1. Strategic Income
Forward EM Corporate Debt Fund
2Q /2012
FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR PUBLIC VIEWING OR DISTRIBUTION.
2. Table of Contents
I. Forward EM Corporate Debt Fund Overview
II. A New Approach to Corporate Credit Management
III. EM Corporate Debt Market Overview
IV. Historical Performance & Risk
V. SW Philosophy, Process & Team
VI. Forward
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3. Forward EM Corporate Debt Fund
Fund Overview
Category Emerging market corporate fixed income
Objective The Fund seeks to achieve high total return (capital appreciation and income)
Inception Date October 5, 2007
FFXRX – Investor Class
Tickers FFXIX – Institutional Class
FFXCX – Class C
Benchmark Credit Suisse Emerging Market Corporate Index
There is no guarantee that the Fund will achieve its objective
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4. Forward EM Corporate Debt Fund
Fund Statistics
Duration 4.96
Top 5 Country Weights Mexico (16.4%), Russia (13.6%), South Korea (7.7%), Brazil (7.6%), Peru (7.2%)
Top 3 Sector Weights Financial (30.5%), Energy (20%), Communications (11.2%)
As of June 29, 2011
Current and future portfolio holdings are subject to change
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5. Table of Contents
I. Forward EM Corporate Debt Fund Overview
II. A New Approach to Corporate Credit Management
III. EM Corporate Debt Market Overview
IV. Historical Performance & Risk
V. SW Philosophy, Process & Team
VI. Forward
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6. The Fixed Income “Mis-Allocation” Problem
· High leverage and external debt balances
Traditional bond · Low yields
allocations are to
countries that have: · Slowest economic growth
· Least ability to repay debts
· Allocate to countries with higher economic growth rates
Potential Solutions: · Refine asset allocation
· Invest using new methods and alternative strategies
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7. Table of Contents
I. Forward EM Corporate Debt Fund Overview
II. A New Approach to Corporate Credit Management
III. EM Corporate Debt Market Overview
IV. Historical Performance & Risk
V. SW Philosophy, Process & Team
VI. Forward
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8. Potential advantages of EM Corporate Debt
Compelling Yields New Asset Class Supportive Backdrop
Yields on EM corporate debt may Emerging market corporates EM corporate debt may
have higher returns than EM are under-researched, offer investors strong bondholder
equities and may offer more yield under-followed and protections along with exposure to
per unit of duration than EM under-appreciated. rapid economic growth in emerging
sovereign or US corporate debt. market countries.
Source: JP Morgan, Bloomberg, Jan ’94 – Dec ’11. Sharpe ratios were calculated based on the annualized returns divided by the annualized volatilities over the state time period.
Past performance does not guarantee future results.
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9. EM Corporate Debt vs. Other Asset Classes
Various factors of the EM corporate debt market make it an attractive addition to the
institutional investors’ portfolio
EM Corporate EM Sovereign EM U.S.
Debt Debt Equity High Yield
Issued primarily in USD and
under U.S. or UK law:
Highest Sharpe Ratio:
Generally secured by assets
and/or owner guarantees:
Least research coverage:
Fewest dedicated mandates:
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10. The Rise of EM Corporate Debt
Sovereign debt crises during the 1990s marked a transformation in EM fiscal policies
and set the stage for more balanced private sector growth in EM
Factors Contributing to the Rise of EM Corporate Debt:
· Transformation accompanied by globalization and the economic growth of developing markets
· Capital needs in EM countries and the trend toward privatizations
· Movement away from fixed exchange rates by many EM countries
· Net external creditor status by many EM economies
· Rise of a middle class in EM countries
· Many upgrades to investment grade status for both EM sovereign and corporate debt
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11. The Evolution of EM Opportunity Set
The emerging market opportunity set has changed—the future is EM corporate debt.
EMERGING EMERGING
EMERGING STOCKS SOVEREIGN DEBT CORPORATE DEBT
PAST FUTURE
Amount Outstanding
EM Stocks EM Sovereign Debt EM Corporate Debt
$6.88T $337B $714B
Source: Credit Suisse, Bloomberg
Data is as of June 29, 2012
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12. EM Corporate Debt Universe
Credit Suisse publishes an emerging market corporate bond index comprised of dollar-
denominated corporate debt in global emerging markets.
