European Investment Grade Fixed Income Thoughts and Positioning for Q1 2016

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1 FOCUS European Investment Grade Fixed Income Thoughts and Positioning for Q January 2016 As we enter 2016, we would like to take this opportunity to review Q performance, our outlook from here and how we are currently positioned. A Review of Q Our monthly commentaries covered most all of the major events that occurred during the quarter, so we recommend that readers looking for a more detailed analysis of what happened in each month refer to those commentaries. Here is a brief review of the main highlights of the quarter on a month-by-month basis: October Good performance from risk assets, following a volatile August and September. The ECB hinted at further stimulus measures, but the Fed steered expectations towards a December rate hike. The People's Bank of China (PBoC) cut rates. Euro bond yields fell, the U.S. Dollar rallied, Emerging Markets (EM) began to show signs of distress, and politics got messy in Europe, especially in Portugal. Oil price resumed its fall, and Euro-area economic data was good (notably the PMI s). David Greene Client Portfolio Manager November Strong U.S. Non-Farm Payrolls (+271k) and Average Hourly Earnings (+2.5%). International Energy Agency said that the oil market would remain oversupplied until the end of the decade. There were suggestions in the financial press that the ECB will act aggressively at their December meeting. Oil price continues to slide. Euro-area Composite PMI continues to remain around recent highs. U.S. Q3 GDP revised substantially higher. Chinese Renminbi was included in the International Monetary Fund s Special Drawing Rights (SDR) basket effective October December Oil price falls below U.S. $40 early in the month. Euro-area November inflation data disappoints. U.S. November Non-Farm Payrolls +211k. The Organisation of the Petroleum Exporting Countries (OPEC) fails to reach an agreement on quota cuts. Market is disappointed by new ECB stimulus measures, which include a cut in the depo rate and programme extension by six months. Chinese Renminbi continues its slow but steady depreciation. Credit boutique fund Third Avenue blocks redemptions from its high yield fund, sparking liquidity concerns within the High Yield space.

2 Q4 at a Glance Q Best Alpha Sleeve Worst Alpha Sleeve Best Trade Worst Trade 1 Currency Relative Value Short 5yr U.S. Treasuries Short 10yr Bunds (Interest Rates U.S.) (ITREND) 2 Credit Selection Europe ITREND Long Euro credit spreads (Credit Spread Duration Macro) Short 10yr Italian BTPS vs Germany (Sovereign Spreads) 3 Inflation Sovereign Spreads Long U.S. Dollar / Short Chinese Renminbi (Event Driven China) Short 30yr Spain vs 10yr Italy (Relative Value) Q Alpha Sleeve Performance All performance numbers are gross and are for Pioneer Funds Euro Aggregate Bond. Interest Rates Europe - We continued to hold a short duration position in German 10-year Bunds via futures. This trade detracted from performance in Q4 to the tune of -1bps but is relatively small in duration size. Overall, this alpha sleeve lost 1bp during the fourth quarter. Interest Rates U.S. - We remain short both 5-year U.S. Treasuries (via futures) and 5-year swap rates at quarter-end. This position gradually began to make money as the Fed hiked rates in mid-december, but the short 5-year swap rate position contributed less to the overall performance, as swap rates in the U.S. out-performed sovereign yields. Overall, in Q the alpha sleeve added 7bps to overall performance, with the short Treasury position making 6bps and the short swap position-adding 1bp. Credit Selection Euro - Having underperformed during Q3 as credit spreads in general widened, investment-grade credit spreads recovered somewhat in Q4, and this alpha sleeve added to overall performance during the quarter. This is the alpha sleeve where the Credit Analysts can implement their own stock-picking and sectoral views. Generally, we have been overweight Real Estate Investment Trusts (REIT s), Subordinated Financials and Corporate Hybrids in Q4. In total, this alpha sleeve added 8bps to performance for the quarter. ITREND - Our CTA momentum-following model had been running a long duration position in 10-year German Bunds (via futures) during October and November. However, the model signalled a change in duration stance just after the ECB meeting in early December, moving to a short duration stance. The timing of this move was rather unfortunate, as the alpha sleeve missed the upward move in yields straight after the meeting, and was short duration when yields fell again. It was this period that caused the bulk of the under-performance during the quarter, and indeed the alpha sleeve began to claw back some of the lost performance late in

