Lazard Emerging Markets Debt

Transcription

1 Emerging Markets Debt 3/13 Platform Review Performance Summary as of March 31, 213 Benchmark-Aware Strategies 1 Month 1 Year 2 Years Annualized Since Inception (December 1, 21) Emerging Markets Debt Core J.P. Morgan EMBI Global Diversified Index Excess Return Emerging Markets Debt Local Debt J.P. Morgan GBI-EM Global Diversified Index Excess Return Annualized Since Inception (October 1, 211) Emerging Markets Debt Blend N/A % JPM EMBI Global Diversified/5% JPM GBI-EM Global Diversified Index N/A Excess Return Benchmark-Unaware Strategies Annualized Since Inception (December 1, 21) Emerging Markets Debt Total Return Annualized Since Inception (November 1, 211) Emerging Markets Debt Total Return N/A Performance is preliminary and 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. Asset Class Performance Global asset prices diverged in March as developed-market equities rose further in what has been an extraordinarily strong beginning to the year. In contrast, emerging markets indices, including equities, fixed income, and currencies declined in March, with losses ranging from.5% for fixed income and currencies to 2% for equities, as represented by the J.P. Morgan EMBI Global Diversified Index and J.P. Morgan GBI-EM Global Diversified Index for fixed income and the MSCI Emerging Markets Index for equities. The negative performance in emerging markets appeared to be a result of weak commodity prices (declines of 2% 3% in March), worries about the sustainability of emerging markets growth and, in some cases, stretched valuations. Strategy Positioning and Performance Core The Emerging Markets Debt Core strategy outperformed its benchmark, the J.P. Morgan EMBI Global Diversified Index in March. Emerging markets debt spreads continued to widen, ending the month at 3 basis points versus 24 bps at the beginning of the year. That spread widening has resulted in over 2% of negative performance for the index since the start of the year. Yield spreads for investmentgrade credits have widened the most in percentage terms year to date, despite a rally in US Treasuries, suggesting a correction in investment-grade credits based on valuations. In March, the strategy s outperformance was mostly attributed to positioning in some of the African off-index credits, including Tanzania, where exploration of offshore gas fields is generating better-than-expected results. Overweight positions RD1217

