rwc

C I T Y W I R E - N O V E M B E R 2 0 1 2

Releasing Value in US Equities

For Professional Investors and Advisors Only

Contents

Introduction to RWC US Absolute Alpha 3 Portfolio Management Team 4

Fund Performance 8

Investment Process 12 Risk Management 19

Fund Summary 24

Contact 26

N O V E M B E R 2 0 1 2

Releasing Value in US Equities

RWC

| RWC 3

Introduction to RWC US Absolute Alpha

Our Investment Approach

• A liquid and transparent Long/Short US equity strategy

• Strategy first launched at Threadneedle Asset Management in 2004 • Launched strategy at RWC in 2009

• The Fund aims to provide strong risk-adjusted returns with significantly lower volatility than the S&P500 index

• Disciplined focus on portfolio liquidity

• Fundamental stock picking drives returns

• Aims to identify patterns of information which may be indicative of changing company or industry dynamics

• Strong focus on sectors that offer a high level of performance transparency and frequent data delivery e.g. retail, leisure, gaming, housing, autos and energy

• Gross exposure actively managed to protect capital

• Net exposure managed to take advantage of directional opportunities when they occur

Portfolio Management Team

RWC US Absolute Alpha Fund

RWC

| RWC 5

Mike Corcell Portfolio Manager

US Equities: Portfolio Management Team

16 years experience as portfolio manager & analyst for both long only and hedge funds

Joined RWC as a Partner in June 2009 to launch US long / short strategy

2008 – S.A.C. Global Investors L.L.P.

• Lead Manager of a US long / short equity book

2003-2008 – Threadneedle Asset Management

• Responsible for launching and managing the Threadneedle American Crescendo Fund from June 2004

• Runner-up 2007 Euro Hedge Global Fund of the Year

2002-2003 – Karsch Capital NYC

BA (Hons) Degree from Colgate University New York

RWC

| RWC 6

Alexander Robarts Co-Portfolio Manager


15 years industry experience – 7 years of which with Mike Corcell

Co-portfolio manager and Equity analyst with generalist responsibilities

2005-2009 – Threadneedle Asset Management

• US Buy Side Equity Analyst

2000-2005 – Insight Investment

• Buy Side Equity Analyst for US, Canada, Japan and Asia Pacific

1997-2000 – Morley Fund Management

• Buy Side Equity Analyst

MA (Hons) Degree from Edinburgh University

RWC

| RWC 7


Equity analyst with generalist responsibilities

April 2011-September 2011

• Fixed Income Strategy Research at Barclays Capital

June 2009-February 2011

• Performance Manager at Fortiwone Strategic Incentive Management

January 2006-February 2009

• Audit Clerk at Ernst & Young

Chartered Accountant (CA) and Level III candidate in the

CFA Program

Dion Purll Adrian Bottega

Dealer Analyst

11 years industry experience

2007-July 2010 • Portfolio manager support within the operations team at RWC

2006-2007

• Position Keeping & Derivatives Reconciliations Team Leader – BNP Paribas Securities Services: London

2004-2006

• Position Keeping, approx 1,500 funds - Deutsche Asset Management: London

2001-2003

• Associate Support Analyst / Cash & Stock Reconciliations - Commonwealth Custodial Services Ltd: Sydney

Fund Performance


RWC

| RWC 9

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12

Fund Cumulative Performance

Performance of Strategy - Returns

Source: Bloomberg. Equity Index is S&P 500 Total Return Index in US dollars. Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD

