Mellon High Yield Beta Strategy

[Pages:4]FOR PROFESSIONAL CLIENTS AND, IN SWITZERLAND, FOR QUALIFIED INVESTORS ONLY. IN THE MIDDLE EAST, PROVIDED SOLELY FOR USE BY THE INTENDED RECIPIENT.

Mellon High Yield Beta Strategy

All information as at 30 September 2018, unless otherwise stated.

Introduction to Mellon

Mellon is a global multi-specialist investment manager dedicated to serving clients with a full spectrum of researchdriven solutions. With roots dating back to the 1800s, Mellon has been innovating across asset classes for generations and has the combined scale and capabilities to offer clients a broad range of single and multi-asset strategies.

Established: AUM (USD billions): Locations:

Investment focus:

19331

549.8

Boston, Pittsburgh, San Francisco, London2, Singapore2, Hong Kong2

Index, multi-asset & multi-factor, active equity and active fixed income

Why Mellon High Yield Beta Strategy?

Innovative, flexible process The Strategy is designed to add value through an innovative, flexible process:

? Smarter index selection: by targeting a broad-based index, the Strategy provides exposure to the full high yield credit spectrum, which improves return potential.

? Flexible versus rules-based index approach: targets a profile that matches the benchmark in terms of sector, credit quality, duration, yield and issuer profile. Relaxation of index rules allows for reduced turnover and trading costs.

? Innovative and cost-efficient sourcing of bonds: by tapping into the liquidity of the ETF market, the investment team is able to instantly and efficiently access a basket of bonds that is representative of the liquid high yield market at a fraction of the cost of trading in the OTC market.

? Liquidity: By accessing ETF liquidity and by combining direct bond holdings with ETF and credit default swap index (CDX) `completion tools', the portfolio maintains an attractive liquidity profile.

Rigorous risk management The investment team overlays stratified sampling of the benchmark with a proprietary fundamental credit model to mitigate default risk in the portfolio, whilst matching the overall risk characteristics of the index.

Strategy key facts

ASSET CLASS:

Fixed income

REGIONS:

US

INVESTMENT OBJECTIVE:

To provide efficient, targeted beta exposure to the high yield market while focusing on delivering indexlike performance

PERFORMANCE COMPOSITE:

High Yield Beta Composite

BENCHMARK:

Bloomberg Barclays US Corporate High Yield Index

COMPOSITE INCEPTION: 30 September 2012

STRATEGY AUM (USD): 884.7 million

BASE CURRENCY:

USD

LEAD PORTFOLIO MANAGER:

Manuel Hayes (team approach)

AVAILABILITY:

Segregated account, pooled fund

TOTAL RETURN

Strategy performance

6% Composite Benchmark

6.0 5.5

4%

2% 1.0 1.0

2.9 2.6

0%

5.8 5.5

5.8 5.6

-2% Q3 2018

1 year

3 years (ann.)

5 years (ann.)

Since composite inception (ann.)

Source: eVestment. Performance calculated as total return, income reinvested, gross of fees, in USD. Fees and charges apply and can have a material impact on the performance of your investment. Mellon claims compliance with the Global Investment Performance Standards (GIPS). Please see performance disclosures on page 3.

eVestment collects information directly from investment management firms and other sources believed to be reliable. eVestment does not guarantee or warrant the accuracy, timeliness, or completeness of the information provided and are not responsible for any errors or omissions. Performance results may be provided with additional disclosures available on our systems and other important considerations such as fees may be applicable. Not for general distribution.

1. Mellon was formed on 31 January 2018, through the merger of The Boston Company and Standish into Mellon Capital. Effective 2 January 2019, the combined firm was renamed Mellon Investments Corporation. 2. Location of affiliated entities providing services. Source of assets under management data: BNY Mellon Investment Management EMEA Ltd and Mellon. Where applicable, AUM includes discretionary and non-discretionary assets and assets managed by investment personnel acting in their capacity as officers of affiliated entities.

