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Lazard
Emerging Markets Debt
06/17
Platform
Review
Performance Summary as of 30 June 2017
(All data in US dollars; %, unless otherwise noted)
Benchmark-Aware Strategies
Annualized
1 Month
YTD
1 Year
3 Years
5 Years
Since Inception
(1 December 2010)
Emerging Markets Debt – Core
-0.23
6.56
6.95
5.25
6.16
7.14
JPMorgan EMBI Global Diversified Index
-0.14
6.19
6.04
5.38
5.72
6.48
-9
+37
+91
-13
+44
+66
Emerging Markets Debt – Local Debt
0.33
10.91
6.41
-2.60
-0.14
1.25
JPMorgan GBI-EM Global Diversified Index
0.46
10.36
6.41
-2.80
-0.67
0.72
Excess Return (bps)
-13
+55
0
+20
+53
+53
Excess Return (bps)
Since Inception
(1 March 2016)
Emerging Markets Debt – Corporate Broad
0.47
6.28
9.52
N/A
N/A
13.48
JPMorgan CEMBI Broad Diversified Index
0.20
5.01
6.81
N/A
N/A
10.60
Excess Return (bps)
+27
+127
+271
N/A
N/A
+288
Since Inception
(1 October 2011)
Emerging Markets Debt – Blend
-0.04
8.44
50% JPM EMBI Global Diversified/
50% JPM GBI-EM Global Diversified Index
0.16
8.26
Excess Return (bps)
-20
+18
6.38
0.11
2.55
6.26
1.28
2.54
3.89
+12
-117
+1
+32
Benchmark-Unaware Strategy
Emerging Markets Debt – Total Return
4.21
Since Inception
(1 December 2010)
-0.27
3.46
5.36
1.43
3.09
3.79
Performance is presented gross of fees. The performance quoted represents past performance. Past performance is not a reliable indicator of future results.
Please refer to the Important Information section for a brief description of each composite.
Entering a New Phase
Emerging markets debt posted strong absolute returns in five
of the last six quarters, dating back to the market bottom in
the first quarter of 2016. This winning streak was extended
in the second quarter of 2017, as the asset class posted a
2.93% return in US dollar terms, reflecting solid gains of
3.62% and 2.24% for local currency debt and hard currency
debt, respectively.
The broader rally can be decomposed into two distinct
phases (Exhibit 1). Phase One, from February through June
2016, was almost entirely attributable to commodity prices
bottoming after six quarters of declines. The subsequent
commodity price rally was widespread, with industrial metals
beginning to surge in late 2015, oil bottoming in early 2016,
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and agriculture prices reaching a nadir in March 2016. By
summer, rebounding commodity prices led to stronger
export growth across emerging markets and upward revisions
to emerging markets GDP growth forecasts. However,
just as emerging markets growth gained traction, markets
were taken by surprise by Donald Trump’s successful US
presidential bid in November. At that point, emerging
markets debt had posted one of its longest and strongest
continuous rallies since the global financial crisis; however,
in our view these gains were partially reversed for reasons
related to the unexpected US election result:
• Trump’s promises to renegotiate or cancel trade deals
would negatively affect major emerging markets
economies such as Mexico and China
2
• The reflation trade began in earnest with a market view that
massive fiscal stimulus at a late stage of the US economic cycle
would be inflationary
• With increased fiscal stimulus, it was thought the Federal
Reserve could afford to be more hawkish, which would result in
higher US Treasury yields and dollar strength
In retrospect, it was the sell-off in November 2016 (due to these
concerns) that marked the distinctly different Phase Two of
the rally. This phase has been characterized by an unwinding of
nearly all of the risks related to Donald Trump’s election. More
specifically:
• No signed trade agreements have been canceled thus far
• While inflation did indeed continue to increase through
February 2017, it has strongly reversed since
• The Fed has been noticeably dovish in its market commentary,
acknowledging that only one rate hike is likely in the second half
of 2017 and that NAIRU¹ and the terminal rate are likely lower
than initially thought
The result has been a nearly continuous rally for emerging markets
debt over the last seven months. What has been particularly
important about Phase Two is that it occurred while commodity
prices moved lower (Exhibit 2).
The dichotomy between rallying emerging markets currencies and
lower commodity prices suggests that there is another force at play
in emerging markets, namely an increase in commodity volumes (as
opposed to prices). Indeed, we have tracked a noticeable increase in
shipping container throughput (Exhibit 3) over the last six months,
with particular volume increases out of Chinese and Singaporean
ports. Changes in global container throughput tends to be a strong
indicator of global growth trends, and the market, rightfully so, is
excited about the most recent upswing in trade data.
To complete our view of improving global growth, we turn
to leading indicators of economic growth (Exhibit 4). Since
mid-2016, both developed markets and emerging markets have
posted improved diffusion index measures, which tend to lead
economic growth by two to three quarters. The improvement in
these measures has been volatile, but overall positive trends have
persisted for quite some time. This gives us increased confidence
that global GDP growth will continue to move higher into 2018.
The most likely result of firming global demand drivers is a further
increase in emerging markets export volumes and a rebound in
commodity prices. As such, we see emerging markets countries
entering a strong third phase of asset price improvement.
While we are categorically optimistic about emerging markets debt
and strongly believe we are in the initial stages of a bull market, it
is important to review the risks that are most likely to cause a short
but meaningful correction in emerging markets. As we recently
witnessed, the asset class is not immune to bull market corrections.
Exhibit 1
The Rally in EMD Has Had Two Distinct Phases
Emerging Markets Debt Blended Index
110
100
90
Phase 2
Phase 1
80
2013
2014
2015
2016
2017
As of 30 June 2017
This information is provided for illustrative purposes only and does not represent the
performance of any product or strategy managed by Lazard. It is not possible to invest
directly in an index.
Source: Lazard, J.P. Morgan
Exhibit 2
EM Currencies Have Appreciated over the Past Seven Months
despite Weaker Commodity Prices
EM REER vs Commodity Index
120
180
110
145
100
110
GBI REER [LHS]
90
75
Commodity Index [RHS]
80
1997
2001
2005
2009
2013
40
2017
As of 31 May 2017
This information is provided for illustrative purposes only and does not represent the
performance of any product or strategy managed by Lazard. It is not possible to invest
directly in an index.
Source: Lazard, J.P. Morgan, Thomson Reuters/CoreCommodity
Exhibit 3
Rising Shipping Activity Indicates Better Global Growth
Container Throughput Index and World Trade Volumes
140
RWI/ISL Container Throughput Index
125
110
World Trade Volume
95
80
2007
2009
2011
2013
2015
2017
As of 31 May 2017
Source: Haver Analytics, Institute of Shipping Economics and Logistics, RWI – LeibnizInstitut für Wirtschaftsforschung
3
It should be noted that emerging markets debt registered a markto-market correction last year of more than 6% before clawing
its way to recovery one quarter later. Currently, we are most
concerned that the market is underpricing the Fed’s intention to
hike policy rates in 2018. As of quarter-end, fed funds futures are
pricing in only one rate hike in 2018, which is well below the Fed’s
central tendency forecast of three hikes. Market expectations are
most likely to adjust if core inflation bottoms in the second half
of 2017 and returns to the trajectory set between September 2015
and March 2017 (Exhibit 5). To the extent that occurs, we expect
higher US Treasury yields and a stronger trade-weighted US dollar.
