Download Emerging Markets Local Currency

Emerging Markets Local Currency
1st Quarter 2016
Market overview
After a rough start to the year, emergingmarkets (“EM”) fixed income staged a strong
rally. Several supportive factors — dovish
communication from the U.S. Federal Reserve
(“Fed”), negative interest rate policy and
additional asset purchases by the European
Central Bank and People’s Bank of China —
signaled that a large-scale devaluation was
not imminent. In addition, oil prices stabilized,
responding well to indications of demand
stability in China and the U.S. All of this set the
stage for a turnaround in the emerging markets
that began in February and continued through
quarter-end. The local EM sovereign benchmark,
JP Morgan Government Bond Index – Emerging
Markets (“GBI-EM” or “Benchmark”), recorded an
impressive quarterly performance of 11.41% in
U.S. dollar terms (unhedged).
Following announcements from the Fed
that its pace of rate hikes in 2016 may be
less aggressive, the U.S. Treasury 10-year
yield declined 50 basis points (bps) to close
the quarter at 1.77%. Local yields declined
51 bps, to close the quarter at 7.12%. The
outperformance of EM debt may be attributed
in part to supportive technicals, such as sharply
lower new issuance and strong inflows, after
a prolonged period of de-risking and declining
valuations in some EM countries.
The Fed’s more dovish approach arrested the
U.S. dollar’s rapid ascendance against EM
currencies, contributing to positive returns
in many parts of the emerging markets. The
recovery in commodities prices was also a
contributing factor. On a regional level, Latin
America (returned 12.52%) fared best, followed
by Asia, Middle East/Africa, and Europe (based
on the GBI-EM). Results on the sovereign level,
however, were widely dispersed, ranging from
double-digit gains for Brazil (+24.10%) and
Russia (+14.37%) to a single-digit advance in
Mexico (+3.54%).
The rising tides lifted both sovereign and
corporate debt across large swaths of the
emerging markets. The JP Morgan Corporate
EMBI Broad Diversified Index rose 3.89%; and
the EMBI Global Diversified, 5.04%.
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Performance and positioning
For the first quarter of 2016, the Emerging
Markets Local Currency Composite
underperformed the Benchmark. Overweighting
Mexico, which experienced a rally in local rates
on expectations of a successful resolution
to debt defaults, was the key contributor.
Underweighting Brazil and Malaysia were
detractors from performance.
During the quarter, we increased exposure
to Turkish and South African local rates. We
maintained above-benchmark weightings in
resilient credits, such as Mexico, Chile, and
Philippines, that have strong fundamentals and
the ability to withstand shocks.
Outlook
The emerging markets rally is being supported
by improvements in global risk sentiment.
However, the fundamental drivers needed to
support sustained recovery are not yet visible.
The deteriorating terms of trade for commodity
exporters have been harsh. Emerging markets
face headwinds from normalization of
monetary policy by the Fed, a stronger U.S.
dollar, and slower global growth. We anticipate
that the Fed will raise the federal funds rate
twice in 2016. We also anticipate that stable
EM foreign exchange rates may provide some
EM central banks with opportunities for easing
or, at least, less pressure to tighten monetary
policy.
We enter the new quarter with an underweight
to local interest-rate duration and continue to
favor Mexico as a low-beta defensive position.
Portfolio
Managers
Alan Buss, CFA
Portfolio Manager
James Rich
Portfolio Manager
Sarvjeev Sidhu, CFA
Portfolio Manager
Brian Westhoff, CFA
Portfolio Manager
Aegon USA Investment Management, LLC, (AUIM) is a U.S.-based investment adviser registered with
the Securities and Exchange Commission (SEC) and a member company of Aegon Asset
Management, the global investment management division of the Aegon Group.