2 2 in Egypt and Venezuela partly offset returns. Key sovereign developments during the month included more negative news about Egypt, whereby a delay in elections originally scheduled for April is leading to concerns about the timing of an International Monetary Fund agreement that will be crucial in averting serious balance of payment pressures. Hungary underwent important changes in macroeconomic policy leadership, with a new and less orthodox central bank governor. Given the dismal growth outlook, this has raised questions about further market-unfriendly policies. Finally, Argentina s month-end proposal to holdout creditors from the 25 and 21 restructuring intensified concerns about a technical default. Given that its proposal mirrors the one that the holdouts rejected in 21, the markets are anticipating a negative ruling from the courts and are thus already pricing in a worst-case scenario. The next key development is whether the final court ruling will indeed involve the intermediaries, which would prevent them from servicing the restructured debt. We expect a ruling within the next two months. The main changes in positioning during the month included adding exposure to Brazil given a very attractively priced issue from the state of Minas Gerais, which enjoys an explicit government guarantee. The strategy also increased positioning in Venezuela following the death of former President Chávez, based on the expectation that the current acting president, who appears likely to win the elections on April 14, will be more of a moderate. The biggest reduction in exposure was in the Philippines, whose near-term ratings upgrade to investment grade is already well-priced into markets (the Philippines 5-year CDS currently trades below 14 bps). In Lebanon, the already complicated political situation is now even more complex given developments in Syria. Fiscal and growth performance is deteriorating for the first time in several years as a result. With external debt having started the year trading at expensive levels relative to our fair value estimates, we have maintained a defensive posture in this segment of the asset class for most of the first quarter. However, given the large increase in spreads over the last three months, we now view the index as attractive. We intend to add exposure across the board, in both investment-grade and noninvestment-grade sovereign and corporate credits, as we are now being adequately compensated for taking credit risk. Local Debt The Emerging Markets Debt Local strategy underperformed the J.P. Morgan GBI-EM Global Diversified Index in March. Emerging markets local market performance was largely driven by idiosyncratic factors during the month. With regard to rates, the muted influence of an overall neutral global rates environment was overridden by local factors: the best performers included Mexico, Poland, Colombia, Hungary, and the Philippines, helped by rate cuts by these countries central banks, some of which were not fully expected. In contrast, a less favorable inflation outlook in Brazil, Turkey, and Indonesia, and associated expectations of policy tightening, caused bonds in these markets to underperform. In currencies, the downward euro move provided a negative backdrop to all euro-related and euro-linked currencies, including the Polish zloty, the Hungarian forint, the Romanian leu, the Czech koruna, the Russian rouble, and the Turkish lira. However, the biggest drivers were bottom-up local factors. In Hungary, the underperformance of the forint was due to lingering uncertainty about the growth-oriented policies that will be pursued by the new central bank governor. In Poland, the zloty depreciated as a result of a larger-than-expected rate cut by the National Bank of Poland as well as continued weakness in inflation and growth data. Finally, the Romanian leu weakened as a result of falling money market rates, even though the central bank kept its policy rate unchanged. Idiosyncratic factors also drove the movements of other currencies: The best performer in March was the Mexican peso, supported by positive momentum in Mexico s structural reform agenda and an expected 5 bps rate cut. Among the underperformers, the South African rand continued to weaken due to weaker-than-expected current account data and a further deterioration in the inflation outlook, which is undermining the currency s competitiveness. The Brazilian real weakened in the second half of the month due to dovish minutes from the Brazilian central bank meeting. The biggest contributors to performance were an overweight in the Mexican peso, an underweight in the Hungarian forint, and an underweight in the South African rand. An overweight in the Uruguayan peso was also additive, as the currency continued to deliver a high yield as a result of persistent inflation and a hawkish central bank, while benefiting from foreign capital inflows. The biggest detractors from performance were an overweight position in the Brazilian real and underweight positions in both rates and currency in Thailand. We continue to hold a constructive view on the Thai baht in light of favorable external fundamentals and the strength of domestic demand momentum, but have been concerned about its outperformance versus Asian peers and the potential reaction of the central bank to the baht s strength. We held a neutral view on rates based on expectations that the Bank of Thailand will not hike interest rates this year, preferring the inflation-linked bond over the nominal bonds due to the positive inflation carry. Instead, both Thai rates and currency rallied during the month, partly because of the neutral global environment for rates and partly because of supportive fundamentals, which stand in contrast to other Asian countries in the index, such as Indonesia or Malaysia. Blend The Emerging Markets Debt Blend strategy outperformed the 5% J.P. Morgan EMBI Global Diversified/5% GBI-EM Global Diversified Index in March. After having been overweight local currency debt for most of the past six months, we shifted the strategy to a neutral position of 51% local debt versus 49% external debt by month end. As both indices declined by approximately the same amount during the month, the asset allocation decision did not affect performance. Rather, bottom-up credit and currency active weights drove the strategy s outperformance in March. On the external side of the strategy, overweights in select African countries and an off-index position in corporate debt added to performance. Meanwhile, on the local side, an overweight in the Mexican peso contributed to the strategy s overall outperformance. The only significant detractor was an overweight in Egyptian sovereign debt, which underperformed significantly in March. The strategy remains slightly underweight duration, but the position is currently more evenly distributed between external and local debt.

