27. november 2014 Nordea Investment Management AB Manager Selection – fixed income

Nordea Alternatives & Manager Selection 2 Alternatives & Manager Selection is based on Nordea Asset Management’s production strategy to broaden and complement the product range. Key Highlights Nordea Alternatives & Manager Selection - a centralised competence centre for search, selection and monitoring of external managed products Responsible for negotiations and for entering of strategic partnership with external managers A&MS has a team of 20 investment professionals located in Finland, Sweden, Denmark and Luxembourg The team is divided into Portfolio Managers (with regional responsibility) and Product Managers (product responsibility) A&MS has three product-lines: White labeling products Guided funds Managed portfolios

The search process in a single slide 14/04/ Definition of “search- mandate” Investigate and describe the universe Mandate Universe Initial – de-selection of obvious ”no gos” - basic statistical key measures 2nd quantitative screening – more advanced risk and performance measures based on proprietary models Long List Qualitative assessment– The 5 factors, Telcos, ”Q&A sessions” with all managers based on RFP Short List On site visits – one full day with each manager. Compliance & business due diligence Final 3 The final selection is based on all the information gathered throughout the whole process Preferred Actively monitored and replaced if needed Mandate Qualitative assessment On siteSelectionInitial deselection Monitoring Quantitative analysis

Composite returns vs fund returns Pro’s and con’s with both but there’s fundamental differences We (in fixed income) prefer composite returns Why I don’t like fund returns? Cut off point for pricing – NAV calculated at different times, causes volatility Dilution levy (swing pricing) – causes volatility Dilution levy vs non levy – penalizes some funds Funds with massive growth in AuM will be penalized compared to steady AuM funds given bid-ask spreads etc. GIPS composites are not completely free of issues Cherry picking of mandates included in the composite Dispersion in underlying strategy returns AuM in composite vs. AuM in strategy (representative account) 14/04/2011 4

The 1st number crunching We calculate a variety of numbers based on the monthly returns We remove the managers we don’t like one by one Too low tracking error, massive swings in performance etc. 14/04/2011 5

The 2nd number crunching Various rolling metrics such as Rolling tracking error, beta, alpha, information ratio, Sharpe ratio etc. Return distribution absolute & relative to benchmark Various up/down market graphs (up-side capture/downside protection etc) Drawdown Again, managers are deselected one by one based on Too significant variation in metrics over time Dependency of outperformance on a few observations (months) Too dependent on market directionality for outperformance 14/04/2011 6

7 Qualitative Assessment on long listed managers based on: People, Philosophy & Style  Quality and experience of Portfolio Managers  True management tenure of track record  Key Individuals for process  Strength of research Process & performance  Credibility of process  Repeatability of process  Transparency of process  Performance in relation to style  Trading skills Risk management  Managers view on risk  Risk management process  Risk management team Business Management  Incentive structure  Strategic importance of strategy at firm level  Capacity management  Retention of key individuals Manager Evaluation People, Philosophy & Style Process & Performance Risk Management Business Management

8 Qualitative Assessment The 4 factors – conference call process 1.Prior to conference calls  Prepare questions based on all the information gathered from the manager (RFP, DDQ, presentation etc.) and the quantitative analyses of the track record 2.During the conference calls (duration typically between 1.5 and 2.5 hours)  Short presentation by the manager, but outspoken focus on Q & A  Looking for the ”red line” between philosophy and investment performance  Always focus on uncovering biases in the investment strategy  Always talking to lead portfolio manager 3.After conference calls  Assessing the manager and writing a memo on each manager Compliance is not discussed at the conference call  This is handled separately by Nordea Investment Management’s Compliance department

The role of performance in the qualitative process Once we initiate the qualitative part, the returns are “good enough” – the data might however not be In the RFP we enquire about/look into: Dispersion within the composite lack of AuM in the composite – can the manager perform with higher AuM? AuM in composite vs strategy 14/04/2011 9

10 On site visits Always on-site at the asset manager and more than one participant from AMS present Agenda of the on-site meetings: Presentation of investment company by CEO, CIO, Head of Global Sales or partner Presentation of investment strategy By the lead portfolio manager (other team members might be present) Then interview with other team members (without the presence of the lead portfolio manager) Presentation of risk management and of the systems utilized by the team 1 full day for each on-site visit Minutes and input to Investment memo is written before visiting the next manager * Compliance on-site separately conducted by Nordea compliance department A manager meeting is considered crucial, we never recommend a manager without having done onsite due diligence

Monitoring Once selected we look at Managers own composite, our GIPS calculated returns and the fund returns Always dispersion between GIPS and fund NAV (our clients experience the NAV return, so we have to pay attention to it) Often dispersion between manager GIPS and our GIPS Difference in guidelines, ramp up period of mandate, flows, price sources 14/04/

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