Emerging Markets Local Currency
1st Quarter 2016
Investment strategy objective
Composite returns vs. benchmark
The AUIM Emerging Markets Local Currency Composite
(“Composite”) is an actively managed strategy investing in
local currency-denominated debt instruments in emerging
countries. The Composite seeks a competitive total return
from high local yields, and the potential for currency
appreciation versus the U.S. dollar. The Composite is
compared to the JP Morgan Government Bond Index Emerging Markets (USD Unhedged) (“Benchmark”).
As of March 31, 2016
15
10
Return %
5
0
-5
-10
Assets
Emerging Markets Local Currency
Total AUIM Firm Assets -15
$109 MM
$128 B
YTD 2016
1 Year
3 Year
5 Year
7 Year
10 Year
AUIM Emerging Markets Local Currency Composite Gross Return
AUIM Emerging Markets Local Currency Composite Net Return
JP Morgan Government Bond Index - Emerging Markets
Sector Allocation (%)
Composite
Benchmark
83.25
100.00
EM Quasi-Sovereign
0.00
0.00
EM Corporates
0.00
0.00
EM Local Market
0.00
0.00
YTD 2016
1 Year
3 Year
5 Year
7 Year
10 Year
Supranational
0.00
0.00
Composite - Gross (%)
6.17
-6.25
-9.57
-3.53
4.53
2.90
Other
0.00
0.00
Composite - Net (%)
6.01
-6.81
-10.12
-4.11
3.96
2.45
Cash
16.75
0.00
Benchmark* (%)
11.41
-2.54
-6.84
-2.31
3.82
3.49
EM Sovereign
Regional Exposure (%)
Composite
Benchmark
Latin America
39.48
46.64
Emerging Europe
32.71
34.17
1.77
9.76
10.44
9.43
0.00
0.00
15.60
0.00
Emerging Asia
Africa
Middle East
North America
Quality Allocation (%)
Composite
Benchmark
A and Above
40.38
44.59
BBB
33.27
50.46
BB and Below
9.60
4.95
NR
0.00
0.00
16.75
0.00
Cash
Characteristics
Composite
Market Value (MM)
Number of Issues
Avg. Quality
Benchmark
$ 108.78
NA
25
151
BBB+
BBB+
6.07%
7.12%
Average Life (yrs)
6.60
6.73
Effective Duration (yrs)
4.28
4.55
Yield to Worst
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Composite returns
Gross and Net of Fees in USD as of March 31, 2016
*JP Morgan Government Bond Index - Emerging Markets
Top Ten Countries (%)*
Issuer
Composite
Mexico
30.80
Turkey
16.75
United States
15.60
South Africa
10.44
Poland
8.75
Brazil
7.55
Russian Federation
5.15
Hungary
2.05
Philippines
1.77
Chile
1.13
Top Five Tickers %
Composite
Benchmark
Mexico (United Mexican States)
23.05
22.46
Republic of Turkey
16.22
9.22
Republic of South Africa
10.13
9.43
Republic of Poland
8.75
12.68
Brazil, Federative Republic of
7.55
22.24
*Foreign cash included
Percentages based on market value as of March 31, 2016.
We use our investment management expertise to help people achieve a lifetime of financial security
Emerging Markets Local Currency
1st Quarter 2016
Disclosures
Aegon USA Investment Management, LLC (“AUIM”), a wholly owned indirect subsidiary of Aegon N.V., is a U.S.-based investment adviser registered with the Securities
and Exchange Commission (“SEC”) and part of Aegon Asset Management, the global investment management division of Aegon Group. AUIM is a limited liability
company formed on June 1, 2001 and began managing assets on December 1, 2001. The firm definition was revised February 1, 2016 to better reflect AUIM’s
relationship in the broader Aegon Asset Management organization.