3 3 Total Return The Emerging Markets Debt Total Return strategy was slightly down in March, as all of the underlying subsets of the asset class posted negative returns. The strategy maintained its defensive posture during the month, ending just 49% net long (63% long versus 14% short). Although net long positioning was similar to February, we decreased both longs and shorts proportionately, thus resulting in lower gross positioning of 77%. These are relatively low levels for the strategy, historically speaking, as we have been awaiting a value correction in the asset class from stretched levels at the beginning of the year. As this correction has now materialized in both external and local debt, we intend to increase the strategy s net long positions into the second quarter, with an emphasis on external sovereign and corporate debt, where we have seen a nice correction occur. Total Return The Emerging Markets Debt Total Return strategy posted a slight negative return for the first time in ten months. The negative return was due mainly to the poor performance of Brazilian and Russian corporate credits. Brazilian bonds, in general, have underperformed as sovereign risk has increased in the last few weeks, while the yields of Russian corporates widened due to worries about the banking crisis in Cyprus. Banco do Brasil was one of the worst performers, which was unsurprising given that a key supporting factor of this credit is the implicit government guarantee. The poor performance of the Russian and Brazilian credits was mitigated by solid performance of CEMEX in Mexico, Gajah Tunggal in Indonesia, and Bank of Georgia in Georgia. The latest US construction indicators, such as the February construction report, indicate potential for further improvement in CEMEX s balance sheet. In addition, management s recent repurchase of part of the 214 bond further reduces rollover risk and reflects the company s commitment to deleveraging. The company has relatively high leverage but a very favorable debt profile. Gajah Tunggal s outperformance was largely due to expectations of positive 212 financial results, to be released in April 213. Finally, Bank of Georgia posted strong 212 results and maintains very strong liquidity and capital levels. The strategy ended the month with a 7% net-long position, an increase from the 6% level in February, as we have begun to add risk in emerging markets corporate debt. Valuations now appear attractive after the recent sell-off in Russian and Brazilian credits. Our most important recent additions include the new bond issued by Minas Gerais, Brazil s third-largest state. The new issuance was very cheaply priced, largely because of the sell-off in the Brazilian bond market and the lack of outstanding debt from other Brazilian states to use as a reference. The state of Minas Gerais has a solid balance sheet, has run at an operating surplus for the last several years, and has moderate leverage levels, while the new bond has an explicit government guarantee. Emerging markets corporate debt issuance increased marginally in March 213 and totaled $36.3 billion compared to $2.1 billion in February, but remained well below January s levels of $5.7 billion. Higher corporate yields and a decline in appetite for new issuance contributed to the slowdown relative to January. Still, approximately two-thirds of the new issuance has been associated with non-investment-grade companies. Outlook Global risk assets delivered differentiated performance in March. US markets were supported by positive momentum in domestic economic data, while fresh policy uncertainty due to the bail-in of depositors in Cyprus weighed on European markets. Meanwhile, a somewhat less favorable mix of growth and inflation in a number of emerging markets caused assets in those locales to underperform their developed-market peers. Over the last four years, the global economy has gone through fits and starts in what (from 3, feet) seems to be a gradual recovery from the financial crisis of 28. Unfortunately for investors, this recovery has been punctuated by large increases in asset prices followed by sudden and deep corrections. One factor that has remained constant, however, is that almost all markets have moved in virtual lockstep with one another. The heavily used term risk-on, risk-off is a simple way of describing the same trend. This tight relationship between markets began to break down in a sustained manner in the first quarter of 213. Instead of all risk assets moving in unison, many equity and currency markets, in fact, diverged. Similarly, even in markets such as emerging markets debt, the number of countries that improved versus those that deteriorated was equal. Should this bifurcation of markets persist into the second quarter, we believe it will herald an important shift in portfolio management in the near term. No longer will large portions of positive and negative relative performance result from topdown global macro views; rather, strategies will derive most of their alpha from bottom-up country, currency, and security choices. In that context, as relates to emerging markets debt, we expect to increase the number and magnitude of active country weights in our long-only strategies and to do the same for long versus short positions in our total return strategies. Security selection will likely be conducted in a context of neutral overall beta to the market. As such, double-digit beta returns in emerging markets external and local debt are likely relics of previous years as the beta trend of falling global yield curves is unlikely to persist. Going forward, we expect the major subsets of the emerging markets debt asset class to return to more typical fixed income type returns of mid-to-high single digits. However, in the context of this return to the old world, we believe the opportunities for outperformance through sovereign analysis ought to be much greater. The underperformance of emerging markets equity and debt over the last quarter has been the result of an unfortunate intersection of stretched valuations and minimal improvement of sovereign and corporate balance sheets. Further, the expected robust rebound in growth from eighteen months of monetary easing ( ) across the emerging world has not materialized. Rather, there are notable countries, including Brazil, India, and Russia, for whom looser monetary policy has translated into a larger dose of inflation versus growth. In these countries, there is little labor slack and, as such, the normal passthrough mechanism of increased liquidity into faster rates of growth has been clogged. As a result, Street analysts have pared back the expected rebound in each of these large emerging markets economies. Meanwhile, inflation continues to trend toward the higher end of each country s internal target, which has further pressured valuations in these markets.