3 December as yields began to move higher again. For the quarter, this sleeve detracted 13bps from overall performance. Relative Value - It was another difficult quarter for Relative Value, following a poor Q3 performance and a very good first half of the year. Three positions were responsible for the majority of underperformance - a 10 s/30 s peripheral flattener position, expecting the long-end of Spain to outperform. Unfortunately political concerns ahead of the Catalan regional election caused Spain (and the long-end particularly) to under-perform during Q4, dropping 7bps. A U.S. curve-steepening position (long 2yr2yr vs short 4yr4yr) suffered as very short-dated yields moved higher in anticipation of Fed Funds rate increases, whilst longer-dated yields were relatively stable this position dropped another 7bps. Finally, a trade that was short Euro 5-year swaps in 3 years time vs long U.S. 5-year swaps in 3 years time underperformed as well. The rationale for this trade was to expect a tightening of the Bund/Treasury spread which was at extreme wides, but the spread continued to widen. This trade lost 7bps over the quarter. Overall, the Relative Value alpha sleeve dropped 26bps in Q4. Quasi-Sovereign - We cut our long-held overweight position in Covered bonds by 50% during Q3, reflecting the strong performance from this alpha sleeve during 2014 and the first half of This proved to be a prudent move, as the sector underperformed their sovereign counterparts in Q4 due to a supply glut and a switch in the ECB s approach to their Asset-Backed and Covered Bond purchase programme. Basically, all the first nine-month s performance in the sector was wiped out in Q4. Overall, the alpha sleeve had flat performance in Q Currency - Another strong quarter from the Currency alpha sleeve, although performance peaked in mid-november and the Portfolio Managers were gradually reducing risk in the run-in to year-end. This was based on an expectation of increased volatility in December (with a number of important central bank meetings) and significantly decreased liquidity. Generally, the theme in this alpha sleeve for the quarter was to be long the U.S. Dollar, mainly against the Japanese Yen and Euro but also opportunistically against certain EM currencies such as the South African Rand, South Korean Won and Chinese Renminbi. Overall, this alpha sleeve added 9bps to overall Q performance. Inflation - The gyrations in the oil price during the quarter had a significant impact on the outlook for inflation-protected securities, with the ECB s announcement of further monetary policy stimulus having less of an impact than anticipated. We have a long-held view that inflation expectations were too pessimistic and that inflation break-even rates offered good value and should rise. Our long 10-year European inflation breakeven position added 3bps to performance during the quarter, but the main contributor to performance during the quarter was our long Euro 5-year real yields vs short U.S. 5-year real yields position. This trade made 4bps during the quarter. Overall, the Inflation alpha sleeve generated 7bps of performance during Q Interest Rates $ Bloc - Our view oscillated during the quarter, as we traded 3-year Australian bond futures from both the long and short side, eventually closing out a long position in early December for an overall 2bps loss. We also were short 5-year 5-year Australian yields vs long New Zealand 5-year 5-year yields in anticipation of the spread narrowing but this trade cost us another 2bps. These losses were slightly offset by gains made on being long 3-year Australian swaps vs short 10-year