Mellon High Yield Beta Strategy

Investment philosophy

The investment team believes that a beta solution in the high yield space is superior to a pure indexed one as high index turnover and transactions costs can erode index performance. The Strategy provides a liquid, cost-efficient alternative that can effectively complement an active strategy. The team's innovative approach to high yield investing is designed to provide four key value-added components:

? Competitive, cost-effective performance targeting the returns of the Bloomberg Barclays US Corporate High Yield Index

? Attractive liquidity profile that drastically reduces implementation costs

? Same day exposure to the full benchmark for incoming cash ? Consistent portfolio exposure to the benchmark via liquid

market completion tools (CDX and ETFs).

Investment process

INNOVATIVE IMPLEMENTATION The Strategy's innovative implementation approach relies on three critical building blocks:

1) Individual high yield bonds make up the core of the portfolio and comprise between 80% and 100% of assets. This core may be sourced using the liquidity of the ETF market to instantaneously deliver a well-diversified portfolio.

2) H igh yield ETFs comprise up to 10% of the portfolio and are used as a liquidity cushion and to add beta exposure.

3) A credit default swap index position comprises up to 10% of the portfolio and is used to add liquidity and beta, or to act as a `placeholder' to ensure consistent exposure until the time is right to buy a specific bond.

HIGH YIELD BETA STRATEGY BUILDING BLOCKS

FLEXIBILITY By relaxing some of the rigid constraints typically applied to index-based approaches, the Strategy is able to reduce turnover and transaction costs. In contrast to traditional index-based strategies, the investment team is not obliged to sell bonds once they reach less than one year maturity and is able to be flexible in terms of when to sell a defaulted bond, meaning that the managers can potentially achieve a more favourable price on assets that exit the portfolio. Historically, the Strategy has experienced materially lower turnover than the index.

RIGOROUS RISK MANAGEMENT The Strategy's risk management process is designed to mitigate systematic and idiosyncratic risk relative to the broad US high yield index.

Systematic risk is managed via a stratified sampling process, whereby the portfolio and the index are compared across a number of risk factors such as yield, option-adjusted spread, and duration.

Idiosyncratic risk is managed through the following factors:

1) Diversification across sector, subsector and issuer, to the greatest extent possible without incurring excessive transaction costs.

2) Overlay of a proprietary credit model to flag bonds that have a higher probability of downgrade or default, enabling the Strategy to avoid overweighting these issues relative to the index.

INDIVIDUAL BONDS 80% TO 100%

ETFs 0% TO 10%

CREDIT DEFAULT SWAP INDEX (CDX) 0% TO 10%

FUNDAMENTAL CREDIT MODEL

HIGH YIELD BETA PORTFOLIO

Past performance is not a guide to future performance.

The value of investments can fall. Investors may not get back the amount invested.

Derivatives Risk: Derivatives are highly sensitive to changes in the value of the asset from which their value is derived. A small movement in the value of the underlying asset can cause a large movement in the value of the derivative. This can increase the sizes of losses and gains, causing the value of your investment to fluctuate. When using derivatives, the portfolio can lose significantly more than the amount it has invested in derivatives.

Changes in Interest Rates & Inflation Risk: Investments in bonds/money market securities are affected by interest rates and inflation trends which may negatively affect the value of the portfolio.

Credit Ratings and Unrated Securities Risk: Bonds with a low credit rating or unrated bonds have a greater risk of default. These investments may negatively affect the value of the portfolio.

Credit Risk: The issuer of a security held by the Strategy may not pay income or repay capital to the portfolio when due.

Counterparty Risk: The insolvency of any institutions providing services such as custody of assets or acting as a counterparty to derivatives or other contractual arrangements, may expose the portfolio to financial loss.

Mellon High Yield Beta Strategy

Please note, in the following disclosure, BNY Mellon Asset Management North America refers to the combined firm formed when The Boston Company and Standish merged into Mellon Capital. Effective 2 January 2019, the combined firm was renamed Mellon Investments Corporation.

Performance disclosures

Gross

Valued

Period Return1 Benchmark2 Added3

Composite Benchmark

Composite

3yr Ann. 3yr Ann. # of

Composite Assets

Std. Dev.4 Std. Dev.4 Portfolios Dispersion (USD m)

Firm Assets (Including Overlay) (USD m)

Firm Assets (Excluding Overlay) (USD m)

2017 7.89

7.50

0.39

5.50

5.65

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