Normalizing US inflation will surely cause some pain for emerging
markets debt. That being said, given the extraordinarily gradual pace
of tightening of developed markets policy rates and balance sheet
reductions, we do not believe that inflation will structurally alter the
ongoing recovery in emerging markets fundamentals. As such, we
intend to continue to deploy nearly the entirety of our respective
risk budgets across our debt strategies (both benchmark-aware
and total return). However, as we move into the third quarter, we
have strategies in place that are intended to protect against shortterm risks: (1) We intend to reduce duration in both our local and
external debt strategies as a precaution against a sharp interest rate
increase. From a tactical perspective, the market has taken significant
long positions in US Treasury securities, which in our view creates
the possibility of a sharp US rate reversal; (2) We also intend
to employ tail risk protection overlays to mitigate any potential
weakening of emerging markets currencies versus the US dollar,
in the event of a more abrupt market adjustment. Both of these
risk mitigation strategies should, in our view, allow our emerging
markets debt portfolios to participate in the continued emerging
markets upswing, while reducing the risk of temporary drawdowns.
Strategy Positioning and Performance
Core
Emerging markets sovereign debt performance was more volatile in
June relative to the tranquility of recent months. The J.P. Morgan
EMBI Global Diversified Index rose in the first half of the month
but sold off nearly 1% in the second half of the month amid a
decline in oil prices and rising Treasury yields. Oil prices touched
their lowest level since November and the yield on the 10-year
US Treasury rose 10 basis points (bps) during the month. The
index ended the month in negative territory, albeit only slightly,
for the first time since November, returning -0.14% in June.
Second quarter and year-to-date returns remain strong at 2.24%
and 6.19%, respectively. The asset class’s solid performance this
year has been supported by strong risk appetite and continued
inflows, thanks to global interest rates that remain low despite the
gradual withdrawal of monetary accommodation that has begun
in the United States and been signaled in the European Union.
As widely expected, the Fed raised the targeted Fed Funds rate
by 25 bps in June. Spreads widened slightly in June and ended
Exhibit 4
Leading Indicators of Growth Continue to Improve
Purchasing Managers’ Index
57
Developed Markets
55
53
Global
51
49
Emerging
Markets
Nov 2014
May 2015
Nov 2015
May 2016
Nov 2016
May 2017
As of 30 June 2017
Source: Haver Analytics, J.P. Morgan, Markit
Exhibit 5
After Rising for over a Year, US Inflation Recently Softened
US PCE Deflator
3
2
1
0
2012
2013
2014
2015
2016
2017
As of 31 May 2017
Source: US Bureau of Economic Analysis
the second quarter precisely where they began at 310 bps over
Treasuries. Many Latin American credits were among the top
performers in the index in June, including Uruguay, the top
performer, which rose 1.5% on an improved economic outlook,
including first quarter growth that surprised on the upside and
inflation that is falling rapidly. Other outperformers include El
Salvador, which gained after the government reached an agreement
with the opposition to fund pension obligations (averting another
temporary default that led to a sharp sell-off in April), and Belize,
which rose due to continued favorable sentiment after reaching a
debt restructuring agreement with bondholders in March. Belize
has been the best-performing emerging markets credit year to date,
registering a gain of over 56%. Other credits that have approached
the International Monetary Fund, including Mongolia and
Cameroon, are among the top performers year to date. Venezuela
was the worst-performing credit in June, falling 5.5% as increasing
social unrest and signs of division within the Chavista government
weighed on bond prices. President Nicolás Maduro is moving
forward with plans to call a constitutional assembly in July, despite
widespread opposition from the public, his political opponents,
and even members of his own government. Iraq declined 2.6% on
4
ISIS-related violence, and Mozambique registered a 2.2% loss after
an independent audit was unable to account for about a quarter of
the $2 billion of previously undeclared government debt. Bolivia
is the only country to have registered a negative return in the first
half of 2017, falling 1.0% after failing to recover fully following
reports earlier this year that local institutional investors had
been prohibited from trading the country’s external debt. Other
underperformers in the first half of 2017 included low-yielding
European credits Latvia and Slovakia, as well as Latin American
high yielders Venezuela and Ecuador.
The Lazard Emerging Markets Debt – Core strategy
underperformed the J.P. Morgan EMBI Global Diversified Index in
June and outperformed the index in the second quarter. In a month
of oil price volatility and rising Treasury yields, performance was
hurt by the strategy’s overweight position in high yield credits and
duration overweight. The strategy’s small overweight in Venezuela
weighed on performance in June, due to the escalation of violence
and political uncertainty in that country. The strategy’s Argentina
overweight also hurt performance as uncertainty increased ahead
of the October midterm elections after former President Cristina
Fernández de Kirchner announced her candidacy for a Senate seat
in the province of Buenos Aires. Preliminary polls show her in a
dead heat against the candidate from President Mauricio Macri’s
party. New supply also weighed on Argentina’s performance, as
the country issued $2.75 billion of 100-year maturity bonds. We
benefited in June from our off-index allocation to corporates, as well
as country overweight positions in Ukraine, Ghana, and El Salvador.
For the quarter, the strategy benefited from an overweight in high
yield credits, including Ghana and Ukraine, and an underweight
in low yielding credits in Asia and Europe. There were no material
detractors from performance in the second quarter.
We maintain our favorable medium-term outlook on emerging
markets sovereign credit but remain somewhat cautious in the
near term, as index-level spreads remain near the lows of recent
years. Nevertheless, we continue to believe individual country
developments offer compelling opportunities to generate alpha.
At the overall portfolio level, we have a small duration overweight,
which we expect to reduce in the near term. We have been
positioned in the long-end of certain higher quality sovereigns as
we were less concerned about rising long-term Treasury rates. This
position has performed well and approached our return targets
and thus we expect to reduce this exposure. We slightly increased
the strategy’s active exposure to high yield countries from 20%
to 22% in June as a result of bottom-up positioning changes. We
participated in Argentina’s 100-year bond issuance as we maintain
a favorable outlook on the country’s structural reform progress and
the new issue came at an attractive discount relative to the country’s
existing curve with only a slightly longer duration than the
country’s 30-year bond. Argentina is currently the strategy’s largest
overweight position. Among the strategy’s other key overweights,
we also added slightly to Ghana on the government’s decision to
extend its IMF program through year-end 2018 (from April of
that year). Strong first quarter growth and adherence to its fiscal
target in the first quarter also contributed to the improved outlook
for Ghana. We also moved from neutral to overweight positions
in the Dominican Republic and Côte d’Ivoire, given improving
fundamentals in the former country and attractive valuations in
the latter. We funded these positions by increasing the strategy’s
underweights in investment grade countries such as Panama, Chile,
and Colombia, where we see little room for additional spread
tightening. The strategy’s largest underweight positions continue to
be China, Poland, and Malaysia. We have maintained our off-index
allocation to short-dated corporates, which offer an attractive yield
pick up versus short-dated sovereigns.