Credit Suisse EM Corporate Index
Number of issues 1,073
Number of issuers 521
Market value outstanding $707.6 Billion
Countries 42
Yield 5.32%
Duration 4.98
Top 5 Sectors 1. Financial (33.6%)
2. Energy (24.2%)
3. Basic Materials (9.5%)
4. Utilities (7.8%)
5. Communications (7.3%)
Source: Credit Suisse
As of June 29, 2012
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13. EM Sovereign vs. EM Corporate Debt
The EM corporate debt market has grown sharply since 2001 and EM economies have
become a larger percentage of World GDP
Market Value Outstanding
800 CS Sovereign Bond Index 40%
700 35%
CS EM Corporate Index
600 30%
EM GDP as a percentage of World GDP (RHS)
In billions, USD
500 25%
400 20%
300 15%
200 10%
100 5%
0 0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: IMF, Credit Suisse. 2011 GDP data are based on IMF Estimates. As of June 29, 2012.
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14. Correlations
Correlation of Monthly Returns
November 1, 2002 to June 29, 2012
Index 1 2 3 4 5 6
1 CS EM Corporate Bond 1.00
2 BarCap US Agg Bond 0.56 1.00
3 BarCap US Corporate High Yield 0.78 0.21 1.00
4 S&P 500 0.56 0.02 0.72 1.00
5 MSCI EM GR 0.64 0.08 0.71 0.82 1.00
6 S&P GSCI 0.39 -0.02 0.36 0.40 0.53 1.00
Source: Morningstar from 01/01/02 – 06/29/12
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15. Table of Contents
I. Forward EM Corporate Debt Fund Overview
II. A New Approach to Corporate Credit Management
III. EM Corporate Debt Market Overview
IV. Historical Performance & Risk
V. SW Philosophy, Process & Team
VI. Forward
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16. EM Debt vs. EM Equity Performance
EM debt has performed better than EM equity from a risk-adjusted standpoint
since 1994
Sharpe Ratios: EM Debt vs. EM Equity
CS EMCI MSCI EM
1 year -0.85 (0.53)
3 year 2.06 0.44
5 year 0.68 0.01
10 year 1.02 0.58
Since Inception 0.95 0.64
Source: Credit Suisse, Bloomberg, November 2001 (Inception) to June 29 2012. Sharpe ratios were calculated based on the annualized returns divided by the annualized volatilities over the state time period.
Past performance does not guarantee future results.
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17. EM Corporate Debt Yields
Credit Suisse EM Corporate Index
BB & B Historical Yields
11/30/2001 – 06/13/2012
40.00%
35.00%
EMCI Index BB Bucket Yield To Maturity
EMCI Index B Bucket Yield To Maturity
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Source: Credit Suisse
As of June 13, 2012
Past performance does not guarantee future results.
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18. EM Assets in Market Volatility
Since 2001, EM corporate debt has generally sold off less than EM sovereign debt and
EM equities during periods of heightened volatility
Total Return in Market Volatility
CS EM Corporate CS Sovereign MSCI EM
Index Bond Index Equity Index
May 02 – Jul 02 -3.2% -9.2% -15.9%
Apr 04 – May 04 -4.4% -6.6% -10.0%
May 06 – Jun 06 -0.7% -1.9% -10.6%
Sep 08 – Oct 08 -24.1% -19.7% -40.1%
Aug 11 – Sep 11* -5.3% -4.4% -22.2%
Sources: Credit Suisse, Bloomberg.
The time periods above were selected based on total returns for all three indices being negative for at least 2 consecutive months.
*During August 2011, the SBI Index returned 0.38% while CS EM Corporate Index and MSCI EM Equity Index had negative returns but this period was included for comparison purposes.
Past performance does not guarantee future results.
