HOUSE_OVERSIGHT_014454.jpg

Appendix 1: Methodology
This publication is aimed at multi-asset institutional investors who tend to have a longer term time horizon for their investments. As such, we will be looking to come up with ideas that will have a minimum six month horizon and ideally longer than a year. The individual trade ideas will be sourced from our strategists across BofA Merrill Lynch Global Research.

This publication is not meant to be an agglomeration of all the trade ideas published by BofAML Global Research strategists, but instead represents those that fit with our longer term themes (as opposed to shorter term tactical trades). In addition, there may be several different trade ideas published by BofAML Global Research strategists across different asset classes that seek to leverage off of the same theme. In most cases we will seek merely to take the trades that have the best risk adjusted return. By risk adjusted we mean the risk undertaken in a trade vs the likely return on that trade. In considering that we will look at the underlying volatility in the individual asset class. This will be combined with our own view of what the likely downside is in an adverse scenario vs the payoff in the expected scenario and our own assessment of the likelihoods of such scenarios.

Once selected it is assumed that the trade would likely be retained for a minimum of six months (as per the selection rationale). Should any analyst change their view on the trade and cease to recommend it, then it will be immediately removed from our list¹. Equally should our target be met for a trade and the relevant strategist feels it has run its course then it will also be removed (see footnote). Otherwise we will review our trades on a monthly basis in this publication. If we feel a new trade idea has a better risk adjusted return than an existing one in the same asset class then we would replace it.

The objective of the trades is that they would be suitable for a typical objective of the multi-asset fund managers, which is typically framed in terms of a Libor+ benchmark (this can be anything from Libor +300bp to Libor +700bp). That return is also coupled with a target volatility, for example half MSCI ACWI volatility. The volatility target will, of course, be a function of the expected return, but there is a general focus on producing lower volatility returns. Our set of trades should not be regarded as a portfolio but a collection of ideas to implement in a multi-asset portfolio.

Appendix 2 – Recommended COCO bonds
Table 4: COCO basket

[Column Headers: ISIN | Bond | Issuing entity | Price | Mid YtM]
XS1055037177 | ACAFP 6.5% EUR Perp-21 | CREDIT AGRICOLE SA | 100.5 | 5.4
XS1002801758 | BACR 8% EUR Perp-20 | BARCLAYS PLC | 100.9 | 7.1
XS1033661866 | BBVASM 7% EUR Perp-19 | BANCO BILBAO VIZCAYA ARG | 91.1 | 7.1
XS1073143932 | NYKRE 4% EUR 2036-21 | NYKREDIT REALKREDIT AS | 102.4 | 2.7
XS0972523947 | CS 5.75% EUR 2025-20 | CREDIT SUISSE | 107.6 | 3.6
DE000DB7XHP3 | DB 6% EUR Perp-22 | DEUTSCHE BANK AG | 78.3 | 6.7
XS1043545059 | LLOYDS 6.375% EUR Perp-20 | LLOYDS BANKING GROUP PLC | 97.5 | 5.7
XS1171914515 | RABOBK 5.5% EUR Perp-20 | COOPERATIEVE RABOBANK UA | 98.5 | 5.5
XS0867620725 | SOCGEN 6.75% EUR Perp-21 | SOCIETE GENERALE | 98.8 | 5.9
XS1107890847 | UCGIM 6.75% EUR Perp-21 | UNICREDIT SPA | 84.5 | 7.7
Source: BofA Merrill Lynch Global Research *As of 28/11/2016 close

¹ Under these circumstances, we will publish a note immediately.

Bank of America Merrill Lynch
Global Cross Asset Strategy – Year Ahead | 30 November 2016
23

HOUSE_OVERSIGHT_014454