1) INVESTMENT MANAGEMENT  SEPTEMBER 2015 Investment Focus A Value Opportunity in U.S. Investment Grade Corporates Recent Developments / Executive Summary AUTHORS During August, the Barclays U.S. Investment Grade Corporate Bond Index widened to a level not witnessed since the third quarter of 2012. After spreads relative to U.S. Treasuries reached a post-crisis low of 99 basis points (bps) in July 2014, U.S. Investment Grade (IG) spreads have steadily widened over the past year. (See Figure 1) We believe the majority of this widening has been driven by macro factors and is not an accurate reflection of fundamental credit risks within the corporate sector. JOSEPH MEHLMAN, CFA Executive Director Figure 1: Recent Widening of IG Corporate Spreads Creates Value Opportunity MIKHAEL BREITERMAN- Index Spreads Relative to Treasuries (basis points) LOADER, CFA Vice President Monthly Data as at July 2015 400 Basis Points 300 200 100 0 1990 1992 1994 Finance, Rated A 1996 1998 2000 2002 Industrial, Rated A 2004 2006 Industrial, Rated B Source: Barclays Capital and Morgan Stanley Investment Management. Past performance is no guarantee of future results. 2008 2010 2012 2014 

2) INVESTMENT FOCUS Since the middle of 2014, the U.S. IG market has faced numerous and persistent headwinds, starting with falling energy prices and extending to questions surrounding U.S. Federal Reserve (Fed) policy, concerns about a Greek exit from the Eurozone, a slowing Chinese economy and falling commodity prices. We believe the risks that China poses to the U.S. economy and corporate markets are manageable. We see U.S. economic growth supporting an eventual rate rise (whether in September, December or later) which will signal the beginning of a very slow tightening cycle in the U.S.. This should be supportive of U.S. IG Corporates. Historically, this level of U.S. growth has created a very favourable backdrop for Corporates. Growth is sufficiently high in our opinion to ward off defaults while not being so fast that it encourages companies to act in ways that are overly friendly to shareholders and to the detriment of bondholders (e.g. aggressive M&A or debt-financed share buybacks). While we have witnessed a resurgence of M&A activity in the IG space, the vast majority of these deals have been financed with a mix of debt and equity, providing a degree of spread and ratings stability uncommon in the prior cycle. (See Figure 2) Our analysis has shown that Corporate spreads have performed well in environments where interest rates rise in a controlled manner. There is a risk that the market may overreact to the Fed’s eventual announcement, but we expect the Fed will be very careful in both their actions and communications to avoid a taper tantrum-type reaction. We expect a continuation of tepid but sustained global growth (with the U.S. leading the pack), low inflation and continued demand for yield from global investors. Figure 2: M&A Volume and Deal Count Macro Fundamentals Recent macro discussions have focused on the slowing Chinese economy and the risk China poses to the broader global economy. While topical, we do not believe China has a direct material impact on the U.S. economy and, by extension, most U.S. IG Corporates. Work done by our MSIM colleagues suggests that a 1% slowdown in China may only lower U.S. GDP by 0.1 to 0.15%. If we assume China is slowing by approximately 2.5%, that would suggest a 0.30% decline in U.S. growth. This should enable U.S. growth to remain comfortably above recent trend in the 2 to 2.5% range, supportive of the Corporate sector. Source: Data and calculations from Morgan Stanley Research. Source: EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. 1 2 2 Quarterly Data as at June 2015 8000 1600 Deal Volumen ($B) 1800 7000 1400 6000 1200 5000 1000 4000 800 3000 600 400 2000 200 Deal Count 1000 0 Sep-14 Mar-15 Sep-13 Mar-14 Sep-12 Mar-13 Sep-11 Mar-12 Mar-11 Sep-10 Mar-10 Sep-09 Sep-08 Mar-09 Sep-07 Mar-08 Mar-07 Sep-06 Sep-05 Volume Mar-06 Sep-04 0 Mar-05 Mar-04 Given our constructive views, we have recently increased IG exposure in portfolios, although we acknowledge that timing the inflection point will be challenging. We believe that a strategy focused on high-quality financials as well as non-financial domestically U.S. oriented Corporates, with little direct commodity exposure, is the right approach to add value to portfolios over time. There will also be opportunities in commodity-sensitive Credits in the Energy and Metals sectors but with more volatility expected there, we are being more patient in these particular sectors. Total M&A Volume and Deal Count Deal Count Source: Bloomberg and Morgan Stanley Investment Management. Much attention has also been given to the eventual change in U.S. monetary policy, and markets have reason to be wary after the Taper Tantrum in 2013. However, we believe that the Fed learned an important lesson from that episode and will give extra attention to its communication strategy this time. We expect that when the Fed decides to act (whether that be in September, December or even early 2016), they will move rates on a very slow and gradual path. U.S. IG Corporates should respond favourably to these conditions. Analysis we have performed confirmed that U.S. IG spreads tend to perform well in periods of gradually rising rates. Not only will higher rates signal continued strength and stability in the U.S. economy, they will also help to bring yield-sensitive buyers back into the market. 

