The recent Greek debt crisis accentuated fears about the sovereign bond market and triggered unprecedented conditions in the euro zone, previously seen as robust: dithering and lack of coordination between countries as to the aid policies to be implemented, lack of responsiveness in a large-scale crisis, abrupt and extensive swings in the sovereign bond markets, etc.

1- Heightened disparity between euro zone countries

From the onset of the financial crisis in 2008, the bond markets presented a very mixed picture from one euro zone country to another:

• German sovereign bonds benefited from the country’s reassuring economic indicators and outperformed all other AAA-rated debt in the euro zone against a backdrop of strong risk aversion;

• The other Core(1) countries benefited from their credibility and ability to apply budget policies;

• Peripheral-country debt was particularly hard hit by the crisis and these countries’ credibility and financial solidity were undermined.

Investor sentiment on sovereign debt was seen in abrupt widenings in the financial markets and unprecedented interest rate levels.At the end of 2008, investor mistrust affected all peripheral countries.At end-2009, it started with Greece before spreading to all peripheral countries.

The ECB’s rescue package admittedly helped to remove fears of a short term liquidity crisis in euro zone countries, while underscoring the medium-term solvency risk: European states now have to face drastic budget cuts and prove their credibility in an environment of deteriorated growth. The stress tests performed on European banks at the end of July, however, did at least reduce investor risk aversion.

In a complex market environment marked by the Greek debt crisis, uncertainty about Spanish debt and instability in the euro zone, Natixis Souverains Euro stands out by generating consistent performance.This Expertise Flash will examine the lasting consequences of the crisis on the sovereign bond market and the factors which enabled Natixis Souverains Euro to make the most of this highly tense environment.

ExPErTISE FlAshSeptember 2010

Euro sovereign bond expertiseat Natixis Asset Management

Euro zone: 5-year bond spreads (in relation to German returns)

Source: Bloomberg, as of end of August 2010

CORPORATE AND INVESTMENT BANKING / INVESTMENT SOLUTIONS / SPECIALIZED FINANCIAL

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o A crisis with lasting consequences on the sovereign bond market

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(1) Core countries: France, Belgium, Austria, Finland, the Netherlands.

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ExPErTISE FlAsh / september 2010

European markets and investors will pay particular heed to the medium term stability risk in euro zone countries and to the risk of a further recession in the United states.

2- Change in market behaviour and liquidity

At the height of the Greek crisis in early May 2010, the two-year interest rate was up to 18%, reflecting expectations of Greece heading to a default scenario or a restructuring of its debt.The country’s yield curve was inverted like a default risk for a private issuer, a rare occurrence indeed for a state.The markets were then assuaged by announcements of financial guarantees from European institutions and the Greek yield curve turned positive again, with the two-year interest rate down to 6%.

While central bankers attempt to steer interest rate levels, they cannot guarantee execution conditions or liquidity (price range: difference between buying and selling price).In the case of Greece, the three-year financial guarantees given to the Greek state will enable it to refinance itself directly from European institutions rather than through issuance in the primary bond market. Unfortunately, this has a negative impact on the liquidity of Greek debt, which is usually ensured by regular flows of new issues.The price ranges of peripheral debt have therefore soared since the crisis: for instance, Greek two-year bonds were trading in a range 80 times wider in June 2010 than in 2007. This bid/ask spread is now almost 2% of the asset’s value for a two-year maturity, compared with 0.025% at end-2007 and 0.55% in June 2009.

3- New fundamentals

The recent very jittery years for all financial markets have altered the traditional hierarchy between interest rate markets and fixed income markets. Over the long term, bond markets have offered significant absolute returns, similar to those of equities, with lower volatility:

Distortion of the Greek Yield Curve

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Source: Bloomberg, as of end of August 2010

Multiplying coefficients of price ranges from 2007 to 2010

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Source: Natixis Asset Management, as of end of August 2010.

1990-2010 2007-2010

Total return (ann.)

Volatility (ann.)

Sharpe Ratio (4)

Total return (ann.)

Volatility (ann.)

Sharpe Ratio (4)

S&P 500 8.05 6.62 0.6 (2) -6.78 9.31 -0.9 (2)

Merril Lynch Corporates Index 7.67 2.37 1.5 (2) 7.74 3.86 1.6 (2)

Merril Lynch All € Government Index 7.22 1.47 1.7 (3) 6.33 1.65 2.4 (3)

(2) Excess return with respect to US risk-free interest rate / volatility.(3) Excess return with respect to € risk-free interest rate / volatility.(4) Sharpe ratio: excess return with respect to a risk-free interest rate, in relation to volatility.

The mentioned figures refer to previous years. Past performance does not guarantee future results.Source: Natixis Asset Management, as of end of August 2010.

In this respect, Government bonds have been particularly attractive in the past few years with the highest sharpe ratio over three years.

ExPErTISE FlAsh / september 2010

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Natixis Souverains Euro outperformance(gross annual, as a %)

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Source: Natixis Asset Management, as of end of August 2010.

o Natixis Souverains Euro’s strong point: having made the most of the crisis

Faced with this unprecedented crisis, the sovereign bond managers had to adapt to the new situation and factor in new parameters in their investment strategies.Focusing solely on sovereign issuers, Natixis souverains Euro’s track record highlights Natixis Asset Management’s expertise in bond strategies: duration (management of the fund’s sensitivity), yield curve (allocation of maturities), stock picking (country allocation).

