DUE DILIGENCE SYMPOSIUM November 12-14, 2014 Scripps Pier, La Jolla

Brandes Value Fixed Income

Mary T. Singh, CFA Client Portfolio Manager INVESTOR NEED FOR INCOME Seeking More Income Without More Risk Total Return

Fundamental VALUE Approach VALUE Bottom-up selection, seeking mispriced bonds Bonds

Long-term Capital Current Income: : bond coupon, Appreciation undervalued Total Return return of capital bonds

“Value bonds” refers to bonds which are selling at discounts to our estimates of their intrinsic value.

Page 9 Not All Bond Strategies are the Same Transparency – Critical to Know What You Own

Typical Bond Strategy Brandes VALUE Fixed Income

. Top down, macro-focused ✓Graham & Dodd, bottom-up . Thousands of securities ✓Concentrated and transparent . High frequency trading ✓Long-term, not trading . Derivatives and/or leverage ✓CASH pay bonds . No derivatives/exotics/leverage

Page 10 VAST Opportunities in Corporate Bonds

Global U.S. Barclays Global Issuers 3,114 Aggregate Corporate Issues 20,686 Bond Index Regional Exposure = $38 trillion U.S.

As of December 31, 2013

Source: Barclays Global Aggregate Corporate Bond Index as of 12/31/2013 *Sourced via FactSet as of 12/31/13; all USD denominated debt issued by US domiciled companies.

Page 11 VAST Opportunities in the Above-Average Bond Yield Space Mispricings Exist for Value Bond Pickers

9 “Sweet Spot” Yield to Worst 8 Average 7

6

5

Yield 4

3

2

1

0 $90 $100 $110 $120 $130 $140 Price

Bank of America Merrill Lynch Corporate Master, BBB Rated As of September 30, 2014

Source: Bank of America Merrill Lynch. The Bank of America Merrill Lynch Corporate Master, BBB Rated Index is comprised of corporate issues that have a BBB rating based off an average from Moody’s, S&P, and Fitch.

Page 12 SWEET SPOT Taking Advantage of “Crossover Bonds”

Crossover* Opportunity

. Institutional investors with investment policy statements requiring investment grade bonds MUST sell when bonds fall from BBB to BB . Forced selling with no natural buyers often leads to mispricing and opportunity . Brandes jumps on “Crossover Bond” opportunities

*A crossover bond is a bond whose credit rating is just on the edge between investment grade and high yield.

Page 13 SWEET SPOT Taking Advantage of “Crossover Bonds”

Forced Selling with No Natural Buyers = Mispricing & Opportunity

Moody’s Investors Service & Barclays Corporate U.S. High Yield Index, 1994 to 2013

Average Annual Credit 1.80% Loss on Downgrade

Average Credit Spread Difference

0.30%

Moody’s Investors Service & Barclays Corporate U.S. High Yield Index (1994 to 2013):

Source: Moody’s Investors Service, Barclays, Brandes Investment Partners. Based on issuer-weighted average default rates and issuer-weighted senior unsecured bond recovery rates. Past performance is not a guarantee of future results. Once cannot invest directly in an index. *A crossover bond is a bond whose credit rating is just on the edge between investment grade and high yield.

Page 14 EXAMPLE OF A VALUE BOND “BBB” Rated Bond JPMorgan 7.90 Perpetual

. Fixed rated coupon 7.90% until 4/30/18 . Bond callable at par on 4/30/18 . If the bond is not called it becomes a floating rate perpetual bond . Floating rate coupon set at 3-month Libor +347 basis points with a quarterly reset . Par value outstanding: $6 billion

JPMorgan: Considered one of the most financially strong banking institutions in U.S.

Account holdings are subject to change and are not recommendations to buy or sell any security. Value bonds” refers to bonds which are selling at discounts to our estimates of their intrinsic value.