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19. Table of Contents
I. Forward EM Corporate Debt Fund Overview
II. A New Approach to Corporate Credit Management
III. EM Corporate Debt Market Overview
IV. Historical Performance & Risk
V. SW Philosophy, Process & Team
VI. Forward
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20. SW Philosophy
A different approach to credit management
The best opportunities exist in the least developed markets
· We believe emerging market credit opportunities outnumber those in developed credit markets
· We believe emerging market corporates are under-researched, under-followed
and under-appreciated
Fundamental credit analysis is necessary but not sufficient; a multifaceted approach works best
· We believe bonds often trade on factors unrelated to fundamentals
· Systemic risks to risk assets have risen since 2008
Credit risk can and should be hedged
· We believe “risk-managed” shorts significantly mitigate tail risk
· We believe innovative hedges are necessary
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21. SW Investment Process
· Macro country and industry views
Thematic
Macro · Identify opportunities in dislocated market segments
Orientation
· Utilize extensive contacts in global credit network
· Analyze asset value, debt structure and free cash flow generation
Fundamental · Evaluate business model and competitive landscape
Analysis
· Create pro forma debt structure and assess liquidation value
· Critical as to purchase timing and entry price
Technical
Analysis · Identify type of holders to assess potential magnitude of forced selling or buying
· Await technical opportunities to purchase/short credit bonds significantly below/above fundamental value
· CIO and portfolio manager must agree on all purchases and sales
Invest · Establish price and position size targets
· Scale into positions based on dealer positioning and forced sellers or buyers
· Understand catalysts and exit opportunities
Monitor and
Harvest · Focus on company news releases, regulatory filings and bankruptcy court recordings
· Reassess return potential in relation to other opportunities
· Which factors – outside credit fundamentals – could cause a significant shock to valuations?
Risk
Management · Which securities/credits are likely to have an intuitive and opposite reaction to such an event?
· Which of the hedges has the highest cost benefit ratio in the event of a tail shock?
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22. SW Portfolio Construction
How does investment process feed into portfolio construction?
Our portfolio comprises of four types of trades:
· Based on fundamental analysis and focused on carry
Yield
· Target allocation: 30% - 60%
Event- · Based on special situations and focused on principal appreciation
Driven · Target allocation: 20% - 50%
· Based on technical analysis and focused on market inefficiencies
Trading
· Target allocation: 0% - 30%
· Based on macro analysis and focused on systemic risk factors
Hedging
· Target allocation: 0% - 150%
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23. SW Asset Management
Why SW?
· Decades of institutional investment, operational and business management experience
· Complementary buy side investment backgrounds in EM and developed market credit
· Five-year track record and demonstrated ability to navigate various credit markets
· Experience successfully managing credit portfolios in crisis periods (2001/2002, 2007/2008)
· Significant business commitment by managing partners
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24. Investment Team
David C. Hinman, CFA* Raymond T. Zucaro, CFA*
Managing Principal Managing Principal
Chief Investment Officer Portfolio Manager
David has over twenty years of experience investing in global credit strategies. Prior to co-founding SW Asset Management LLC, Ray was a Portfolio Manager
Prior to co-founding SW Asset Management LLC, David was Global Head of at Drake Management where he concentrated on investment opportunities in
Credit at Drake Management in New York where he oversaw $5Bn in credit Emerging Markets. Prior to joining Drake Management, Ray was a Senior
assets with hedge funds and various fixed-income portfolios. Prior to Drake, Investment Analyst for two years at INTL Consilium
David was a Portfolio Manager at Ares Management, based in Los Angeles, in Florida. In this capacity, he was the Portfolio Manager responsible for
where he managed credit-based portfolios, including the Ares Total Value researching and recommending corporate fixed-income and equity securities
Fund, an absolute-return, long/short credit hedge fund. across two absolute return vehicles and two benchmarked long-only accounts.
Ray was also a key participant in the structuring and execution of private
Prior to joining Ares Management, David was a Portfolio Manager at Pacific
placements in EMEA and Latin America.
Investment Management Company (“PIMCO”) in Newport Beach, California.