4 4 Given the recent valuation give-back in emerging markets, we now believe that markets are more fairly valued. That is a general observation for the beta of the asset class; but it does not do justice to the numerous, more severe undervaluations and overvaluations on a country-by-country basis. In forthcoming monthly Platform Reviews, we plan to profile examples of countries that are deteriorating and those that are improving, along with how we are positioning our strategies to potentially capture value dislocations. We continue to favor net long positions in credits as divergent as Ivory Coast sovereign debt, Brazilian quasi-sovereign debt, and Indonesian corporate debt. In local markets, we currently favor currencies in Latin America and, selectively, in Africa. With respect to local rates, we are close to neutral on rates in central Europe, shorter duration in Asia, and have a long bias in Brazil and Mexico. Meanwhile, we believe that countries such as Poland in external debt are priced to perfection and some currencies, such as the Thai baht, have run too far in the short term and are due for a pullback. Overall, we believe that global markets are transitioning into more of a country/currency pickers universe and away from a beta-trending environment. Specifically, within emerging markets, we are studying both improving and deteriorating credits in order to capitalize on divergent trends and inappropriate valuations. We continue to favor corporate debt over sovereign debt, but now believe that external and local debt are more fairly valued, as compared to the beginning of the year. We still find the yield pick-up in local markets attractive, but believe that some of our favored currencies have appreciated too rapidly in a short period and that better entry points should present themselves in the future. As such, we intend to start putting more capital to work in the second quarter across the asset class as opportunities unfold. Sincerely, Denise S. Simon Managing Director, Portfolio Manager/Analyst Arif T. Joshi, CFA Managing Director, Portfolio Manager/Analyst George V. Varino Managing Director, Client Portfolio Manager

5 5 Emerging Markets Debt Core Sector Allocation Characteristics Benchmark Yield to Maturity Duration (yrs) Average Coupon % Forwards/NDFs 1.% 7.5% External 76.6% Key Hard Currency Exposure and Quasi- O/W or U/W External Quasi- 13.5% Angola 4.1 Côte d Ivoire 3.1 Iraq 3. Venezuela 1.6 Senegal 1.1 Tanzania 1.1 Lebanon -1. Quality Distribution Philippines -1.1 Sri Lanka -1.3 Panama -1.7 Uruguay -1.9 South Africa -1.9 Colombia -2. Lithuania China -3.1 Poland -3.6 Investment Grade BB B 2. Not Rated Russia 2.4 Indonesia 1.1 Mexico.8 Dominican Republic.8 India.6 Kazakhstan.6 Peru.6 Guatemala.5 Performance Attribution J.P. Morgan EMBI Global Diversified Index 1 Month 1 Year Since Inception² Hard Currency Overweight/Underweight Security Selection Local Debt Rates F/X s Total As of March 31, All yields are calculated assuming yield-to-worst. 2 Inception date: December 1, 21 Benchmark is 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. receives credit quality ratings on the underlying securities of the portfolio from two major reporting agencies Standard & Poor s (S&P) and Moody s. The credit quality breakdown is provided by by using the S&P rating when both agencies assign the same rating to a security. In the event the ratings differ, will use the lower of the two ratings. converts all ratings to the equivalent S&P major rating category for purposes of the categories shown. rated BBB and above are considered investment grade. rated below BBB are generally referred to as speculative grade securities. 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:, J.P. Morgan

6 6 Emerging Markets Debt Local Debt Characteristics Benchmark Yield to Maturity Duration (yrs) Average Coupon Gross Currency Exposure and Quasi- O/W or U/W Mexico 1.2 Uruguay 1. Nigeria.8 Romania.8 Serbia.5 Ghana.3 Zambia.2 Dominican Republic.2 Sri Lanka.1 Turkey. Brazil -.1 Chile -.2 Poland -.3 Russia -.3 Philippines -.3 Peru -.7 Euro -.8 South Africa -1. Hungary -1.3 Colombia -2. Thailand -2.2 Malaysia -3.1 Indonesia -3.3 Key Duration Exposure O/W or U/W (yrs) Sri Lanka 3.9 Philippines 3.4 Ghana 2.7 Uruguay 2.4 Dominican Republic 2. Indonesia.9 Malaysia -1. Russia -1. Colombia -1.2 Peru -1.3 Turkey -1.5 Nigeria -1.5 Poland -1.7 South Africa -1.9 Brazil -2.6 Chile -6. Gross Regional Allocation Asia 16.7 Eastern Europe Gross Sector Allocation Quasi-Sov 4.7 Performance Attribution Inflation Linked 18.2 Latin America Interest Forwards/ Rate Swaps NDFs 1 Month 1 Year 18.5 Middle East & Africa Since Inception² Rates F/X Total Gross Quality Distribution AAA/A BBB 32.6 BB B and Below 5.3 J.P. Morgan GBI-EM Global Diversified Index 2.4. Not Rated As of March 31, All yields are calculated assuming yield-to-worst. 2 Inception date: December 1, 21 Benchmark is 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. receives credit quality ratings on the underlying securities of the portfolio from two major reporting agencies Standard & Poor s (S&P) and Moody s. The credit quality breakdown is provided by by using the S&P rating when both agencies assign the same rating to a security. In the event the ratings differ, will use the lower of the two ratings. converts all ratings to the equivalent S&P major rating category for purposes of the categories shown. rated BBB and above are considered investment grade. rated below BBB are generally referred to as speculative grade securities. 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:, J.P. Morgan