4 Australian swaps, which generated 1bps in profit as the curve steepened. Overall, the alpha sleeve lost 3bps of performance in Q Event Driven Volatility - As the divergence in monetary policy and economic conditions increases, we continue to expect volatility to increase, particularly in the rates markets. We are positioned for higher volatility in both Euro and U.S. rates markets, and both positions had minor losses over the quarter. Overall, this alpha sleeve lost 3bps of performance during Q Credit Spread Duration Macro - Good solid performance from this alpha sleeve in Q4, mainly driven by our decision to sell protection on the Euro itraxx Main index in anticipation of tighter credit spreads in late August We reduced the position by 50% right at the start of Q4 based on a couple of stock-specific events (Volkswagen and Glencore) pushing the index wider. However, spreads generally recovered during the quarter, meaning this position added 6bps to performance. Overall, this alpha sleeve added 6bps to overall performance in Q Interest Rates UK - A difficult quarter for this alpha sleeve. Based on the reasonably strong performance of the UK economy and the low unemployment rate, we believe UK yields should be higher than current levels. Our belief is that the Monetary Policy Committee (MPC) could hike interest rates soon after the Fed increase U.S. rates. They do not want to hike in advance of the Fed for fear of causing a tightening of Sterling, but we expect the MPC may move a couple of months after the Fed s first move. We entered a couple of trades that were positioned for higher yields at the front end of the curve and one trade that is positioned for higher yields at the long end of the curve. The former position generated 2bps whilst the latter trade was flat during the quarter. But we also implemented short UK vs long U.S. positions in short-dated and 10yr maturities and these trades both underperformed by about 2bps each, as UK yields remained relatively stable but U.S. yields moved modestly higher. Overall, the Interest Rates UK alpha sleeve dropped 2bps in performance in Q Event-Driven China - We remain concerned that the slowdown in Chinese economic activity may have unintended consequences, both locally in China and for the global economy. We decided to hedge against this tail-risk by implementing a longdated short position in the Chinese Renminbi against the U.S. Dollar using options. This position continues to benefit from the Chinese authorities decision to allow the Renminbi to gradually depreciate, which makes our long-dated put options very valuable. Overall, this alpha sleeve added 6bps to overall performance in Q Interest Rates Scandi - We had long positions in both the Norwegian and Swedish short-dated maturities against similar maturity U.S. bonds during the quarter. We believed that the falling oil price would cause problems for the Norwegian economy, and that Sweden would have to cut rates further and/or increase the size of their Quantitative Easing (QE) programme to achieve their inflation target. This alpha sleeve marginally added to performance, generating 1bp during the quarter. Sovereign Spreads - We maintained our two positions in this alpha sleeve - a short 10yr Italy / long 10yr Germany position (implemented via futures), and a short 10yr Spain position (implemented via cash bonds). The on-going tightening in peripheral spreads over the quarter meant this alpha sleeve detracted from performance, with the short Italian position being the biggest under-performer, losing 6bps. Overall, the Sovereign Spreads alpha sleeve dropped 10bps in Q

5 Interest Rates Asia Minor underperformance from this alpha sleeve during Q4, as a trade that was positioned for South Korean 10yr yields to out-perform vs Japanese 10yr yields slightly underperformed, costing 2bps. Our other trades (an Indian 2 s/5 s steepener and long 1-year Indian swaps), were marginally positive in performance terms during the quarter. Overall, this alpha sleeve was negative to the tune of 1bp for Q Interest Rates Japan We had two positions in this alpha sleeve during the quarter receiving Japanese Yen 20yr10yr and a long Euro 2yr2yr vs short Japanese Yen 2yr2yr position. The former position generated 3bps of performance as the Bank of Japan announced it would extend its bond-buying programme to an average duration of 7-12 years from the current 7-10 years. The long Euro position vs short Japan position benefitted from further ECB measures and generated another 3bps of performance. The Japanese Yen 20yr10yr trade was closed in December, whilst the long Euro 2yr2yr vs Japanese Yen 2yr2yr was closed in November. Overall, the alpha sleeve contributed 6bps to overall performance in Q Quant