2009 RWC US AA - - - - - - - - 0.0% 0.4% 0.6% 0.9% 1.9%

S&P 500 - - - - - - - - - -2.0% 5.7% 1.8% 5.5%

2010 RWC US AA 0.0% -1.5% 1.0% 2.4% -2.0% -3.3% 0.1% -0.9% -0.7% 0.9% -1.3% 0.8% -4.4%

S&P 500 -3.7% 2.9% 5.9% 1.5% -8.2% -5.4% 6.9% -4.7% 8.7% 3.7% -0.2% 6.5% 12.8%

2011 RWC US AA 0.6% 1.4% -0.6% 1.2% -0.7% -1.2% 2.0% -0.4% -2.9% -0.1% -0.4% -1.1% -2.3%

S&P 500 2.3% 3.2% -0.1% 2.9% -1.4% -1.8% -2.2% -5.7% -7.2% 10.8% -0.5% 0.9% 0.0%

2012 RWC US AA 0.7% 2.5% 1.6% 1.6% 0.0% 0.9% -0.5% 3.1% 2.1% -0.1% 12.4%

S&P 500 4.4% 4.1% 3.1% -0.7% -6.3% 4.0% 1.3% 2.0% 2.4% -2.0% 12.3%

Data as of the end of October 2012


Total Return since Inception 6.91%

Annualised Return 2.23%

Volatility 6.8

% of Positive Months 53

% of Negative Months 47

Sharpe Ratio 0.3

Sortino Ratio 0.4

RWC

| RWC 10


2008 SAC n/a n/a n/a n/a n/a -5.47%* n/a n/a n/a

S&P 500 -6.0% -3.2% -0.6% 4.8% 1.1% -8.6% -1.0% 1.2% -9.1% -16.9% -7.5% 0.8% -38.5%


2004 Crescendo - - - - - 6.5% 0.0% 0.0% 2.6% 1.3% 0.2% 3.7% 15.2%

S&P 500 - - - - - 1.9% -3.3% 0.4% 1.1% 1.5% 4.0% 3.4% 9.3%

2005 Crescendo 1.2% 1.5% 0.8% -1.3% 1.2% 2.2% 1.1% 0.8% 1.8% -2.8% 5.4% 2.1% 14.6%

S&P 500 -2.4% 2.1% -1.8% -1.9% 3.2% 0.1% 3.7% -0.9% 0.8% -1.7% 3.8% 0.0% 4.9%

2006 Crescendo 1.8% 0.6% 2.0% -0.1% -2.1% -2.9% 1.3% 1.9% 2.0% 1.8% 5.3% 2.5% 14.7%

S&P 500 2.6% 0.3% 1.2% 1.3% -2.9% 0.1% 0.6% 2.4% 2.6% 3.3% 1.9% 1.4% 15.8%

2007 Crescendo 3.4% -0.8% 0.6% 2.8% 6.6% 1.7% 6.1% -1.5% 5.1% 3.5% 0.5% 0.9% 32.7%

S&P 500 1.5% -2.0% 1.1% 4.4% 3.5% -1.7% -3.1% 1.5% 3.7% 1.6% -4.2% -0.7% 5.5%

2008 Crescendo -5.3% +0.5% - - - - - - - - - - -4.8%

S&P 500 -6.0% -3.2% - - - - - - - - - - -9.0%

Performance of Strategy - Returns

Source: Bloomberg. Equity Index is S&P 500 Total Return Index in US dollars. Fund data refers to Threadneedle American Crescendo US dollar unrestricted share class. Data from May 2004 – February 2008. This period relates to the period Mike Corcell was the Portfolio Manager on the Fund. Important note: All performance data relates to the offshore limited feeder fund. Performance for the onshore LLC fund may vary due to different withholding taxes and fees. Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested

*Note that SAC have waived confidentiality restrictions relating to the performance during the period June to October.

RWC

| RWC 11

Distribution of Returns – Limited Drawdowns

Source: RWC 1 Please note that monthly returns are in 1% buckets from the stated number; the quoted number is the higher bound of the range. As an example “-3%” represents returns between -3% and -4%; likewise a “3%” range reflects returns between 2% and 3%.