Page 15 Taking on More Risk for Less Compensation? Tighter Fixed-Income Yield Spreads Warrant Dry Powder

2000

1500

1000

Points Basis 500

0 U.S. U.S. Agency U.S. Mortgage Asset-Backed U.S. Credit U.S. Corporate Global Credit Aggregate Backed Securities High Yield Securities -500

Range (10 years) Most Recent (as of 9/30/14)

Option Adjusted Spread Ranges (10 years from 9/30/04 to 9/30/14) Source: Barclays Indexes; as of 9/30/2014. Past performance is not a guarantee of future results. One cannot invest in an index. U.S. Aggregate represented by the Barclays U.S. Aggregate Bond Index; U.S. Agency represented by the Barclays U.S. Agency Bond Index; U.S. Mortgage Backed Securities represented by the Barclays U.S. Mortgage Backed Securities Index; Asset-Backed Securities represented by the Barclays U.S. Fixed-Rate Asset Backed Securities; U.S. Credit represented by the Barclays U.S. Credit Bond Index; U.S. Corporate High Yield represented by the Barclays U.S. Corporate High-Yield Bond Index; Global Credit represented by the Barclays Global Credit Index. Dry powder: Securities such as Treasuries or other fixed-income investments that can be liquidated on short notice to provide emergency operational funding or allow an investor to purchase other assets.

Page 16 Fixed Income Team Collectively 68 years of Experience in the Bond Industry

Charles S. Gramling, CFA Timothy M. Doyle, CFA Director of Fixed Income Portfolio Manager/Analyst

David J. Gilson, CFA Ping Wong, CFA Associate Portfolio Associate Portfolio Manager/Analyst Manager/Analyst

As of September 30, 2014

Page 17 Thank You Disclosures

The Barclays U.S. Aggregate Bond Index is an unmanaged index consisting of U.S. dollar-denominated, fixed-rate, taxable bonds. The U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS and CMBS. The U.S. Aggregate rolls up into other Barclays flagship indices such as the multi-currency Global Aggregate Index and the U.S. Universal Index, which includes high yield and emerging markets debt. The U.S. Aggregate Index was created in 1986, with index history backfilled to January 1, 1976. The index is a total return index which reflects the price changes and interest of each bond in the index. The Barclays U.S. Treasury Index includes public obligations of the U.S. Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index. In addition, certain special issues, such as state and local government series bonds (SLGs), as well as U.S. Treasury TIPS, are excluded. STRIPS are excluded from the index because their inclusion would result in double-counting. Securities in the index roll up to the U.S. Aggregate, U.S. Universal, and Global Aggregate Indices. The U.S. Treasury Index was launched on January 1, 1973. The Barclays U.S. Corporate Investment Grade Bond Index is an unmanaged index consisting of publicly issued U.S. Corporate and specified foreign debentures and secured notes that are rated investment grade by at least two ratings agencies, have at least one year to final maturity, and have at least $250 million par amount outstanding. Securities must be rated investment grade (Baa3/BBB- or higher) by Moody’s, S&P, and Fitch, respectively. When all three agencies rate an issue, a median or “two out of three” rating is used to determine Index eligibility by dropping the highest and lowest rating. When a rating from only two agencies is available, the lower (“most conservative”) of the two is used. When a rating from only one agency is available, that rating is used to determine Index eligibility. The Barclays U.S. Mortgage-Backed Securities (MBS) Index covers agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). Introduced in 1986, the GNMA, FHLMC, and FNMA fixed-rate indices for 30- and 15-year securities were backdated to January 1976, May 1977, and November 1982, respectively. Balloon securities were added in 1992 and removed on January 1, 2008. 20-year securities were added in July 2000. On April 1, 2007, agency hybrid adjustable-rate mortgage (ARM) pass-through securities were added to the index. Hybrid ARMs are eligible until 1 year prior to their floating coupon date. The Barclays U.S. Credit Bond Index is an unmanaged index consisting of U.S. dollar-denominated, publicly issued, fixed-rate corporate securities. The U.S. Credit Index comprises the U.S. Corporate Index and a non- corporate component that includes foreign agencies, sovereigns, supranationals and local authorities. The U.S. Credit Index was called the U.S. Corporate Investment Grade Index until July 2000, when it was renamed to reflect its inclusion of both corporate and non-corporate issuers. Index history is available back to 1973. The U.S. Credit Index is a subset of the U.S. Government/Credit Index and the U.S. Aggregate Index. The index is a total-return index which reflects the price changes and interest of each bond in the index. Barclays U.S. Fixed-Rate Asset Backed Securities (ABS) Index: The Barclays U.S. Fixed-Rate Asset Backed Securities (ABS) Index is an unmanaged index consisting of U.S. dollar-denominated, fixed-rate, taxable bonds. The U.S. Fixed-Rate Asset-Backed Securities (ABS) Index covers fixed-rate ABS with the following collateral types: credit cards, autos, home equity loans and stranded-cost utility (rate reduction bonds). To be included in the index, an issue must have a fixed-rate coupon structure, have an average life greater than or equal to one year, and be part of a public offering. Manufactured housing asset-backed securities were removed from the U.S. ABS Index on January 1, 2008. The index was introduced in January 1992 when it was also added to the U.S. Aggregate Bond Index in its entirety. The index is a total return index which reflects the price changes and interest of each bond in the index. The Barclays U.S. Agency Index includes callable and non-callable agency securities that are publicly issued by U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government (such as USAID securities).