Fixed Income - Our quant strategies continue to run both weekly and monthly outright positions and curve positions. These positions change quite regularly but one models detracted from performance in Q4 our 10yr UK monthly model (- 2bps). Other model made minor contributions to performance and overall the alpha sleeve lost 1bp in performance in Q Volatility - Our long Euro 9mth 30yr at-the-money forward (ATMF) straddles vs Euro 9mth 10-year ATMF straddles worked well and we booked a 5bps profit on this position. However, our Euro 1yr 10yr ATMF 0/50/100 Payer Fly position (buying the wings, selling the belly) expired worthless and detracted 4bps from performance. Finally, a long volatility position in the front end of the U.S. curve cost 1bps. Overall, the alpha sleeve was flat in performance terms for Q Core Strategy - The core strategy detracted 4bps from performance during the quarter, within our tolerance range. Outlook for Q Our view remains much as it has been for most of at current levels of yields bond markets offer no value, and in our opinion are at risk of a significant correction. Valuations have been pushed to extreme levels by a combination of central bank QE programmes, very accommodative monetary policy stances and significant overweight positioning. If our economic view is correct, and we continue to see a recovery or normalisation in economic activity, and inflation rates rebound from their current low levels, we would expect to see a rise in sovereign bond yields that could, depending on the extent of the rise, lead to overall returns from sovereign bonds turning negative. In some markets, such as the U.S. and the UK, we feel that bond yields are out of line with economic fundamentals, whilst in other markets, such as German Bunds and peripheral European markets, significant overweight positioning has pushed bond yields to unattractive levels. The European economy continues its recovery, and now appears to be on solid ground. Our forecasts for 2016 suggest growth should be around 2.0%, moderating slightly to 1.8% in The important point to note is that, according to ECB staff forecasts, the Eurozone economy could be growing above trend in 2016 and 2017,

6 something that hasn't happened since the financial crisis in The outlook for headline inflation is highly dependent on what happens to the oil price, but assuming it remains around current levels of U.S. $35bbl, headline inflation could creep higher into Base effects will mechanically push headline inflation higher in the first quarter of 2016, and we could expect to see headline HiCP rising from its current level of 0.2% to 0.8%-1.0%, before falling back towards 0.5% by mid This will still be well below the ECB s target of close to, but below 2%. Neither do we have much confidence in the ECB staff forecasts that inflation will accelerate to 1.6% by end-2017, meaning that ongoing debate about a further extension of the ECB s QE programme could be a feature of the coming year. Our view is that the ECB have done as much as the ECB Council will allow for the moment, and any further QE measures / extension will only come on the back of further downgrades to the ECB s inflation forecasts. In the U.S. the first rate hike in nine years was marked by a lack of significant market reaction. The median Fed dots plan showed that the Fed expect to hike rates by a cumulative 100bps in 2016, whereas the market is only priced for 50bps. Despite Fed Chairperson Yellen reinforcing the message that rates hikes will be gradual, we believe that economic conditions could be strong enough to validate the Fed s 100bps forecast. We remain puzzled by the lack of wage growth, given that the economy continues to grow at a reasonable pace and the unemployment rate has fallen to 5.0%. Any sign of wage growth pressures emerging may force the market to move towards pricing in more rate hikes than the market expects, with consequent upward pressure on bond yields. Apart from the path of U.S. interest rates, the outlook for China remains possibly the single biggest cause for concern for markets as we look out into Following its admittance into the SDR basket, the Chinese authorities have allowed the Renminbi to weaken, falling another 2.50% since the end of October. Although this depreciation has not had the same effect on markets that the initial September 2015 depreciation had, it still puts other countries in