Local
Local currency debt once again outperformed sovereign debt in
June and in the second quarter. The J.P. Morgan GBI-EM Global
Diversified Index returned 0.46%, as positive carry and a decline in
local yields more than offset a slight spot depreciation in emerging
markets currencies. For the quarter, the index returned 3.63%,
benefiting from both spot currency appreciation and falling yields.
Local yields diverged from core yields in June and ended the period
at 6.15%, the lowest level since September 2016, although it is
important to note that this is partially attributable to the addition
of the Czech Republic to the index during the quarter. The Czech
Republic currently accounts for 3.4% of the index, but yields a mere
0.54%. Mexico was the top-performing country in both rates and
currency in June, driven by two factors. First, was further evidence
that policy risks are diminishing with the Untied States giving up on
the border adjustment tax and taking a more constructive approach
on NAFTA renegotiations. Second, and more importantly, was
the signaling from Mexico’s central bank that monetary policy
tightening was coming to an end, with indications that the June rate
hike is likely the last in this cycle. The notable underperformers in
currencies were the Russian and Colombian peso, which were hurt
by the drop in oil prices. Russia was also hurt by concerns that the
US Congress might expand the economic sanctions, but this was
of secondary significance, in our view. For the quarter, Argentina
was a top performer in rates and one of the worst performers in
currencies. Argentine rates performed well amid signs of growth
and sticky core inflation, while the peso depreciated over 6% driven
by a confluence of factors. Meanwhile, the euro-linked currencies
were the top performers in the second quarter, benefiting from the
continued economic recovery in the euro zone, higher core rates, and
the market-friendly outcome to the French presidential election. The
Czech koruna was the strongest-performing currency, appreciating
9.5% as the central bank took a more-hawkish tone and scrapped an
intervention regime that had held back the exchange rate since 2013.
The Lazard Emerging Markets Debt – Local strategy
underperformed the J.P. Morgan GBI-EM Global Diversified
Index in June and the second quarter. Active currency positioning
was the primary detractor from relative performance. Specifically,
5
an overweight position in the Argentine peso weighed on relative
performance. The Argentine peso’s underperformance was driven
by a confluence of factors, including a less compelling valuation
in conjunction with continued fiscal profligacy and debt issuance,
rising political risk premium, and hoarding by the soft commodity
farmers. These losses were partially offset by the outperformance
of Argentine rates. For the quarter, the largest detractor from
relative performance was an overweight duration position in Brazil.
Brazil has been the strategy’s largest duration overweight for some
time and had been a significant outperformer earlier in the year.
Despite the recent developments in Brazil, we remain constructive
on the outlook for Brazil rates, as disinflation continues and the
reforms—including the progress made on labor market, subsidized
credit, and social security reforms—are likely postponed, not
derailed. Indeed, in early June, Brazil’s Senate resumed the push to
pass labor market reform despite continued political uncertainty
regarding President Temer. The strategy’s long positions in
“good carry” high yielding currencies against proxies for the euro
and Japanese yen also detracted due to the long US dollar bias
of the basket, the spot appreciation of funding currencies (e.g.,
Taiwan dollar and Korean won), and the underperformance of
the Brazilian real. These losses were partially offset by duration
overweight positions in Peru and Russia. Russia outperformed as
the central bank accelerated the pace of monetary easing. Inflation
readings continued to come in significantly lower than had
been expected a few months ago, allowing Russia’s central bank
significant room to ease.
We remain constructive on the outlook for emerging markets
carry trades and continue to allocate the majority of the strategy’s
risk budget to currency positions. We maintain a high degree of
conviction in the strategy’s relative value currency positions as
higher yielding currencies should outperform in an environment
of lower volatility, supportive emerging markets fundamentals, and
more stable commodity prices. We recently increased the strategy’s
overall currency exposure by adding to positions in the Indian
rupee, Romanian leu, and the Russian ruble while paring exposure
to the Brazilian real. With respect to overall duration positioning,
the strategy has maintained a roughly neutral profile and is
selectively positioned from a bottom-up perspective. The strategy’s
largest duration overweight continues to be Brazil, as we maintain
a constructive outlook despite the recent negative headlines. We
recently moved some of our yield curve exposure from the long
end, which is more influenced by fiscal adjustments, to the 2- to
5-year portion of the curve, which is more influenced by monetary
easing. With inflation well within the central bank’s target range,
we have greater confidence in continued rate cuts than we do
on the timing and extent of fiscal reform at the juncture. We
also continue to favor Peruvian rates, especially relative to the
central and eastern European countries due to the positive carry
and increasing potential for rising core rates in Europe as growth
continues to show signs of recovering. Lastly, we see a strong
cyclical story in Russia, where inflation has declined more rapidly
than expected and the central bank has been very conservative
in cutting rates. Thus, we believe local Russian yields have the
potential to move significantly lower.
Corporates
Emerging markets corporates, as measured by the J.P. Morgan
CEMBI Broad Diversified Index, returned 0.20% in June
and 1.97% in the first quarter. Positive carry and slight spread
tightening more than offset the losses from higher Treasury yields
in June and led to outperformance versus sovereign external debt,
which is longer in duration. Although emerging markets corporates
lagged the other emerging markets asset classes in the first half of the
year, in large part due to interest rate sensitivity, they outperformed
their developed markets counterparts in both the investment
grade and high yield segments. After touching a post-financial
crisis tight of 242 bps in mid-May, spreads ended June at 254 bps,
slightly tighter than where they began in the second quarter. The
investment grade portion of the index narrowly outperformed
the subinvestment grade component in June, but lagged slightly
during the quarter. From an industry standpoint, the transport
sector performed the best in June, while oil and gas was the only
sector to post a negative absolute return, largely due to the drop
in oil prices. For the quarter, the technology media and telecom
(TMT) sector led the way, returning over 3% and rebounding
from underperformance in March that was largely attributed to
significant outflows from US high yield mutual funds. The TMT
sector tends to be heavily trafficked by US high yield managers and
as such can be technically vulnerable to high yield fund flows. Thus,
the sector suffered as US high yield mutual fund managers saw
significant outflows in March, but rebounded in the second quarter
as fund flows stabilized. From a regional perspective, Latin America
continued its strong performance and was the best-performing
region in both June and the second quarter. Jamaica was the
best-performing country in the index during the second quarter,
returning over 10%, primarily driven by the high yield TMT
performance, which accounts for the bulk of issuance from the
country. Meanwhile, Croatia was the notable laggard, declining by
more than 50% due to the company-specific developments of the
distressed issuer, Agrokor, which is the country’s largest privately
owned company. Agrokor’s core businesses are the production
and distribution of food and beverages and retail. In June, it was
reported that the company will cease to exist by July 2018 following
an expected sale process of its subsidiaries once a settlement with
creditors has been reached. Overall, default levels remain low at just
0.8% in the high yield subcomponent of the universe. Emerging
markets corporates issued $41 billion of debt in June, bringing
the total for the first half to $245 billion and setting a new record.