0

2

4

6

8

10

12-9

%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

11%

12%

Mon

ths

Monthly Return1

S&P 500 Index - Distribution of Monthly Returns

0

2

4

6

8

10

12

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

11%

12%

Mon

ths

Monthly Return1

RWC USAA - Distribution of Monthly Returns

Investment Process


RWC

| RWC 13

Stock Selection Parameters

Once identified, stocks are assessed through an analysis of:

• Pricing and capacity trends

• Return on invested capital

• Management actions

• Broader industry dynamics

• Optionality in growth model

• Valuation metrics

Price targets set for every stock in portfolio

Long and short ideas are assessed similarly, but valuation parameters drive entry points

Fundamentally, recognising a “good idea” and sizing it correctly are core skills

RWC

| RWC 14

Company Analysis Earnings quality and trend

Management quality Detailed company model

Portfolio Price targets and risk targets

Idea conviction Position size

Idea Generation Company meetings Primary Research

Balance sheet and Cash flow focused screening

High Level Analysis Industry Dynamics Catalysts /change Valuation drivers

Investment Process

RWC

| RWC 15

Examples of themes that we look for when selecting stocks:

Capacity Change • Industry consolidation or individual company actions leading to greater pricing power • Increasing capacity leading to lower returns on capital

Cyclical Reversion

• Current industry trends are better/worse than long term averages with valuations discounting the current paradigm • Potential exists for a return to long term averages which would result in a significant valuation adjustment

Optionality

• A potential catalyst exists (such as increased capital return) but is not being discounted at the current valuation • The underlying fundamentals stack up limiting risk should the catalyst not transpire

Investment Themes

RWC

| RWC 16

Implementation of Investment Opportunities – Case Study

Capacity Change: Starbucks (SBUX) - Short

Idea Implementation: Q212

Why of interest?

• Valuation at 27x forward EPS represented a 35% premium to the historic average • Change of strategy: Having successfully downsized their US store base, capital expenditures started to increase materially for FY 2012 (Sept) to

$850m from $532m in FY 2011 to grow the store count in the US and internationally

Catalysts/Change

• We viewed SBUX’s capex plan as materially increasing the execution risk for the company as well as lowering the free cash flow generation going forward

• We believe that investors had rewarded SBUX with a higher multiple given their capital constraint with capex below depreciation from 2009-2011 (with the forward p/e increasing to 25x from 15x in the same period)

Price Targets & Monitoring

• Initial target set at $40 or 20x forward earnings, in line with the 5 yr average • Monthly channel checks for domestic same store sales (pointed to decelerating trends in June 2012)

RWC

| RWC 17

Cyclical Reversion: US Homebuilders (Lennar and DR Horton) – Long


Why of interest?

• Valuation – Group trading at book value (compared to a historic range of 1-2x book value) • Cyclically depressed – demand at post war lows and less than half the 50 year average. Any improvement could be sustained for several years

with the valuation limiting potential downside

Catalysts/Change

• US Mortgage rates were below 4% at the end of Q4 2011 from 5% at the end of 2010 with apartment rents increasing 5% annually. Affordability was at record levels with the cost to buy 20% below the cost to rent

• Early signs of a recovery with monthly orders for December up more than 20% compared to mid single digit increases in the prior 5 months. Searches on Google for “buy a house” were up 79% in Q4 2011 when compared to Q4 2010


• Initially our price targets were set at 1.5x book in Q1 2012. As we became more confident in the recovery via weekly order checks through the key selling season we increased our targets to 2.0x book value

• We had our maximum position size when Lennar reported Q2 EPS in late June when the stocks were trading at 1.4x book value and our model gave a 15% beat compared to the consensus on orders

• We have since reduced our position sizes as the risk reward has become more balanced


RWC

| RWC 18


Optionality: US Merchant Power (Genon Energy and NRG Energy) - Long


Why of interest?