3) INVESTING IN US INVESTMENT GRADE CORPORATES Credit Fundamentals Technicals Fundamentals within the IG Corporate markets vary by sector but remain largely favourable despite some recent moderate deterioration. With the Non-Financial sector later in the business cycle, we have witnessed a steady and modest deterioration in company fundamentals over the past couple of years. This has allowed gross and net leverage to rise to levels not seen since the early 2000s.1 While this trend is certainly not supportive of bondholders, we do find some comfort in that the bulk of this deterioration has been the result of active decisions by management teams rather than EBTIDA declines (leaving aside the Energy and Metals sectors where top line growth is pressured).2 Thanks in part to ample cheap capital, companies have been willing to increase leverage to fund stock buybacks or mergers. As these are discretionary activities, we have already seen examples of companies halting buyback programmes when leverage targets were breached. We are also not seeing aggressive financial engineering (such as LBOs) as we did in the mid-2000s. Additionally, despite a steady rise in leverage, interest coverage for most companies is holding near all-time highs, which means companies are well positioned to service their debts.3 Technicals in the IG market paint a very mixed picture. Demand for IG bonds remains very strong, as evidenced by strong new issue order books, oversubscribed deals, and narrower spreads when new bonds are sold to investors in comparison to the initial price talk. Additionally, stubbornly low yields in the government sector, especially in Europe, have driven more investors into the U.S. Corporate market, in search of higher yields and carry. 1300 1100 900 Issuance 700 500 300 Volume 2015 2013 2014 2011 2012 2010 2009 2007 2008 2005 2006 2003 2004 2001 2002 1999 2000 100 1998 Supported by these positive fundamentals, we remain overweight Financials across portfolios. In the Non-Financial space, the expansionary behaviours make us more cautious though we have been opportunistic in adding attractively priced names during recent periods of volatility. Figure 3: Annual Gross IG New Issuance (including estimated 2015 total) Forecast. While the Non-Financial Corporate sector has been gradually relevering, the Financial sector (banks in particular) remains in an earlier, and less expansionary, phase of the business cycle. Most large U.S. banks have spent the past few years de-risking and de-levering their balance sheets, behaviour which is well aligned with the interests of bond holders. These institutions also remain under strict oversight by Federal regulators. Even for those institutions that have largely completed their balance sheet repair, such as some of the largest U.S. banks, regulators have tightly controlled plans to return cash to shareholders. Unfortunately, low yields and robust demand have also helped permit record new issuance in the IG sector. Total supply has grown each year since 2010, with 2015 on pace to break 2014’s record for all-time issuance. (See Figure 3)4 Much of the increase in supply has been driven by the M&A activity, particularly in the Non-Financial sector. Estimates vary but we believe that M&A related financing explains much of the increase in issuance over the past couple of years.5 Even though spreads have been leaking wider, companies have been eager to issue bonds into the IG market to take advantage of low all-in yields. Deal Count Source: MS&CO. Source: Data and calculations from Morgan Stanley Research Source: Data and calculations from Morgan Stanley Research 5 Source: Data and calculations from Morgan Stanley Research 3 4 3 