7 7 Emerging Markets Debt Blend Characteristics Benchmark Yield to Maturity Duration (yrs) Average Coupon Hard Currency 5.1 Local Currency Total Country Distribution O/W or U/W Angola 3.9 Côte d Ivoire 3. Brazil 2.5 Iraq 2. Nigeria 1.7 Mexico 1.7 Venezuela 1.5 Romania 1.3 Senegal 1. Lithuania -1.2 Panama -1.3 China -1.4 Peru -1.5 Thailand -1.7 Indonesia -1.7 Poland -1.9 South Africa -2.8 Colombia -3.4 Sector Allocation External External Quasi Performance Attribution Overall Allocation Hard vs. Local External Local Nominal Quality Distribution Investment Grade Local Quasi- Local Month Local Inflation Linked Year Since Inception² Hard Currency Overweight/Underweight Security Selection Hard Currency Local Debt Rates F/X Total Forwards/NDFs BB B Not Rated 5% JPM EMBI Global Diversified/ 5% JPM GBI-EM Global Diversified Index As of March 31, All yields are calculated assuming yield-to-worst. 2 Inception date: October 1, 211 Benchmark is a blended index consisting of 5% J.P. Morgan EMBI Global Diversified/5% 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. receives credit quality ratings on the underlying securities of the portfolio from two major reporting agencies Standard & Poor s (S&P) and Moody s. The credit quality breakdown is provided by by using the S&P rating when both agencies assign the same rating to a security. In the event the ratings differ, will use the lower of the two ratings. converts all ratings to the equivalent S&P major rating category for purposes of the categories shown. rated BBB and above are considered investment grade. rated below BBB are generally referred to as speculative grade securities. 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:, J.P. Morgan

8 8 Emerging Markets Debt Total Return Characteristics Yield to Maturity Duration (yrs) 2.83 Average Coupon 6.22 Longs Shorts 3.6 Net Exposure Gross Exposure Key Hard Currency Exposure and Quasi- Net % of Market Value Net % of Market Value Total Net % of Market Value Brazil Côte d Ivoire Russia Angola Venezuela Mexico Iraq Guatemala Indonesia Congo Tanzania Egypt.9.9 Currency Exposure United States 76.3 Mexico 4.1 Romania 3.3 Russia 2.5 Turkey 1.9 Nigeria 1.8 Indonesia 1.2 Malaysia 1. Uruguay 1. Serbia.8 Colombia.8 Brazil.7 Ghana.4 Zambia.3 Dominican Republic.3 Sri Lanka.1 South Africa. Czech Republic -1. Euro -2.4 Local Debt Exposure Net % of Market Value Russia 3.1 Turkey 1.9 Romania 1.7 Nigeria 1.5 Indonesia 1.2 Malaysia 1. Uruguay 1. Mexico.8 Colombia.8 Brazil.7 Ghana.4 Serbia.3 Dominican Republic.3 Sri Lanka.2 As of March 31, 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.

9 9 Emerging Markets Debt Total Return Performance Contribution 1 Month 1 Year Since Inception 1 Hard Currency Long Short Quasi Long s Short s Local Debt Long Rates Short Rates Long F/X Short F/X 6 Relative Value Total Gross Regional Allocation Latin America Eastern Europe Gross Sector Allocation Middle East & Africa 4.9 Asia Hard Currency Hard Currency Quasi- Hard Currency Local Nominal Local Inflation Linked Local Quasi- Local Interest Rate Swaps FX/NDFs/Options As of March 31, Inception date: December 1, 21 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. Contribution is based upon a representative portfolio. Contribution 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.