• Valuation - after significant underperformance, the names were trading below their replacement cost • Evidence that natural gas prices may have bottomed with production declines in evidence with Natural Gas below $2.50

Catalysts/Change

• The merchant power sector has always been an area of consolidation given the high fixed cost nature of the of the business (with the vast majority of acquired company corporate overhead eliminated in a business combination)

• Improving industry fundamentals as well as lower capex going forward also set the group up for improved free cash flow generation in 2013


• NRG announced an all share bid for Genon in July 2012 and we subsequently exited the positions when the stocks reached price targets

Risk Management


RWC

| RWC 20

Click to edit title Permitted / Maximum Range Typical Exposure

Long / short ratio Less than 2:1 1.5:1 Gross Range n/a 80% to 150% Net Range n/a -10% to +30% No of Long Positions n/a 30-50 No of Short Positions n/a 50-75 Largest Long Max 10% (at market) Average 2.5% Largest Short Max 5% (at market) Average 1% Illiquids Less than 10% in stocks less than $500m mkt cap Minimal VaR(99% / 1 month) Set by regulators (CSSF) Maximum 20% 6% - 8% Counterparty Exposure 10% of NAV to any single counterparty n/a Concentration Limits Sum of position >5% cannot exceed 40% of NAV n/a

Portfolio Construction & Risk Management

1 Data is from May 2004 – February 2008. This period relates to the period Mike Corcell was the Portfolio Manager on the American Crescendo US Dollar Fund. Typical defined as 85% of time over period. The data is for illustrative purposes only to show a sample of the relevant limits and exposures that may apply to a portfolio utilizing the strategy. There is no guarantee that the

actual fund will implement all the above parameters. 2 Value at Risk - A measure of risk that indicates the maximum loss, based on a given confidence level, that a portfolio may incur over a given period.

• Positions sized relative to risk & reward – target of 3:1 upside-downside skew • Diversification through independence of investment these • Long-short ratio enables fund to perform in all market environments • Gross exposure reduced at times of performance stress • Willing to be directional (including net short) • Very limited or no exposure to illiquid stocks • Ability to liquidate 95% of portfolio within 3 days • Hard stop losses – 20% peak to trough for all positions

RWC

| RWC 21

0%

5%

10%

15%

20%

25%

30%

35%

40%

Dec-2009 Apr-2010 Aug-2010 Dec-2010 Apr-2011 Aug-2011 Dec-2011 Apr-2012 Aug-2012

SPX 3m Rolling Vol

USAA 3m Rolling Vol

Source: RWC

3 Month Rolling Volatility and Monthly Net & Gross Management

3 Month Rolling Volatility

Monthly Net & Gross Management

0%

20%

40%

60%

80%

100%

120%

140%

160%

Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

NetGross

RWC

| RWC 22

Source: Bloomberg, RWC 1 The annualized statistical alpha (intercept) of regressing the daily returns of USAA B $ on the daily returns of the S&P500, calculated over rolling 130-day periods since inception. A measure of the annualized average daily fund performance that cannot be explained by the fund’s beta to the market. 2 The Up-Market Correlation is the rolling 130-day correlation between the USAA B $ daily returns and those of the S&P500 on the days in which the S&P500 has a positive return. The Down-Market Correlation is the rolling 130-day correlation between the USAA B $ daily returns and those of the S&P500 on the days in which the S&P500 has a negative return.

Correlation Analysis

-15%

-10%

-5%

0%

5%

10%

15%

Sep-2009 Mar-2010 Sep-2010 Mar-2011 Sep-2011 Mar-2012 Sep-2012

Annualized Statistical Alpha (v SPX) - 130 days1

-0.2

0

0.2

0.4

0.6

Sep-2009 Mar-2010 Sep-2010 Mar-2011 Sep-2011 Mar-2012 Sep-2012

130d Up- and Down-Market Correlations2

Down Correlation Up Correlation

Annualized Statistical Alpha

2012 9.3%

Pre-2012 -3.5%

Up-Market Correlations

2012 0.43

Pre-2012 0.17

Down-Market Correlations

2012 0.39

Pre-2012 0.33

RWC

| RWC 23

• RWC act as the fund’s advisor

• BPERE (Rothschild) are independent administrator & custodian

• Deutsche Bank AG and UBS have been appointed as prime broker

• Kinetic Partners appointed for local Luxembourg and UCITS oversight

• Counterparty exposure limited to 10% of NAV

• Daily production and reconciliation of NAVs

• Daily cash reconciliation

• Independent Board of Directors speak with portfolio manager and CEO once a quarter

• Revenue is diversified across investment teams, products and clients. Less than 50% of client assets are hedge funds.