the region such as South Korea and Taiwan at a distinct disadvantage in terms of trade. It is therefore not surprising that we hear stories about currency wars and competitive devaluations. Nevertheless, for us, the main concern about China remains the extent of credit that has been extended to the Chinese economy and the ability of borrowers to repay those loans, especially as the authorities manage the transition from an investmentled economy to a consumption-driven economy. Whilst our base case remains that the Chinese authorities manage to engineer a soft landing, the possibility of a significant slow-down, significant corporate defaults and/or a further depreciation in the Renminbi will exercise investors minds for the foreseeable future. In the UK growth has been moderated from the above-trend levels that we have seen over the last two years, but still remains strong. As with the U.S., the falling unemployment rate (5.2% at October 2015) has failed to generate any inflation. The headline UK inflation rate is being depressed by the fall in the oil price, and the Bank of England reckon that 80% of the current inflation undershoot is caused by external factors. Consequently, the market has pushed the first UK rate hike out into late 2016 / early our We believe the Bank of England would like to move earlier than that, but wants to move after the Fed, to avoid a strengthening currency. In credit markets, our Analysts continue to be positive on their sectors, and we maintain our view that stock-picking and sector selection will be the key to generating excess performance in That was proven by the effect that

7 developments in Glencore and Volkswagen had on the overall performance of credit markets in Q Our preferred sectors remain European Real Estate Investment Trusts (REIT s), subordinated financials and corporate hybrids. At an overall credit index level, we believe indices are trading too cheaply to fundamentals, and spreads should remain around current levels, or even tighten further from here. In currency terms, we remain mildly bullish on the U.S. Dollar, mainly against the Euro and Japanese Yen but also against certain EM currencies, such as the Chinese Renminbi and South Korean Won. However, in the run-in to the year-end many positions have been taken off and FX market liquidity is very thin, so we will wait until early 2016 to see how new trends develop before implementing any new positions. Positioning for Q Interest Rates Euro Short 10yr German Bunds (market appears to be very long German Bund exposure). Sovereign Spreads Short 10yr Italian BTP futures vs 10yr German Bund futures and short Spanish cash bonds (one of the biggest consensus trades at present and one with which we disagree. We think that economic fundamentals in both Italy and Spain do not justify such tight spreads. Bigger short in Italy than Spain.) Interest Rates U.S. Short 5yr U.S. Treasuries and 5yr swaps (we think U.S. yields should move higher as the Fed increases rates by more than the market expects, plus 5yr U.S. swaps rates are now lower than 5yr U.S. Treasuries, which we don t think is sustainable). Credit Selection Euro We are positive on most European credit sectors, and believe that stock picking and sector selection could be key in Our current preferred sectors are German REIT s, subordinated financials, regulated Utilities, TMT, Toll Roads, non-spirit Beverages and Corporate Hybrids. Credit Spread Duration Macro Sold protection on European itraxx Main, effectively expecting credit spreads to tighten. We recently halved our exposure to this position. ITREND Our momentum-following model is signalling a short duration exposure to German 10yr Bunds, and in maximum size. This is currently one of our biggest conviction positions in terms of duration exposure. Quasi Sovereign Euro Still slightly overweight this sector vs sovereign bonds, but we reduced our overweight Covered Bond position by 50% during the summer of 2015 after strong performance. We will look to substitute existing positions with new issuance in Q and take advantage of new issue premiums. We are keeping a small overweight in peripheral covered bonds. Quant Fixed Income No duration positions at the moment, positioned short Italy vs Bunds in relative value, and expecting U.S. 2 s/5 s steepeners, U.S. 5 s/10 s steepeners and Australian Dollar 3 s/10 s flatteners, but all in relatively small size.