The Emerging Markets Local Currency composite includes institutional fully discretionary portfolios invested in emerging markets fixed income securities, local currency
only. These securities are issued by emerging markets sovereigns, quasi-sovereigns, cities, regions, corporates, and supranationals. The strategy seeks competitive
total return primarily through investments in debt securities issued by emerging markets issuers. The strategy is diversified both by region and country, and targets both
income and capital appreciation. Due to the investments in various types of emerging markets bonds and sovereign jurisdictions, there are risks pertaining to potential
capital repatriation restrictions, withholding taxes, limited liquidity, settlement/operational/custody restrictions, trading costs, interest rate risk, currency risk, credit risk,
derivatives risk, non-diversification risk, ratings risk, foreign investments risk, leverage risk, market risk, corporate management risk, and issuer default risk. Although not
material, swaps, forwards, and options in currencies and interest rates are rarely used. This composite may contain foreign currency denominated securities. For any
foreign currency denominated bonds, the returns will be calculated in USD to reflect the contribution of the exchange rate and/or any currency hedge.
For comparison purposes, the JP Morgan Government Bond Index - Emerging Markets (USD Unhedged) is a comprehensive emerging market debt benchmark that tracks
local currency bonds issued by emerging market governments in Asia, Europe, Latin America, and the Middle East/Africa.  The index consists of regularly traded, fixedrate, domestic currency government bonds which international investors can readily access.
The U.S. dollar is the currency used to express performance. Returns are presented gross and net of management fees and include the reinvestment of all income. Past
performance is not indicative of future results.
Aegon USA Investment Management, LLC claims compliance with the Global Investment Performance Standards (GIPS).
Please contact AUIM at [email protected] or 877-234-6862 to obtain a compliant presentation and/or a list of composite descriptions.
Aegon USA Investment Management, LLC (AUIM) is a U.S.-based SEC registered investment adviser and is also registered as a Commodity Trading Advisor (CTA) with the
Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association (NFA). AUIM is a member company of Aegon Asset Management,
the global investment management division of the Aegon Group.
This material is to be used for institutional investors and not for any other purpose. The enclosed information has been developed internally and/or obtained from
sources believed to be reliable but AUIM does not make any representation as to its accuracy or completeness. This material contains current opinions of the manager
and such opinions are subject to change without notice. AUIM is under no obligation, expressed or implied, to update the material contained herein. This material contains
general information only on investment matters; it should not be considered a comprehensive statement on any matter and should not be relied upon as such. If there
is any conflict between the enclosed information and AUIM’s Form ADV, the Form ADV controls. The information contained does not take into account any investor’s
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any investment or strategy is suitable or appropriate to you. The value of any investment may fluctuate. Past performance is not indicative of future results.
Specific sectors mentioned do not represent all sectors in which AUIM seeks investments. It should not be assumed that investments of securities in these sectors were
or will be profitable.
Returns greater than 12 months have been annualized. Performance and index information represented was compiled using eVestment Alliance, a source believed to
be reliable.
Credit quality ratings are received from S&P®, Moody’s®, and Fitch®. The breakdown uses the following methodology: the median rating if rated by all three agencies;
the lower of two if only two agencies rate the security; and one rating if rated by one agency. NR includes securities that are not rated by S&P, Moody’s, or Fitch, but
may be rated by other nationally recognized statistical rating organizations, and may contain bonds, equities and/or bank loans.  Average Quality excludes cash and
securities that are not rated.
Individual accounts may vary based on restrictions, substitutions, cash flows and other factors. The mention of specific securities illustrates the application of AUIM’s
investment approach only and is not to be considered a recommendation by the firm. Specific securities identified and described above do not represent all securities
purchased and sold for the portfolio; it should not be assumed that investment in these securities were or will be profitable or that investment recommendations or
decisions that AUIM makes in the future will be profitable. There is no assurance that securities purchased remain in the portfolio or that securities sold have not been
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This document contains “forward-looking statements” which are based on AUIM’s beliefs, as well as on a number of assumptions concerning future events based
on information currently available to AUIM. These statements involve certain risks, uncertainties and assumptions which are difficult to predict. Consequently, such
statements cannot be guarantees of future performance and actual outcomes and returns may differ materially from statements set forth herein.
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Contact AUIM at 877.234.6862
www.AegonInvestments.com
We use our investment management expertise to help people achieve a lifetime of financial security