• Business is managed to be profitable before performance fees are generated

• Independent compliance monitoring firm, IMS, complete compliance review bi-annually

• Front end order management system (with trip wires for mandate restrictions and full audit trail), Latent Zero

Portfolio Risk Management Internal Risk Management & Oversight

Corporate Risk Management Independent Fund Monitoring

• Separation of compliance, risk monitoring & portfolio management

• Independent Risk Manager reporting directly to CEO • Daily independent review of stock, market, sector, style /

thematic and macroeconomic exposures • Exposures considered within the context of the risks observed

and evolving within the market • Bespoke risk analytics that are fully integrated with exposure

analytics

• Significant risks discussed directly with PM and highlighted to CEO who has the ultimate oversight of risk. CEO has regular review meetings with the PM teams

• Portfolio risk focused at a stock level

• Portfolio analytics function gives output on a wide range of portfolio level risks and attribution

• Fund is highly liquid with position sizes matched to stock liquidity

Risk Management Oversight

Fund Summary


RWC

| RWC 25

Click to edit title Launch Date 25th September 2009

Liquidity Daily subscriptions & redemptions / daily NAV

Fees 2% AMC / 20% performance fee

Performance Fee HWM Paid quarterly. Share class level high water mark

Performance Fee hurdle US LIBOR (or share class currency equivalent)

Fund structure Luxembourg SICAV (UCITS) - sub-fund of the “RWC Funds” SICAV

Currency USD base currency – GBP, EUR hedged share classes

UCITS IV designation “Sophisticated Fund” – VaR approach to exposure 20% VaR monthly with a 99% confidence level

Administrator Banque Privée Edmond de Rothschild Europe

Instruments used Long positions – cash equities / CFDs Short positions – CFDs

Exposures 200% maximum gross exposure (longs + shorts) Net market exposure of -20% to +60%

Local Registrations Luxembourg, Germany, Switzerland, Italy, UK, France

Tax Registered for Reporting Status for 2010 – GBP / USD / EUR share classes German and Austrian tax transparency across share classes

RWC US Absolute Alpha – Indicative Term Sheet

RWC

| RWC 26

Contact

Please contact us if you require any further information or would like to discuss any of our strategies.

Robert Gourlay

Direct: +44 20 7227 6012 Mobile: +44 7932 762848 Email: [email protected]

Susanne Sorge

Direct: +44 20 7227 6019 Mobile: +44 7725 757 614 Email: [email protected]

Robert Gourlay | Susanne Sorge

RWC Risk Warnings & Disclaimers

This document contains information relating to RWC Partners Limited, RWC Focus Asset Management Limited and RWC Asset Management LLP (collectively, “RWC”), each of which is authorised and regulated in the United Kingdom by the Financial Services Authority (“FSA”), and services provided by them and may also contain information relating to certain products managed or advised by RWC (“RWC Funds”).

RWC may act as investment manager or adviser, or otherwise provide services, to more than one product pursuing a similar investment strategy or focus to the product detailed in this document. RWC seeks to minimise any conflicts of interest, and endeavours to act at all times in accordance with its legal and regulatory obligations as well as its own policies and codes of conduct.

The services provided by RWC are available only for and this document is directed only at, persons that qualify as Professional Clients or Eligible Counterparties under rules of the FSA. It is not intended for distribution to and should not be relied on by any person who would qualify as a Retail Client.

