Credit where credit’s due

1. Credit where credit’s due Peter Harvey Cazenove Strategic Bond Fund 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 Authority Cazenove Capital Management Limited provides independent advice

2. Is there any value?

3. 8 7 6 5 4 3 BB/B long term loss rate 2.4% 1.7% 2 1 0 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 How low can you go? European BB-B Spread over Swaps % Source: Merrill Lynch Spread contraction, robust earnings and low default rates

4. As good as it gets? High Yield Default Rates recession Enron/Worldcom 1.7% Source: Moody’s, Datastream Default rates at a record low Default rates at a record low

5. Will earnings remain supportive? US Corporate Sector Margins 18.5% Source: Citigroup Corporate earnings highest since 1960s

6. Is leverage too high? LBO Debt / EBITDA ratio (x) 5.8x Source: MSCI Leverage makes companies unstable

7. 10 8 6 4 2 Fed Funds rate adjusted for CPI inflation 0 -2 -4 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 A liquidity boom? US Real Interest Rates Source: Datastream, CCM Three years of loose monetary policy from 2002-2004

8. £100 £10 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

9. $497 bn 500 450 400 350 300 250 200 $ billion 150 100 50 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 The credit bubble Collateralised Debt Obligations Source: Morgan Stanley Structured products were the main source of liquidity and demand in 2006

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. Stable industry 4 Balance sheet 4 Senior debt 4 BB rating 4 ≤5 years 4 Equity Coverage 4 Finding value through fundamental analysis • Cable & Wireless: 5yr Libor +2.5% Enterprise Value £3.8bn £bn

12. 1. Where are we now? Danger zone 2. Will earnings remain supportive? Unlikely 3. Is leverage too high? Yes 4. Will the liquidity boom continue? Until it doesn’t 5. How are we positioned? Defensively What’s that coming over the hill?

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.