4) INVESTMENT FOCUS Another feature of this market has been the frequency of jumbo deals (one company issuing more than $10 billion of bonds at once). Between 2012 and 2014, our market saw just eight of these deals. In 2015, we have already seen 11 jumbo deals come to market with even more possible for later in the year. With very few exceptions, these transactions have all been used to fund mergers or acquisitions. These large transactions, coupled with record overall amounts of supply, have at times caused some indigestion for the market. Spreads have tended to widen during periods of especially heavy supply. We believe this situation has been exacerbated by poorer liquidity conditions in the market, in particular smaller dealer inventories and balance sheets. It is indisputable that liquidity has declined over the past few years. Much of this shift seems to have been driven by the financial regulatory climate, specifically Dodd-Frank (Volker) and Basel III which have directly or indirectly increased the costs for broker-dealers to hold inventory. Inventories are now assigned larger capital charges (higher for lower quality assets) which has reduced dealer inventory, and subsequently reduced secondary market liquidity. There are also fewer large counterparties in the Credit market following consolidation or dissolution of several large U.S. firms, as well as the downsizing of U.S. operations by select European banks. This evolving landscape has made us increasingly mindful of liquidity risk when managing our portfolios, even if it has not substantially altered our core investment process or philosophy. For example, additional attention must be paid to the liquidity risks of specific issuers or issues to ensure we are properly compensated to hold a name or security in light of evolving market conditions. We have also become more active in the new issue market and work to ensure that a meaningful portion of portfolios are invested in more current and liquid issues. 6 4 Source: Data from Barclays. Valuation At the end of August, the Barclays U.S. Investment Grade Corporate Index traded at 163bps over U.S. Treasuries. Looking at monthly data, that is the widest closing level since August 2012, and the broad Corporate index is now 64bps above the post-crisis lows reached last summer. Single A Financials and Industrials are 43bps and 48bps wider respectively, while BBB Industrials are 95bps wider, explained in part by the larger weights in the Energy and Metals sectors.6 While the weakness in oil and metals prices can justify some of the moves in these commodity-sensitive sectors, we believe spreads for Financials and less commodity-sensitive Non-Financials now look very attractive relative to fundamentals. In light of a supportive regulatory environment and limited event risk, we continue to believe high quality Financials look very attractive. NonFinancial Corporates also offer value, though careful Credit selection is paramount as this segment of the market is firmly in an expansionary phase of the business cycle. 

5) INVESTING IN US INVESTMENT GRADE CORPORATES Conclusion About the Authors In conclusion, given the macro backdrop of sustained U.S. economic growth and low default risks, we see a significant value opportunity for investors in the U.S. Corporate market. While macro developments may continue to create volatility in the short term, current levels of IG Corporate spreads present attractive value for long-term investors. After trading inside of long term medians for much of 2014, spreads on the U.S. IG Corporate Index have reached levels which we believe compensates investors well for the risks we have discussed. We expect spreads to be further supported by an improving U.S. economy and gradually rising interest rates. As we seek to add additional IG Corporate exposure to portfolios, we remain cognisant that the business cycle has matured. As a result, we will remain reliant upon our active, value-oriented approach and bottom up credit research process to help identify the best value opportunities, while avoiding those companies where we believe there is limited scope to earn attractive returns. JOSEPH MEHLMAN, CFA Executive Director Joe is a member of the Global Fixed Income team and is the head of U.S. Credit. He joined Morgan Stanley in 2002 and has 13 years of investment experience. Joe received a B.A. with honors in economics from Trinity College. Joe holds the Chartered Financial Analyst designation and is a member of the New York Society of Security Analysts. MIKHAEL BREITERMAN-LOADER, CFA Vice President Mikhael is a member of the Global Fixed Income team. He joined Morgan Stanley in 2009 and has six years of investment experience. Mikhael received a B.S.E. in operations research and financial engineering from Princeton University. He holds the Chartered Financial Analyst designation and is a member of the New York Society of Security Analysts. About Morgan Stanley Investment Management7 Morgan Stanley Investment Management, together with its investment advisory affiliates, has 585 investment professionals around the world and approximately $403 billion in assets under management or supervision as of June 30, 2015. Morgan Stanley Investment Management strives to provide outstanding long-term investment performance, service and a comprehensive suite of investment management solutions to a diverse client base, which includes governments, institutions, corporations and individuals worldwide. For more information, please visit our website at www.morganstanley.com/im. Source: Assets under management as of June 30, 2015. Morgan Stanley Investment Management (“MSIM”) is the asset management business of Morgan Stanley. Assets are managed by teams representing different MSIM legal entities; portfolio management teams are primarily located in New York, Philadelphia, London, Amsterdam, Hong Kong, Singapore, Tokyo and Mumbai offices. 7 5 