Page 19 The Barclays Global Aggregate Corporate Bond Index provides a broad-based measure of the global investment grade fixed-rate debt markets. The Global Aggregate Corporate Bond Index contains three major components: the U.S. Aggregate (USD 300mn), the Pan-European Aggregate (EUR 300mn), and the Asian-Pacific Aggregate Index (JPY 35bn). In addition to securities from these three benchmarks (94.0% of the overall Global Aggregate market value as of December 31, 2010), the Global Aggregate Index includes Global Treasury, Eurodollar (USD 300mn), Euro-Yen (JPY 25bn), Canadian (USD 300mn equivalent), and Investment Grade 144A (USD 300mn) index-eligible securities not already in the three regional aggregate indices. The Global Aggregate Corporate Bond Index family includes a wide range of standard and customized subindices by liquidity constraint, sector, quality, and maturity. A component of the Multiverse Index, the Global Aggregate Index was created in 1999, with index history backfilled to January 1, 1990.

The Barclays U.S. Corporate High-Yield Bond Index is an unmanaged index consisting of U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bonds. The U.S. Corporate High-Yield Index measures the market of U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging-market debt. It was created in 1986, with history backfilled to July 1, 1983. The U.S. Corporate High-Yield Index is part of the U.S. Universal and Global High-Yield Indices. The index is a total-return index which reflects the price changes and interest of each bond in the index. The information provided in this material should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any security transactions, holdings, or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. International and emerging markets investing is subject to certain risks such as currency fluctuation and social and political changes; such risks may result in greater share price volatility. Stocks of small companies usually experience more volatility than mid and large sized companies. Strategies discussed are subject to change at any time by the investment manager in its discretion due to market conditions or opportunities. Please note that all indices are unmanaged and are not available for direct investment. Unlike bonds issued or guaranteed by the U.S. government or its agencies, stocks and other bonds are not backed by the full faith and credit of the United States. Stock and bond prices will experience market fluctuations. Please note that the value of government securities and bonds in general have an inverse relationship to interest rates. Bonds carry the risk of default, or the risk that an issuer will be unable to make income or principal payment. There is no assurance that private guarantors or insurers will meet their obligations. The credit quality of the investments in the portfolio is no guarantee of the safety or stability of the portfolio. Investments in Asset Backed and Mortgage Backed Securities include additional risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. International and emerging markets investing is subject to certain risks such as currency fluctuation and social and political changes; such risks may result in greater share price volatility. The foregoing reflects the thoughts and opinions of Brandes Investment Partners ® exclusively and is subject to change without notice. Brandes Investment Partners® is a registered trademark of Brandes Investment Partners, L.P. in the United States and Canada.

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