However, when accounting for amortizations, coupons, buybacks,
tender offers, and calls, net issuance is much lower at slightly more
than $50 billion for the first half of 2017.
6
The Lazard Emerging Markets Debt – Corporate Broad strategy
outperformed the J.P. Morgan CEMBI Broad Diversified Index
in June and in the second quarter. In June, the primary drivers
of outperformance were country and security selection. From a
country standpoint, the strategy benefited from an underweight
position in Qatar, which was among the worst-performing
countries in the index due to both higher rates and spread widening
amid tensions with its neighbors in the region. From a security
selection perspective, the strategy benefited from an overweight
position in the additional Tier 1 bonds of Korean banks as
valuations converged with peers. For the second quarter, the
strategy benefited mainly from country selection. Argentina was
among the strategy’s top country overweight positions and was
among the top-performing countries in the index in the second
quarter. Additionally, the strategy’s more structural underweight
position in tighter spread Asian countries, such as China and
Hong Kong, also helped performance. From a security selection
standpoint, the strategy had no exposure to Agrokor, the distressed
Croatian retailer, whose bond prices fell over 20 points during the
quarter.
At the overall index level, spreads remain tight relative to historical
levels, as they do across most spread products, both on an absolute
basis and relative to the respective sovereigns. However, emerging
markets corporates continue to offer a spread pick up over developed
markets corporates and emerging markets sovereigns. Importantly,
we remain constructive on the underlying fundamentals of the
asset class. Valuations at the index level appear neither rich nor
cheap, yet we see a number of attractive idiosyncratic opportunities.
Fundamentals are as solid as they have been in years and the
trends are positive. We believe leverage has reached an inflection
point and will decline going forward. Recent earnings results have
generally been good given the year-over-year improvement in
commodity prices. Additionally, the quality of balance sheets is
strong, and ratings trends are improving. Primary market activity
has been robust, yet net issuance remains relatively low as many
companies have used the proceeds from new issues to extend
the maturity profile of their debt at attractive rates. High yield
companies, in particular, have seen an increase in primary market
activity accounting for 45% of year-to-date issuance, a significant
increase from the 25%–35% over the past few years. Notably, net
issuance has been much lower and more manageable, as evidenced
by overall spread compression. From a positioning standpoint, we
reduced the magnitude of our financials underweight by adding
Mexican and Turkish banks through attractively priced new issues
while rotating out of Panamanian banks where valuations appear
less attractive. We also marginally reduced exposure to a Chilean
airline. We remain structurally underweight investment grade
Asian companies where spreads are tight on both an absolute
and relative basis. The strategy is currently overweight high yield
companies with an emphasis on Latin America where spreads offer
modest room for additional tightening. From a sector standpoint,
they strategy’s largest overweight positions are in the utilities and
metals and mining sectors with a modest underweight in financials.
We continue to identify attractive idiosyncratic stories across the
investment universe. New issues and price volatility should provide
attractive entry points for disciplined investors. We continue to seek
tactical opportunities that may arise in fundamentally strong issuers
at attractive valuations.
Blend
The Lazard Emerging Markets Debt – Blend strategy
underperformed the 50% J.P. Morgan EMBI Global
Diversified/50% J.P. Morgan GBI-EM Global Diversified Index in
June and in the second quarter. The main detractors in June were
a general overweight position in subinvestment grade sovereign
credits and the strategy’s high carry currency positions funded in
lower yielding currencies that are proxies for the euro and yen. With
regard to the strategy’s bottom-up positions in sovereign credit,
the primary detractors were overweight positions in Venezuela
and Argentina. Venezuela underperformed due to an escalation
in violence and political uncertainty, while Argentina suffered
from uncertainty ahead of midterm elections. For the quarter, the
strategy benefited from a general overweight in local currency debt
as well as a general overweight in subinvestment grade sovereign
credit, including some of the strategy’s largest active risk positions,
such as Ghana and Ukraine. However, these gains were more than
offset by the strategy’s currency and rates positions within the local
segment of the strategy. In local rates, the largest detractor for the
quarter was a duration overweight in Brazil. This position performed
well early in the year, benefiting from a faster pace of monetary
easing and progress on fiscal reform. However, Brazil gave back a
portion of these gains during the second quarter as fresh corruption
allegations surfaced against President Temer, sparking fears of
delays or a potential derailment of key legislation including social
security reform. In currencies, the strategy’s long positions in the
Brazilian real and Argentine peso also detracted from performance
as these currencies each depreciated over 5% on a spot basis due to
the aforementioned headlines in Brazil. Underweight positions in
euro-related currencies also detracted from performance. The eurosensitive currencies rose 6% versus the dollar, benefiting from the
better growth outlook in Europe and the market-friendly outcome
to the French presidential election.
As we head into the second half of 2017, we continue to deploy
nearly our full risk budget as we believe we are still in the early
stages of a rally, which should lead to continued outperformance
of local currencies. Accordingly, we favor local currency debt over
hard currency debt and we expect to use any periods of relative
weakness to add to our overweight position in local debt. Within
the strategy’s local currency allocation, we have maintained our
bias towards higher yielding currencies, which should serve as a
strong source of carry amid a less volatile environment. In local
rates, we continue to favor duration in Brazil, as we maintain a
constructive outlook despite the recent negative headlines. Within
7
the external portion of the strategy, we expect to move to a more
neutral overall duration position by reducing our exposure to
long-dated investment grade credits, which have approached our
expected return targets over the course of the past few months. We
continue to favor higher yielding subinvestment grade countries
such as Ghana and Argentina at the expense of low yielding
countries such as the highest quality credits in Asia and Europe.
Total Return
The Lazard Emerging Markets Debt – Total Return strategy
returned -0.27% in June and 0.85% in the second quarter. Across
the key investment themes on which the strategy is currently
focused, the largest driver of performance in June was the strategy’s
outright idiosyncratic long positions in local currencies and local
rates. Within the strategy’s outright currency positions, a long
exposure to the Mexican peso was the largest contributor while
long rates positions in Brazil and Peru were also beneficial. The
strategy also benefited from a position in short-dated corporates,
which earned returns roughly in line with the overall carry on this
portfolio theme. These gains were offset by losses on the strategy’s
“good carry” emerging markets currency theme. Certain high
yielding currencies, primarily the Colombian peso and Russian
ruble, underperformed the basket of funding currencies during
the month. The peso and ruble suffered from the decline in oil
prices and the strategy’s short position in the Canadian dollar,
which is typically correlated with the price of oil, significantly
outperformed these currencies. For the quarter, the main drivers of
performance were idiosyncratic long positions in sovereign credit,
local rates, and local currencies. Specifically, Ghanaian sovereign
credit, which is among the strategy’s top active risk positions, was
a top contributor. After underperforming its African peers in the
first quarter, Ghana outperformed in the second quarter due to
indications that the government will extend its IMF agreement.