6) INVESTMENT FOCUS IMPORTANT INFORMATION The views and opinions are those of the authors as of 25th September 2015 and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all portfolio managers at MSIM or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers. All information provided is for informational purposes only and should not be deemed as a recommendation. The information herein does not contend to address the financial objectives, situation or specific needs of any individual investor. In addition, this material is not an offer, or a solicitation of an offer, to buy or sell any security or instrument or to participate in any trading strategy. All investments involve risks, including the possible loss of principal. Charts and graphs provided herein are for illustrative purposes only.. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto. All information contained herein is proprietary and is protected under copyright law. Risk Warnings Past performance is not a guarantee of future performance. There can be no assurance that the portfolio will achieve its investment objectives. Portfolios are subject to market risk, which is the possibility that the value of the investments and the income from them can go down as well as up and an investor may not get back the amount invested. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Investments in Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall. In a declining interest-rate environment, the portfolio may generate less income. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging market countries are greater than the risks generally associated with investments in foreign developed countries. 6 High yield securities (“junk bonds”) are lower rated securities that may have a higher degree of credit and liquidity risk. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. Municipal securities are subject to early redemption risk and sensitive to tax, legislative and political changes. Sovereign debt securities are subject to default risk Collateralized mortgage obligations (CMOs) can have unpredictable cash flows that can increase the risk of loss. Public bank loans are subject to liquidity risk and the credit risks of lower rated securities. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). In addition to the risks associated with common stocks, investments in convertible securities are subject to the risks associated with fixed-income securities, namely credit, price and interest-rate risks. This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations. There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. The Barclays U.S. Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market. 

7) INVESTING IN US INVESTMENT GRADE CORPORATES EMEA: For Business and Professional Investors and May Not Be Used with the General Public. This communication was issued and approved in the UK by Morgan Stanley Investment Management Limited, 25 Cabot Square, Canary Wharf, London E14 4QA, authorized and regulated by the Financial Conduct Authority, for distribution to Professional Clients or Eligible Counterparties only and must not be relied upon or acted upon by Retail Clients (each as defined in the UK Financial Conduct Authority’s rules). US: This communication is a marketing communication. It is not a product of Morgan Stanley’s Research Department and should not be regarded as a research recommendation. The information contained herein has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. All information contained herein is proprietary and is protected under copyright law. Singapore: This document may only be communicated in Singapore to those persons who are “institutional investors”, “accredited investors” or “expert investors” each as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore (collectively referred to herein as “relevant persons”). Australia: This publication is disseminated in Australia by Morgan Stanley Investment Management (Australia) Pty Limited ACN: 122040037, AFSL No. 314182, which accept responsibility for its contents. This publication, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act. Hong Kong: This document has been issued by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance. of Hong Kong (Cap 571). The contents of this document have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this document shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. 7 

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