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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%. Contact AUIM at 877.234.6862 www.AegonInvestments.com 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 Contact AUIM at 877.234.6862 www.AegonInvestments.com 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 investment objectives, particular needs, or financial situation. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that 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 repurchased. 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. Recipient shall not distribute, publish, sell, license or otherwise create derivative works using any of the content of this report without the prior written consent of Aegon USA Investment Management, LLC, 4333 Edgewood Rd NE, Cedar Rapids, IA 52499. Copyright © 2016 Aegon USA Investment Management, LLC Ref: A042016078; Expires 07/31/16 Contact AUIM at 877.234.6862 www.AegonInvestments.com We use our investment management expertise to help people achieve a lifetime of financial security