Ghana remains one of our highest conviction credits in external
debt markets. In local rates, the strategy benefited from a long
duration position in Peru. Outright exposure to certain local
currencies, including the Polish zloty, Mexican peso, and Turkish
lira, was also beneficial. To a lesser extent, the strategy’s shortdated corporate exposure was also beneficial as this portfolio
theme earned returns roughly in line with its carry. These gains
were partially offset by the underperformance of the “good carry”
currency basket in May and June, as well as portfolio hedges that
were held at times throughout the quarter. In the early part of the
quarter, the strategy held a short risk position in CDX EM,² to
mitigate the beta, or market exposure, inherent in our idiosyncratic
sovereign credit positions. This detracted from performance
as credit spreads continued to grind tighter. We started to
significantly reduce this hedge in May and we fully exited the
position by early June. The strategy forfeited a small amount of
premium on tail hedges designed to protect the strategy against a
potential adverse outcome to the French presidential election.
We continue to deploy nearly our full risk budget as we maintain a
favorable outlook on bottom-up fundamentals. Over the course of
the first half of 2017, we have allocated more of the risk budget to
local currencies. Given our view that we are still in the early stages
of a rally, we expect to continue to run close to our full risk budget
and to use any periods of market weakness to add local currency
exposure. Risk in the Total Return strategy is currently allocated
across five key investment themes. First, despite the recent
bout of underperformance of the “good carry” currency theme,
we continue to believe this is a source of attractive carry. The
underperformance of this trade has primarily been a result of spot
appreciation of the funding currencies, which are proxies for the
euro and Japanese yen. In the first half of 2017, emerging markets
currencies appreciated by more than 4% against the US dollar,
but have declined nearly 4% versus the euro and are roughly flat
versus the yen. We have maintained a roughly 35% long position
in high yielding currencies of fundamentally solid countries such as
Indonesia, Brazil, and Russia, among others that is funded in low
yielding currencies that are prone to slower growth. We maintain
conviction in the rationale underlying our short positions and
believe continued tightening in China should weigh on Asian
currencies such as the won and Taiwan dollar. Early in the year, we
added a second theme to the strategy focused on local currencies
that is designed to benefit more from spot appreciation relative
to the dollar. We currently have roughly 15% of the portfolio in
outright idiosyncratic currency positions including the Indian
rupee, Peruvian sol, Polish zloty, and Mexican peso. Meanwhile,
the strategy also has long exposure to local rates in Brazil, Russia,
and Peru. In addition, the strategy has small exposures to frontier
local markets such as Uruguay and Ghana. The third key portfolio
theme is a 15% exposure to corporates, which is focused mainly
on short-dated and/or callable bonds of fundamentally sound
companies that offer a modicum of yield and very limited interest
rate and credit risk. This theme is also designed to capture positive
carry, rather than price appreciation. In aggregate, our corporate
exposure has a duration of roughly 3.5 years and a yield in excess
of 5%. The fourth key theme in the portfolio is a 10% exposure to
long-dated, high quality sovereign credits. This trade has performed
well and is approaching our targets, thus we expect to reduce
exposure and reallocate the risk to idiosyncratic opportunities. We
continue to see attractive bottom-up opportunities in a handful of
sovereign credits (our fifth investment theme). Ghana, Argentina,
Mozambique, and Turkey are among the top risk positions within
this segment of the strategy.
Sincerely,
Denise S. Simon
Managing Director, Portfolio Manager/Analyst
Arif T. Joshi, CFA
Managing Director, Portfolio Manager/Analyst
8
Emerging Markets Debt – Core
Sector Allocation
Characteristics
Lazard
Benchmark3
Yield to Maturity1 (%)
6.48
5.37
Duration (years)
7.03
6.66
Average Coupon (%)
6.55
6.04
Cash
0.4%
External Corporate
8.5%
External
Quasi
16.9%
External
Sovereign
74.3%
Key Hard Currency Exposure
Sovereign and Quasi-Sovereign
Lazard O/W
or U/W (%)
Argentina
2.5
Turkey
2.2
Ukraine
1.9
Ghana
1.8
Paraguay
1.1
Zambia
1.0
El Salvador
1.0
Nigeria
0.9
South Africa
0.8
Honduras
0.8
Romania
-1.0
Lithuania
-1.1
Panama
-1.2
Croatia
-1.8
Philippines
-2.1
Hungary
-2.2
Chile
-2.2
Malaysia
-2.4
Poland
-2.7
China
-4.2
Key Corporate Exposure
Quality Distribution
(%)
60
49.5
38.7
40
27.4
23.6
23.7
20
5.1
0
Investment
Grade
Lazard
BB
B
3.1
CCC &
Below
0.0
0.0
Not Rated
J.P. Morgan EMBI Global Diversified Index
Performance Attribution3
1 Month
(bps)
YTD
(bps)
-15
51
Country Selection
-13
Security Selection
-2
Sovereign Hard Currency
1 Year
(bps)
Since Inception²
(bps)
56
87
44
92
78
7
-36
9
0
0
0
-9
Rates
0
0
0
9
FX
0
0
0
-18
-12
Local Debt
Lazard
28.8
Brazil
2.08
India
1.37
Corporates
6
4
23
Russia
0.92
Cash
0
-18
12
0
Argentina
0.84
Total
-9
37
91
66
Colombia
0.74
As of 30 June 2017
1 All yields are calculated assuming yield-to-worst.
2 Inception date: 1 December 2010
3 Relative to the J.P. Morgan EMBI Global Diversified Index.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to change.
Attribution is based upon a representative portfolio and is versus the benchmark noted. Attribution analysis is provided for illustrative purposes only, as values are calculated based on returns gross of
fees. Performance would be lower if fees and expenses were included. Past performance is not a reliable indicator of future results.
Lazard receives credit quality ratings on the underlying securities of the portfolio from the major reporting agencies – Standard & Poor’s (S&P), Moody’s, and Fitch. The credit quality breakdown
is provided by Lazard by using the S&P rating when the agencies assign the same rating to a security. In the event the ratings differ, Lazard will use the same of the two out of three ratings. If
there are only two, Lazard uses the lower of the two. Lazard converts all ratings to the equivalent S&P major rating category for purposes of the categories shown. Bonds rated BBB and above are
considered investment grade. Bonds rated below BBB are generally referred to as speculative grade securities. Bonds rated BB, B, or CCC are regarded as possessing a speculative capacity to pay
debt service because of the negative factors or uncertainties for which there are no compensating positive factors. Ratings from BBB to CCC may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within each of the major rating categories. An N/R category consists of rateable securities that have not been rated by a Nationally Recognized Statistical Rating
Organization (NRSRO). Unrated securities do not necessarily indicate low quality. Ratings and the portfolio’s credit quality distribution may change over time. The portfolio itself has not been rated by
an independent rating agency.