During his ten-year tenure at PIMCO, David managed a variety of credit- Previously, Ray was a Corporate Research Analyst working with the same team
oriented portfolios, including several CDOs and credit-derivative products, as at Standard (Bank) Asset Management in Florida. During his four years at
well as several public funds, including the PIMCO Corporate Opportunity Fund Standard, Ray sourced, analyzed and managed a portfolio of traditional and
(NYSE: PTY), the Corporate Income Fund (PCN) and the Dublin-registered alternative emerging market investment vehicles totaling
PIMCO Global Credit Fund. In addition, David held the lead analyst position for $2 billion. He started his career as a corporate analyst at Americas Trust Bank
several industry sectors. David was formerly a member of the High Yield (ATB) in Florida evaluating global credit investment opportunities as part of
Syndicate and Investment Banking Group at Merrill Lynch & Co. in New York, the portfolio management team.
and began his professional career as a credit analyst with First Union (now
Ray received a Masters of Business Administration degree with a concentration
Wells Fargo) in Charlotte, North Carolina. David has lived in both South Korea
in International Business Administration and graduated with a Bachelor of Arts
and Thailand.
degree in Spanish and Psychology from Temple University graduating with High
David holds a Masters of Business Administration degree in Finance and Honors. Ray also earned the Chartered Financial Analyst designation. Ray is
Accounting from the Wharton School of Business of the University of fluent in Spanish and Portuguese and is currently studying Russian.
Pennsylvania and a Bachelor of Science degree in Finance from the University As part of Ray’s due diligence he has traveled to the following countries:
of Alabama, graduating with High Honors. David also earned the Chartered Argentina, Azerbaijan, Belarus, Brazil, China, Colombia, Dominican Republic,
Financial Analyst designation. Ecuador, Ghana, Kazakhstan, Kenya, Malaysia, Malawi, Mexico, Nigeria,
Paraguay, Peru, Philippines, Russia, South Africa, Tanzania, Uganda,
Ukraine and Venezuela.
*David C. Hinman and Raymond T. Zucaro have earned the right to use the Chartered Financial Analyst designation. CFA Institute marks are trademarks owned by the CFA Institute.
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25. Table of Contents
I. Forward EM Corporate Debt Fund Overview
II. A New Approach to Corporate Credit Management
III. EM Corporate Debt Market Overview
IV. Historical Performance & Risk
V. SW Philosophy, Process & Team
VI. Forward
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26. About Forward
The New Direction of Investing
The world has changed, leading investors to seek new strategies that better fit an evolving global climate.
Forward's investment solutions are built around the outcomes we believe investors need to be pursuing –
non-correlated return, investment income, global exposure and diversification. With a propensity for
unbounded thinking, we focus especially on developing innovative alternative strategies that may help
investors build all-weather portfolios. An independent, privately held firm founded in 1998, Forward
(Forward Management, LLC) is the advisor to the Forward Funds. As of March 31, 2012, we manage more
than $5.2 billion in a diverse product set offered to individual investors, financial advisors and institutions.
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27. Definitions
The Credit Suisse Emerging Market Corporate Bond Index consists of U.S. dollar-denominated fixed income
issues from Latin America, Eastern Europe and Asia.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to
measure equity market performance in the global emerging markets.
One cannot directly invest in an index.
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28. Important Information
Please consider the objectives, risks, charges and expenses carefully before investing in the fund. A
prospectus with this and other information may be obtained by calling (888) 312-4100 or by visiting
www.forwardinvesting.com. It should be read carefully before investing.
RISKS
There are risks involved with investing, including loss of principal. Past performance does not guarantee future results, share prices will
fluctuate, and you may have a gain or loss when you redeem shares.
Derivative instruments involve risks different from those associated with investing directly in securities and may cause, among other things,
increased volatility and transaction costs or a fund to lose more than the amount invested.
Investing in Exchange-Traded Funds (ETFs) will subject a fund to substantially the same risks as those associated with the direct ownership of
the securities or other property held by the ETFs.
Foreign securities, especially emerging or frontier markets, will involve additional risks including exchange rate fluctuations, social and
political instability, less liquidity, greater volatility and less regulation.
Investing in lower-rated (“high yield”) debt securities involves special risks in addition to those associated with investments in higher-rated
debt securities, including a high degree of credit risk.
Investing in a non-diversified fund involves the risk of greater price fluctuation than a more diversified portfolio.
Performance figures and other portfolio data shown for period prior to February 14, 2011, do not reflect the current sub-advisor’s
performance or strategy.
Forward Funds are distributed by Forward Securities, LLC.
Not FDIC Insured | No Bank Guarantee | May Lose Value
FWD004127 103112
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