, the three risks

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Rate Risk:

• Dollar value loss of a 1% increase in rates is at the highest in history

Price Risk:

• Investment grade priced to perfection with longest duration, lowest yield and highest price in history

Credit Risk:

• Default rates are low today at just over 2%, but through cycle they’ve averaged almost 5%

Government bonds: no gain, all pain

• “This time is different”—equities 1999/2000, oil 2008, “safe” bonds now?

7Source: Picton Mahoney Asset Management, CIBC Research, Treasury Direct, Bureau of Economic Analysis

1994, The Great Bond Massacre

• Today, while we don’t expect a dramatic sell off in Government bonds, they are 30% more sensitive to a rise in rates than 1994

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(30.0%)

(25.0%)

(20.0%)

(15.0%)

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

5.00%

5.50%

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7.50%

8.00%

8.50%

9.00%Ja

n-94

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Indi

cative

% L

oss

on

10 Y

r

% Y

ield

10 Yr Long Bond Yield Indicative % Loss on 10 Yr

Source: Bloomberg, Bank of America Merrill Lynch

Sensitivity analysis, visualize the pain

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Source: Bloomberg, Picton Mahoney Asset Management

(30.0%)

(25.0%)

(20.0%)

(15.0%)

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

20.0%

0.0% 0.5% 1.0% 1.5% 1.7% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5%

Per

centa

ge C

han

ge in

Pri

ce

Yield %

Change in Market Value at Various YieldsCurrent US 10 Year Note—T 1 5∕8 % of 2022

1% Increase in Yield

Increase to 200 Year Avg yield

$ Loss: ($25.00)

$ Loss: ($9.00)

Speaking of sensitivities, we’ve done well when Government’s have sold off• Outperformed 97% of the time! PM Income Opportunities Fund Class A since inception (December 2009)

10Source: BofA Merrill Lynch Global Research, Picton Mahoney Asset Management Estimates

(2.0%)

(1.0%)

0.0%

1.0%

2.0%

3.0%

4.0%

1 2 3 4 5 6 7 8 9 10111213141516171819202122232425262728293031323334353637383940414243444546474849505152535455565758596061626364656667

Ove

rper

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ance

/ (U

nder

per

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ance

) %

Weeks When the 10-Year Experienced Negative Performance

Our Outperformance In Weeks When the 10 Year US Gov't Bond Was Negative

2010 2011 2012

Can’t beat the relative value in High Yield

• High Yield (HY) affords the best risk reward within fixed income - but it will be a credit-pickers market

• High-end of the HY market (BB’s &B’s) remains our highest conviction outright call with:

• Still-attractive valuations

• Good carry

• Low default risk

• See excellent short side opportunity in pockets of high yield (especially ETF held bonds)

• Prefer long/short to managed and managed to passive—but manage your manager

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High Yield remains the relative winner

• High yield spreads remain in-line with historical averages and are attractive given low default expectations

Source: BofA Merrill Lynch Global Research

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0.00

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16.00

0

400

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1200

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Def

ault R

ate

(%)

Spre

ad (B

ps)

Global HY Spread to Worst vs Global Default Rate

Global HY Spread to Worst

Long Term Average HY Spread

Global Default Rate

Bringing it to a trade – summary recommendations

Strategy Level Picks:

• Higher quality High Yield – B to BB

• Investment Grade financials

• Levered loans

• Credit driven equity ideas

Strategy Level Pans:

• Government, Investment Grade and other rate sensitive mandates

• Passive ETF strategies

• ETF held high yield bonds

• CCC rated corporate bonds13

Pull it all together, maximizing return and minimizing risk

• Fund is right for today’s times – stability and returns

• Objectives & Targets:

• Maximize total return = 6 - 8% net of fees

• Generate a sustainable distribution = 5% paid monthly

• Preserving capital = Less volatile than high yield and stocks

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PMAM’s Income Investment Process

• Powerful combination of credit and equity analytics

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Deep portfolio management team

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TradingCredit Research

David PictonPresident

James LawsonChief Investment

Officer

Phil MesmanLead Portfolio

Manager

Ashley KayHead

Trader/Strategist

Sam GoddardTrader

Sam ActonCredit Analyst

Kyle MartaCredit Analyst

Phil PoratCredit Analyst

Other PMAM Team Members

2 Traders3 Portfolio Managers

5 Quantitative Analysts10 Fundamental Analysts

Our basic hedge fund strategy

• Defensive income necessitates a value focus

• Long:

• Securities showing positive fundamental change, lower valuations and higher quality scores

• Short:

• Securities showing negative fundamental change, higher valuation and lower quality scores

• Portfolio construction / risk control used to design portfolios that trade-off exposure to desired traits with specified volatility targets

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Strategy Examples

Longs:

• Flint Energy (URS) 7.5% of 2019

• Viterra Inc. (GLENLN) 6.406% of 2021

• Sherritt International Corp. (SCN) 7.5% of 2015

• Financials

Shorts:

• Meg Energy Corporation (MEGCN) 6 3/8s of 2023

• First Data Corporation (FDC) 6.75% of 2020

• Fortescue Metals Group (FMGAU) 7.0% of 2015

• Aimia (Aeroplan) Inc. (AIMCN) 5.6% of 2019

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PMAM Income Opportunities Fund

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The inception date of the Class A Units of the fund is December 31, 2009. Performance and Performance Analysis data is presented since inception for Class A Units of the Fund. Performance data is compared a blended benchmark of 50% Merrill Lynch CDN HY Index & 50% Merrill Lynch US Master II (A) Index (CAD). The composition of the Funds’ portfolio will significantly differ from the benchmark due to the investment strategy employed. Please see “Investment Strategies” in the Confidential Offering Memorandum for more details. The Merrill Lynch Canadian Broad Market Index is provided for information purposes only. Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. This is for information only and is not an offer or solicitation to sell units of the fund. Complete information relating to the funds, including risk factors, is contained in the Confidential Offering Memorandum. This fund is not guaranteed, its values change frequently and past performance may not be repeated. Please see “Risk Factors” in the Confidential Offering Memorandum for more details.

Targets:

• 6-8% annual return; net of fees

• Generate a sustainable distribution = 5% per year

• Half the volatility of the Canadian High Yield Index

Firm level advantages

• Weekly pricing & Liquidity

• Sold by Offering Memorandum

• A Class 2/20 model & F Class 1/20 model

• 5% initial distribution & 5% hurdle rate

• High-water mark calculated weekly

• We are partnered with top notch service providers:

• Prime Brokers – Goldman Sachs, Scotia Capital Inc.,

• Canadian Legal Counsel – McMillan LLP

• Auditor – PricewaterhouseCoopers LLP

• Administrator – Citigroup Global Transaction Services

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