Source: Lazard, J.P. Morgan
9
Emerging Markets Debt – Local Debt
Characteristics
Lazard
Benchmark3
Yield to
(%)
Duration (years)
7.51
5.26
6.15
5.07
Average Coupon (%)
6.52
6.26
Maturity1
Key Currency Exposure
Sovereign and Quasi-Sovereign
India
Argentina
Indonesia
Turkey
Brazil
Thailand
Korea
Taiwan
Canada
Hungary
Key Duration Exposure
Brazil
Peru
Russia
Lazard O/W
or U/W (%)
3.7
2.4
2.3
2.0
1.8
-1.1
-1.7
-1.8
-1.8
-1.8
Gross Regional Allocation
(%)
45
38.5
30
20.6
21.2
Asia
Eastern
Europe
16.7
15
0
Middle East
& Africa
Latin
America
Gross Sector Allocation
(%)
120
94.1
80
40
Lazard O/W
or U/W (bps)
1.4
0.6
0.1
0
12.4
0.9
-9.5
23
16
10
-40
Sovereign Quasi- Corporate Inflation
Bonds Sovereign Bonds
Linked
Bonds
Interest Forwards/
Rate
NDFs/
Swaps Options
USD
Cash
Gross Quality Distribution
(%)
60
42.9 47.1
28.6 31.8
30
19.9 18.0
0
13.3
3.0
1.9
1.2
0.0
-7.8
-30
AAA/AA
A
Lazard
J.P. Morgan GBI-EM Global Diversified Index
BBB
BB
B
N/R
Performance Attribution3
Rates
1 Month
(bps)
YTD
(bps)
1 Year
(bps)
Since Inception²
(bps)
-3
52
18
13
FX
-10
3
-18
40
Total
-13
55
0
53
As of 30 June 2017
1 All yields are calculated assuming yield-to-worst.
2 Inception date: 1 December 2010
3 Relative to the J.P. Morgan GBI-EM Global Diversified Index.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to change.
Attribution is based upon a representative portfolio and is versus the benchmark noted. Attribution analysis is provided for illustrative purposes only, as values are calculated based on returns gross of
fees. Performance would be lower if fees and expenses were included. Past performance is not a reliable indicator of future results.
Lazard receives credit quality ratings on the underlying securities of the portfolio from the major reporting agencies – Standard & Poor’s (S&P), Moody’s, and Fitch. The credit quality breakdown
is provided by Lazard by using the S&P rating when the agencies assign the same rating to a security. In the event the ratings differ, Lazard will use the same of the two out of three ratings. If
there are only two, Lazard uses the lower of the two. Lazard converts all ratings to the equivalent S&P major rating category for purposes of the categories shown. Bonds rated BBB and above are
considered investment grade. Bonds rated below BBB are generally referred to as speculative grade securities. Bonds rated BB, B, or CCC are regarded as possessing a speculative capacity to pay
debt service because of the negative factors or uncertainties for which there are no compensating positive factors. Ratings from BBB to CCC may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within each of the major rating categories. An N/R category consists of rateable securities that have not been rated by a Nationally Recognized Statistical Rating
Organization (NRSRO). Unrated securities do not necessarily indicate low quality. Ratings and the portfolio’s credit quality distribution may change over time. The portfolio itself has not been rated by
an independent rating agency.
Source: Lazard, J.P. Morgan
10
Emerging Markets Debt – Corporate
Broad
Characteristics
Lazard
Benchmark²
Key Country Exposure
Lazard O/W
or U/W (%)
Argentina
5.0
Guatemala
4.4
3.6
Yield to
(%)
Duration (years)
5.17
3.87
4.61
4.52
Peru
Mexico
2.7
Average Coupon (%)
6.56
5.31
Turkey
2.1
Korea
1.6
Georgia
1.3
Zambia
1.2
Bangladesh
1.1
Worst1
Industry Exposure
Utilities
Metals & Mining
Transport
Infrastructure
TMT
Consumer
Industrial
Pulp & Paper
Diversified
Oil & Gas
Real Estate
Financial
Lazard O/W
or U/W (%)
7.8
4.4
1.1
0.0
0.0
-0.2
-0.9
-1.0
-1.9
-0.5
-2.9
-5.8
Nigeria
1.0
Kuwait
-1.1
Malaysia
-1.2
Indonesia
-1.3
India
-1.5
Singapore
-1.7
Philippines
-1.8
Israel
-1.9
Qatar
-3.0
Hong Kong
-4.2
China
-5.5
Quality Distribution
(%)
66
55.7
44
39.8
25.1
22
30.6
21.5
15.0
3.7
0
Investment
Grade
Lazard
BB
B
1.8
0.8
CCC &
Below
5.9
Not
Rated
J.P. Morgan CEMBI Broad Diversified Index
Performance Attribution²
1 Month
(bps)
YTD
(bps)
1 Year
(bps)
Since Inception¹
(bps)
106
Country Selection
13
60
106
Industry Selection
3
38
108
62
Security Selection
11
29
57
120
Total
27
127
271
288
As of 30 June 2017
1 Inception date: 1 March 2016
2 Relative to the J.P. Morgan Corporate Emerging Markets Bond Broad Diversified Index.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to change.
Attribution is based upon a representative portfolio and is versus the benchmark noted. Attribution analysis is provided for illustrative purposes only, as values are calculated based on returns gross of
fees. Performance would be lower if fees and expenses were included. Past performance is not a reliable indicator of future results.
Source: Lazard, J.P. Morgan
11
Emerging Markets Debt – Blend
Historical
Allocation
ALWAYS KEEP
THE SCALE AT A 100%
(%)
Characteristics
Lazard
Benchmark2
Yield to Maturity1 (%)
7.44
5.76
Duration (years)
6.08
5.87
Average Coupon (%)
6.70
6.15
Hard Currency (%)
43.07
50.00
Local Currency (%)
56.93
50.00
100
75
50
25
Key Country Distribution
0
Lazard O/W
or U/W (%)
1.1
Indonesia
1.1
Paraguay
0.7
El Salvador
0.6
Chile
-1.0
Romania
-1.1
Malaysia
-1.4
Korea
-1.7
Taiwan
-1.7
Canada
-1.8
Philippines
-1.8
China
-2.1
Thailand
-2.4
Hungary
-3.3
40
50.1
34.1
20
5.7
5.9
0.0
0
0.0
1.1
5.6
-2.7
-20
Cash
1.5
South Africa
2017
Sector Allocation
(%)
60
Forwards/
NDFs
Ukraine
2016
Local Inflation
Linked
2.1
Local Corporate
Bonds
3.0
Ghana
2015
Local Currency Exposure
Local QuasiSovereign
Brazil
2014
Local Nominal
Sovereign
3.5
2013
Corporate
Bonds
3.7
Turkey
External
Quasi
5.1
India
External
Sovereign
Argentina
2012
Hard Currency Exposure
As of 30 June 2017
1 All yields are calculated assuming yield-to-worst.
2 Relative to a blended index consisting of 50% J.P. Morgan EMBI Global Diversified/50% J.P. Morgan GBI-EM Global Diversified Index.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to change.