1- Country allocation used as the main performance driver

In 2009 and 2010, it was the portfolio managers’ ability to bank on discrepancies between the sovereign debt of euro zone countries that enabled them to generate performance or not. Natixis souverain Euro’s investment process factored in the significant interest rate movements related to each country and therefore new sources of value added.

The bar chart below highlights the fund’s gross annual performance in relation to its benchmark index as well as the component related to the global duration strategy.

While the “global duration” component made a consistent contribution to performance in recent years, it is worth noting that in the last two years, when the outperformance was the highest, the proportion of the contribution was smaller. Tactical management of duration was only possible on German securities, which offered good liquidity conditions, through Futures(5). The overall duration in 2009 and 2010 therefore resulted mainly from the country/maturity allocation.

The investment team had anticipated this accentuation in disparities between euro zone countries by creating an adapted organisation: a sector Team (analysis group) dedicated to country allocation had been formed in early 2008. Regular exchanges between the sector Team specialists and the manager of Natixis souverains Euro enabled the investment teams to be prepared and react as soon as spreads amplified.The sector Team’s long term anticipations will continue to be a key factor in performance generation in the years ahead.

2- New risk measures deriving from the Corporate bond market

In order to tackle the new situation in the sovereign bond markets, new risks, traditionally associated with the corporate bond market, must be taken into account when managing sovereign debt: the market risk (and sovereign issuers’ exposure to the credit risk) and the default risk (not measured by duration). sovereign bond management therefore has to rethink its risk indicators.

With this outlook, the weighting of strategies implemented in Natixis souverains Euro is regularly reviewed. Furthermore, new risk measures will be incorporated in the investment processes:

• Contribution to Duration Time Spread (DTS): measurement of the risk of a change in spread, meets the limitations of duration, ideally by maturity segment;

• Weight of a sovereign issuer in the fund: measurement of default/restructuring risk. The impact of an issuer’s default on a fund’s returns depends more on the size of its position in the portfolio.

Olivier de larouzière, portfolio manager of Natixis souverains Euro and head of Interest rate & Foreign exchange, explains:“The problems met by euro zone countries look set to last for several years. Country spreads are therefore likely to remain volatile. Our sovereign debt investment process will continue to make the most of these opportunities, while learning to master new risk measures deriving from the corporate bond market.”

*Performance for 2010, registered performance as of 31/08/2010.The mentioned figures refer to previous years. Past performance does not guarantee future results.

Net performance of the fund is equal to the gross performance after deduction of the maximum operating and management fees including taxes (I share: 0.45%; R share: 0.70%).

(5) Futures on underlying 2-year, 5-year and 10-year German bonds.

Disclaimer

This document is intended for professional clients. It may not be used for any purpose other than that for which it was intended and may not be reproduced, disseminated or disclosed to third parties, whether in part on in whole without prior authorization in writing from Natixis Asset Management. No information contained in this document may be interpreted as being contractual in any way. This document is produced purely for informational purposes. It is a presentation created and prepared by Natixis Asset Management based on sources considered to be reliable. Natixis Asset Management reserves the right to change the information in this document at any time without notice, and in particular anything relating to the description of the investment process, which under no circumstances constitutes a commitment from Natixis Asset Management.Natixis Asset Management will not be held liable for any decision taken or not taken on the basis of the information in this document, nor for any use that a third party might make of the information. The Funds are authorized for sale in France and possibly in other countries where the sale is not contrary to local legislation. Prior to any investment, investors must check that they are legally authorized to invest in a Fund. The risks and fees connected to investment in a Fund are described in the relevant prospectus. The prospectus and periodic documents are available from Natixis Asset Management upon request. The prospectus must be given to the investor prior to the subscription.

Natixis Souverains Euro awarded by Lipper In a complex market environment marked by the Greek debt crisis, uncertainty about spanish debt and instability in the euro zone, Natixis souverains Euro stands out by generating consistent performance. At end August*, in its lipper category (Euro zone bonds) of 50 funds, the fund ranks:

• 8th / 64 for its performance year-to-date and over a one-year period,

• 12th / 53 for its performance over three year. Natixis souverains Euro is also a lipper leader for Consistent Return over 3 years* at end August 2010.

Olivier de Larouzière, portfolio manager of Natixis Souverains Euro and Head of Interest rate & Foreign exchange at Natixis Asset Management, was thus named Lipper fund manager of the month** by Lipper.

* Source Lipper as of 31/08/2010. The Lipper Consistent Return rating reflects a fund’s performance over a three-year period, adjusted for short- and long-term risk, compared with its peers in the same Lipper category. A Lipper Leader is one of the 20% best funds in its category.

** Source Lipper as of June 2010. The manager of the month is selected according to the fund’s performance over the reference month and to its consistency over time, confirmed by the Lipper Leaders rating [Read more: lipperweb.com].

ExPErTISE FlAsh / september 2010

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3- Range

Net performances over 1 year I share Benchmark

Natixis souverains Euro 8.06 % 6.53 %

Natixis souverains Euro 1-3 1.36 % 2.20 %

Natixis souverains Euro 3-5 4.30 % 4.53 %

Natixis souverains Euro 5-7 4.55 % 6.30 %

Natixis souverains Euro 7-10 5.70 % 6.21 %

Natixis Obli Opportunités 12 mois* 1.01 % 0.36 %

The mentioned figures refer to previous years. Past performance does not guarantee future results.Source: Natixis Asset Management, as of end of August 2010.

* The I Share of Natixis Obli Opportunités 12 Mois has been created on 14/09/2009.