10 1 Emerging Markets Debt Total Return Characteristics Yield to Maturity Duration (yrs) 5.43 Average Coupon 8.14 Total Country Distribution Russia 16.2 Brazil 15.5 Mexico 9.7 India 6.2 Indonesia 5.3 Kazakhstan 3.7 Venezuela 3.5 Colombia 3.4 Peru 3.1 Dominican Republic 2.7 Georgia 2.7 Guatemala 2.7 China 1.1 Chile Industry Exposure Financial 19.2 Oil & Gas 12.4 Metals & Mining 11.7 TMT 7.2 Industrial 7.2 Diversified 5.1 Consumer 3.7 Pulp & Paper 2.2 Quasi-s Gross Sector Allocation As of March 31, 213 Total All yields are calculated assuming yield-to-worst. 2 Inception date: November 1, 211 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. Contribution is based upon a representative portfolio. Contribution 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. receives credit quality ratings on the underlying securities of the portfolio from two major reporting agencies Standard & Poor s (S&P) and Moody s. The credit quality breakdown is provided by by using the S&P rating when both agencies assign the same rating to a security. In the event the ratings differ, will use the lower of the two ratings. converts all ratings to the equivalent S&P major rating category for purposes of the categories shown. rated BBB and above are considered investment grade. rated below BBB are generally referred to as speculative grade securities. 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 Hard Currency 7.8 Quasi- Gross Quality Distribution Investment Grade 33.3 BB Gross Regional Allocation Asia 22.6 Eastern Europe 41.4 Latin America Performance Contribution 2.3 Local Currency 1 Month. Middle East & Africa 1 Year 2.4 B Since Inception² Investment Grade Below Investment Grade Quasi Investment Grade Below Investment Grade

11 Emerging Markets Debt Important Information Published on April 15, 213. 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 Asset Management s composites and/or a presentation that adheres to the GIPS standards, please contact Henry F. Detering, CFA at Asset Management, 3 Rockefeller Plaza, New York, New York or by at Henry.Detering@.com. Provided below are descriptions of each of the composites, the performance of which appears on the preceding pages. The Emerging Markets Debt Core strategy seeks to outperform the benchmark, the J.P. Morgan Emerging Market Bond Index Global Diversified (EMBI Global Diversified), by +2% 4% p.a. over a market cycle, with a tracking error of 2% 4%. The majority of the portfolio (typically 75% 1%) will be held in hard currency emerging-market debt. Typically, % 25% may be held in local currency emerging market debt. Despite being benchmark-aware, the strategy is free to invest out of the benchmark (maximum non-benchmark exposure is 4%) 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 +2% 4% p.a. over a market cycle, with a tracking error of 2% 6%. The majority of the portfolio (typically 8% 1%) will be held in local currency debt. Typically % 2% 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 5%) 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 Blend strategy seeks to outperform the 5/5 benchmark of the J.P. Morgan Emerging Market Bond Index Global Diversified (EMBI Global Diversified) and J.P. Morgan Government Bond Index-Emerging Markets (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 4%) 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-market countries. The strategy may hold up to 25% 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-market 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 the team sees value. This is in contrast to the team s benchmark-aware approaches, in which countries are overweighted or underweighted. 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 2% maximum gross exposure) and shorting. It has typically been run with a 6% 9% net exposure and 1% 14% gross exposure. The team may invest in all emerging-market debt asset classes, but also has the ability to allocate tactically to cash, if the team has no conviction in the market. 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 2% maximum gross exposure) and shorting. It has typically been run with a 6% 9% net exposure and 1% 14% gross exposure. The team may invest throughout the EMD corporate asset class, but also has the ability to allocate tactically to cash if the team has no conviction on the market. The strategies invest primarily in emerging-market debt positions. The strategies will generally invest in debt investments denominated in either US dollars or emerging-market 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-market 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-market 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 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. The information and opinions presented do not constitute investment advice and have been obtained or derived from sources believed by to be reliable. makes no representation as to their accuracy or completeness. All opinions and estimates expressed herein are subject to change. Past performance is not a reliable indicator of future results. Asset Management LLC 3 Rockefeller Plaza New York, NY