In addition, although certain sub-funds of RWC Funds SICAV are recognised schemes for the purposes of Section 264 of the Financial Services and Markets Act 2000 of the United Kingdom (“FSMA”), all other RWC Funds are unregulated collective investment schemes for the purposes the FSMA, the promotion of which either in or from the United Kingdom is restricted by law. Accordingly, this document is issued and approved by RWC Limited for communication by RWC Partners only to, and is directed only at, persons reasonably believed by it to be of a kind to whom it may communicate financial promotions relating to unregulated collective investment schemes by virtue of the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001, as amended (the “Order”), or the Conduct of Business Rules of the FSA. Such persons include: (i) persons outside the United Kingdom; (ii) persons having professional experience of participating in unregulated collective investment schemes; and (iii) high net worth bodies corporate, partnerships, unincorporated associations, trusts, etc. falling within Article 22 of the Order. Any unregulated collective investment schemes described herein are available only to such persons, and persons of any other description may not rely on the information in this document.

Where this document is received outside the United Kingdom, it is the responsibility of every person reading this document to satisfy himself as to the full observance of the laws of any relevant country, including obtaining any government or other consent which may be required or observing any other formality which needs to be observed in that country. Nothing in this document constitutes an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. Interests in RWC Funds are available only in jurisdictions where their promotion and sale are permitted.

No person receiving this document may further distribute it, or copies of it, to any other person or publish any of its contents, in whole or in part, for any purpose.

This document is provided for informational purposes only. The information contained in it is subject to updating, completion, modification and amendment. RWC does not accept any liability (whether direct or indirect) arising from the reliance on or other use of the information contained in it. The information set out in this document is to the reasonable belief of RWC, reliable and accurate at the date hereof, but is subject to change without notice. In producing this document, RWC may have relied on information obtained from third parties and no representation or guarantee is made hereby with respect to the accuracy or completeness of such information. Performance figures and data analysis within this document are shown and calculated net of fees and expenses and represent the reinvestment of dividends and income. Market index information shown within this document is included to show relative market performance for the periods indicated and not as standards of comparison. Such broadly based indices are unmanaged and differ in numerous respects from the portfolio composition of RWC Funds.

This document does not constitute offer or solicitation to anyone in any jurisdiction of or to acquire interests in any RWC Fund. Investment in any RWC Fund should be considered high risk. Past performance is not a reliable indicator of future results and may not be repeated. The value of investments in RWC Funds and the income from them may fall as well as rise and may be subject to sudden and substantial falls. Changes in rates of exchange may cause the value of such investments to fluctuate. An investor may not be able to get back the amount invested and the loss on realisation may be very high and could result in a substantial or complete loss of the investment. In addition, an investor who realises their investment in RWC Funds after a short period may not realise the amount originally invested as a result of charges made on the issue and/or redemption of such investment. The value of such interests for the purposes of purchases may differ from their value for the purpose of redemptions. No representations or warranties of any kind are intended or should be inferred with respect to the economic return from, or the tax consequences of, an investment in RWC Funds. Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns. There is no guarantee that the securities referred to in this document will be held by RWC Funds in the future. Nothing in this document constitutes advice on the merits of buying or selling a particular investment. This document does not constitute investment, legal or tax advice.

This document expresses no views as to the suitability or appropriateness of the RWC Funds or any other investments described herein to the individual circumstances of any recipient. Potential investors in the RWC Funds should refer to the latest relevant Full Prospectus, KIID and latest Annual and Interim Reports for more information.

A United Kingdom investor may not have the right (otherwise provided under the FSA Handbook of Rules and Guidance) to cancel any agreement constituted by acceptance by or on behalf of an RWC Fund of an application for interests in an RWC Fund. In addition, most if not all of the protections provided by the United Kingdom regulatory structure will not apply to investments in an RWC Fund. Investors in an RWC Fund will not receive compensation under the Financial Services Compensation Scheme in the United Kingdom in the event that the fund is unable or likely to be unable to satisfy claims against it.

This document is issued by RWC Partners Limited, a company registered in England and Wales (No. 03517613) with its registered address at 60 Petty France, London SW1H 9EU. .

| RWC 27

rwc

Documents

full amount investedrwc

long term averages

period mike corcell

rwc partners limited

financial services

daily returns

daily returns

united kingdom