Attribution is based upon a representative portfolio and is versus the benchmark noted. Attribution analysis is provided for illustrative purposes only, as values are calculated based on returns gross of
fees. Performance would be lower if fees and expenses were included. Past performance is not a reliable indicator of future results.
Source: Lazard, J.P. Morgan
12
Emerging Markets Debt – Blend
Quality Distribution
(%)
Performance Attribution2
1 Month
(bps)
Overall Allocation –
Hard vs. Local
Sovereign Hard Currency
Country Selection
Security Selection
80
YTD
(bps)
1 Year
(bps)
Since Inception1
(bps)
3
-13
-9
52
-15
25
35
-23
-13
24
49
2
-2
1
-14
-25
4
2
11
-7
-12
4
-25
10
-2
14
6
-4
FX
-10
-10
-31
14
Total
-20
18
12
32
Corporate Hard Currency
Local Debt
Rates
65.2
60
43.7
40
25.3
20
20.8
22.0
12.5
3.2
0
Investment
Grade
Lazard
BB
B
1.6
CCC &
Below
5.6
0.0
Not
Rated
50% JPM EMBI Global Diversified/
50% JPM GBI-EM Global Diversified Index
As of 30 June 2017
1 Inception date: 1 October 2011
2 Relative to a blended index consisting of 50% J.P. Morgan EMBI Global Diversified/50% J.P. Morgan GBI-EM Global Diversified Index.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to change.
Attribution is based upon a representative portfolio and is versus the benchmark noted. Attribution analysis is provided for illustrative purposes only, as values are calculated based on returns gross of
fees. Performance would be lower if fees and expenses were included. Past performance is not a reliable indicator of future results.
Lazard receives credit quality ratings on the underlying securities of the portfolio from the major reporting agencies – Standard & Poor’s (S&P), Moody’s, and Fitch. The credit quality breakdown
is provided by Lazard by using the S&P rating when the agencies assign the same rating to a security. In the event the ratings differ, Lazard will use the same of the two out of three ratings. If
there are only two, Lazard uses the lower of the two. Lazard converts all ratings to the equivalent S&P major rating category for purposes of the categories shown. Bonds rated BBB and above are
considered investment grade. Bonds rated below BBB are generally referred to as speculative grade securities. Bonds rated BB, B, or CCC are regarded as possessing a speculative capacity to pay
debt service because of the negative factors or uncertainties for which there are no compensating positive factors. Ratings from BBB to CCC may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within each of the major rating categories. An N/R category consists of rateable securities that have not been rated by a Nationally Recognized Statistical Rating
Organization (NRSRO). Unrated securities do not necessarily indicate low quality. Ratings and the portfolio’s credit quality distribution may change over time. The portfolio itself has not been rated by
an independent rating agency.
Source: Lazard, J.P. Morgan
13
Emerging Markets Debt – Total Return
Currency Exposure
Characteristics
United States
Lazard (%)
Lazard
Yield to
Maturity1
(%)
7.12
Duration (years)
4.28
Average Coupon (%)
7.59
Long Exposure (%)
109.99
Short Exposure (%)
39.82
Net Exposure (%)
70.17
Gross Exposure (%)
149.82
Key Hard Currency Exposure
Sovereign and
Quasi-Sovereign Net
% of Market Value
Corporate
Net % of
Market Value
Total
Net % of
Market Value
Ghana
5.31
—
5.31
Argentina
3.47
0.66
4.12
Mexico
3.04
1.01
4.05
Ukraine
3.57
—
3.57
Turkey
3.04
0.37
3.41
Brazil
—
3.09
3.09
Russia
0.97
1.24
2.21
Egypt
1.52
—
1.52
El Salvador
1.50
—
1.50
65.26
Indonesia
9.04
India
8.99
Brazil
6.61
Argentina
4.79
Russia
3.24
Peru
3.08
South Africa
3.05
Turkey
2.76
Mexico
2.72
Colombia
2.57
Poland
2.56
Uruguay
0.54
Ghana
0.43
Taiwan
-8.25
Korea
-8.26
Canada
-8.76
Hungary
-8.86
Key Local Rate Positions
Bond
(%)
IRS
(%)
Total
(%)
Brazil
2.28
3.83
6.11
Russia
3.21
—
3.21
Peru
2.55
—
2.55
Argentina
1.76
—
1.76
Uruguay
0.54
—
0.54
Ghana
0.43
—
0.43
South Africa
1.00
-0.70
0.30
Historical Gross Exposure Allocations
(%)
200
Cash
Long Credit
Short Credit
Long Local
Short Local
Relative Value
150
100
50
0
2010
2011
2012
2013
2014
2015
2016
2017
As of 30 June 2017
1 All yields are calculated assuming yield-to-worst.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to change.
14
Emerging Markets Debt – Total Return
(%)
80
321
Long Sovereign
-8
293
421
293
Short Sovereign
-2
-87
-80
-21
Quasi-Sovereign
-7
18
77
31
Long Corporates
7
80
136
18
Short Corporates
0
0
0
0
Local Debt
24
94
32
49
Long Rates
11
69
39
111
Short Rates
1
1
1
-2
Long FX
12
45
10
-67
Short FX
0
-21
-18
7
Relative Value
-41
-52
-50
9
Total
-27
346
536
379
40
35.5
20.1
0
Asia
Eastern
Europe
Latin
America
Middle East
& Africa
Gross Sector Allocation
(%)
100
82.8
75
50
31.1
25
Hard Currency
Quasi-Sovereign
Hard Currency
Sovereign
0
3.4
CDX/CDS
15.1
1.1
10.6
1.2
0.0
0.0
4.5
0.0
Cash
554
FX/NDFs/Options
304
Local Corporate
Bonds
-10
56.8
37.4
Local QuasiSovereign Bonds
Since Inception1
(bps)
Local Inflation
Linked Bonds
1 Year
(bps)
Local Nominal
Sovereign Bonds
YTD
(bps)
Hard Currency
Corporate
1 Month
(bps)
Interest Rate
Swaps
Performance Attribution
Hard Currency
Gross Regional Allocation
Historical Long/Short Exposures
(%)
200
Long
Short
Net
110
100
70
0
-40
-100
2011
2012
2013
2014
2015
2016
2017
As of 30 June 2017
1 Inception date: 1 December 2010
There is no benchmark for this strategy as it has an absolute return investment objective.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to
change. Attribution is based upon a representative portfolio and is versus the benchmark noted. Attribution analysis is provided for illustrative purposes only, as values are calculated based on
returns gross of fees. Performance would be lower if fees and expenses were included. Past performance is not a reliable indicator of future results. Performance would be lower if fees and
expenses were included. Past performance is not a reliable indicator of future results.
Lazard Emerging Markets Debt
This content represents the views of the author(s), and its conclusions may vary from those held elsewhere within Lazard Asset Management.
Lazard is committed to giving our investment professionals the autonomy to develop their own investment views, which are informed by a
robust exchange of ideas throughout the firm.
Notes
1 Non-accelerating inflation rate of unemployment
2 CDX EM refers to the Markit CDX Emerging Markets Index which is composed of credit default swaps on 15 sovereign issuers.
Important Information
Published on 17 July 2017.
Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions
expressed herein are as of 30 June 2017 and are subject to change.
Lazard Asset Management LLC is a US registered investment advisor and claims compliance with the Global Investment Performance Standards (GIPS®). To receive a complete list and description
of Lazard Asset Management’s composites and/or a presentation that adheres to the GIPS standards, please contact Henry F. Detering, CFA at Lazard Asset Management, 30 Rockefeller Plaza, New
York, New York 10112-6300 or by email at [email protected].
The Emerging Markets Debt – Core strategy seeks to outperform the benchmark, the J.P. Morgan Emerging Markets Bonds Index Global Diversified (EMBI Global Diversified), by 2%–3% p.a. over
a market cycle, with a tracking error of +2%–4%. The majority of the portfolio (typically 90%–100%) will be held in hard currency emerging markets debt. Typically 0%–10% may be held in local
currency emerging markets debt. Despite being benchmark-aware, the strategy is free to invest out of the benchmark (maximum non-benchmark exposure is 30%) to allow the investment team to
exploit the full universe of evolving opportunities. Key drivers of return for this strategy are moves in US Treasuries and credit premiums.
The Emerging Markets Debt – Local Debt strategy seeks to outperform the benchmark, the J.P. Morgan Government Bond Index-–Emerging Markets (GBI-EM) Global Diversified, by +1%–3%
p.a. over a market cycle, with a tracking error of 2%–6%. The majority of the portfolio (typically 90%–100%) will be held in local currency debt. Typically 0%–10% may be held in hard currency debt.
Despite being benchmark-aware, the strategy is free to invest out of the benchmark (maximum non-benchmark exposure is 50%) to allow the investment team to exploit the full universe of evolving
opportunities. Key drivers of return for this strategy are currency appreciation/depreciation and interest-rate moves.
The Emerging Markets Debt – Corporate Broad strategy seeks to outperform the benchmark, the J.P. Morgan Corporate Emerging Markets Bonds Index Broad Diversified (CEMBI Broad Diversified),
by 2–3% p.a. over a market cycle, with a tracking error of +2–4%. The majority of the portfolio (typically 90–100%) will be held in emerging markets corporate debt. Typically 0–10% may be held in
quasi-sovereign emerging markets debt. Despite being benchmark-aware, the strategy is free to invest out of the benchmark (maximum non-benchmark exposure is 30%) to allow the investment
team to exploit the full universe of evolving opportunities. Key drivers of return for this strategy are moves in US Treasuries and credit premiums.
The Emerging Markets Debt – Blend strategy seeks to outperform the 50/50 benchmark of the J.P. Morgan Emerging Markets Bonds Index Global Diversified (EMBI Global Diversified) and J.P.
Morgan GBI-EM Global Diversified by +2%–4% p.a. over a market cycle, with a tracking error of 2%–5%. The portfolio may hold 25%–75% in either hard currency or local currency debt, depending
on the outlook for each asset class. Despite being benchmark-aware, the strategy is free to invest out of the benchmark (maximum non-benchmark exposure is 35%) to allow the investment team
to exploit the full universe of evolving opportunities. Key drivers of return for this strategy are moves in US Treasuries, credit premiums, growth, and inflation expectations within emerging markets
countries. The strategy may hold up to 20% in corporate securities.
The Emerging Markets Debt – Total Return strategy has no benchmark and uses a “best ideas” approach. The investment team looks across the entire Emerging Markets Debt universe—hard
currency sovereign debt, hard currency quasi-sovereign debt, local currency sovereign debt, local currency quasi-sovereign debt corporate debt, etc.—positioning the portfolio in the specific asset
classes and countries in which they see value. This is in contrast to the team’s benchmark-aware approaches, in which they are overweighting/underweighting countries. The Emerging Markets Debt
– Total Return strategy is a long-biased approach, that seeks to capture upside performance and minimize negative performance. The strategy is allowed some leverage (up to 200% maximum gross
exposure) and shorting. It has typically been run with a 60%–90% net exposure and 100%–140% gross exposure. The team may invest throughout the Emerging Markets Debt asset classes, but
also has the ability to allocate tactically to cash if the team has no conviction on the market.
Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities
markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in emerging markets countries.
The strategies invest primarily in emerging markets debt positions. The strategies will generally invest in debt investments denominated in either US dollars or emerging markets local currencies.
As such, an investment in the strategies is subject to the general risks associated with fixed-income investing, such as interest rate risk and credit risk, as well as the risks associated with emerging
markets investments, including currency fluctuation, devaluation, and confiscatory taxation. The strategies may use derivative instruments that are subject to counterparty risk.
Investments in global currencies are subject to the general risks associated with fixed-income investing, such as interest rate risk, as well as the risks associated with non-domestic investments,
which include, but are not limited to, currency fluctuation, devaluation, and confiscatory taxation. Furthermore, certain investment techniques required to access certain emerging markets currencies,
such as swaps, forwards, structured notes, and loans of portfolio securities, involve risk that the counterparty to such instruments or transactions will become insolvent or otherwise default on its
obligation to perform as agreed. In the event of such default, an investor may have limited recourse against the counterparty and may experience delays in recovery or loss.
The strategies will invest in securities of non-US companies, which trade on non-US exchanges. These investments may be denominated or traded in both hard and local currencies. Investments
denominated in currencies other than US dollars involve certain considerations not typically associated with investments in US issuers or securities denominated or traded in US dollars. There may
be less publicly available information about issuers in non-US countries that may not be subject to uniform accounting, auditing, financial reporting standards, and other disclosure requirements
comparable to those applicable to US issuers.
The allocations, investment characteristics, and specific securities mentioned are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations
and security selection are subject to change. The securities mentioned are not necessarily held by Lazard for all client portfolios, and their mention should not be considered a recommendation or
solicitation to purchase or sell these securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the
future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in the portfolio or that
securities sold have not been repurchased. The securities mentioned may not represent the entire portfolio.
All index data is shown for illustrative purposes only and is not intended to reflect the performance of any product or strategy managed by Lazard
This material is provided by Lazard Asset Management LLC or its affiliates (“Lazard”). There is no guarantee that any projection, forecast, or opinion in this material will be realized. Past performance does not guarantee future results. This document is for informational purposes only and does not constitute an investment agreement or investment advice. References to specific
strategies or securities are provided solely in the context of this document and are not to be considered recommendations by Lazard. Investments in securities and derivatives involve risk,
will fluctuate in price, and may result in losses. Certain securities and derivatives in Lazard’s investment strategies, and alternative strategies in particular, can include high degrees of risk and
volatility, when compared to other securities or strategies. Similarly, certain securities in Lazard’s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance.
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The information in this document does not constitute any specific investment advice on China capital markets or an offer of securities or investment, tax, legal, or other advice or recommendation or, an offer to sell or an invitation to apply for any product or service of Lazard Asset Management. Singapore: Issued by Lazard Asset Management (Singapore) Pte. Ltd., 1 Raffles Place,
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