8 Currency We are long the U.S. Dollar vs Chinese Renminbi and South Korean Won, plus a number of other small option positions. However, we kept risk light due to year-end and lack of liquidity. We will wait until January 2016 to implement any new themes. Interest Rates Scandi Long short-dated Norway and Sweden against U.S. (Norway s economy is being affected by the lower oil price whilst Sweden is facing deflation and adopting aggressive QE policies). Interest Rates UK Short the UK front end, both outright and vs U.S. Treasuries. Short 10yr UK gilt futures vs long 10yr U.S. Treasury futures. Also short long-dated UK swaps. Expecting UK rate hikes sooner than the market is anticipating. Expecting UK yields to rise faster than U.S. yields, and finally strong LDI demand from UK pension funds has pushed UK long-dated yields to very low levels, and we think as rate rises in the UK approach, long-dated yields should rise. Interest Rates Asia Long 10yr Korea vs 10yr Japan, expecting Korean rates to fall towards Japanese rates as the Korean economy displays many of the similarities that Japan showed 20 years ago. Long Indian 1yr as we believe there is scope for further rate cuts over the next six months. Interest Rates Japan currently no open positions. Interest Rates $ Bloc Short Australian Dollar 5yr5yr vs New Zealand Dollar 5yr5yr, as the spread is near the top of its recent range and we anticipate some tightening. Long Canadian Dollar 2yr and positioned for a flattening Canadian Dollar yield curve (Canadian economy being badly affected by the falling oil price). Long 10yr Australian Dollar swaps vs Short 10yr U.S. Dollar swaps (Australian Dollar rates could be cut whilst U.S. rates may increase, and Australian Dollar /U.S. Dollar swap spread differential is correlated with that of the Australian Dollar /U.S. Dollar base rate differential). Australian Dollar 3yr/10yr swap spread box trade where we expect Australian Dollar 10yr swap spreads to underperform 3yr swap spreads and the gap between the two to widen. Inflation Long Euro inflation and long Euro 5yr real yields vs U.S. 5yr real yields (we think the market has become too pessimistic on the outlook for European inflation). Event Driven China Still long the U.S. Dollar vs Chinese Renminbi, and expect the Renminbi would be allowed to depreciate further. 1yr forward rates suggest the Renminbi could fall another 5% over the coming 12 months. This position is being implemented via long-dated options. Event Driven Volatility Still expecting higher volatility in markets so we are long volatility in both U.S. and Euro rates markets. Volatility Long U.S. Dollar 1yr2yr volatility. With the Fed potentially increasing rates by more than the market expects, short-dated U.S. volatility should be higher than it currently is. Relative Value Positioned for peripheral 10 s/30 s flattening, paying Euro 3yr5yr vs U.S. Dollar 3yr5yr and receiving U.S. 2yr2yr vs U.S. 4yr4yr (expecting a steeper U.S. curve).

9 Important Information Unless otherwise stated all information contained in this document is from Pioneer Investments and is as at 31 December Pioneer Funds Euro Aggregate Bond, Pioneer Funds Global Aggregate Bond, Pioneer Funds Euro Bond and Pioneer Funds Absolute Return Bond are sub-funds (the Sub-Fund ) of Pioneer Funds (the Fund ), a fonds commun de placement with several separate sub-funds established under the laws of the Grand Duchy of Luxembourg. Past performance does not guarantee and is not indicative of future results. Unless otherwise stated, all views expressed are those of Pioneer Investments. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. More recent returns may be different than those shown. Please contact your local Pioneer Investments representative for more current performance results. This material is not a prospectus and does not constitute an offer to buy or a solicitation to sell any units of any Pioneer Investments fund or any services, by or to anyone in any jurisdiction in which such offer or solicitation would be unlawful or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. For additional information on the Fund, a free prospectus should be requested from Pioneer Global Investments Limited ( PGIL ), 1 George s Quay Plaza, George s Quay, Dublin 2, Ireland. Call Fax or your local Pioneer Investments sales office. This information is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities or services in the United States or in any of its territories or possessions subject to its jurisdiction to or for the benefit of any Restricted U.S. Investor (as defined in the prospectus of the Fund). The Fund has not been registered in the United States under the Investment Company Act of 1940 and units of the Fund are not registered in the United States under the Securities Act of This document is not intended for and no reliance can be placed on this document by retail clients, to whom the document should not be provided. This content of this document is approved by Pioneer Global Investments Limited. In the UK, it is directed at professional clients and not at retail clients and it is approved for distribution by Pioneer Global Investments Limited (London Branch), Portland House, 8th Floor, Bressenden Place, London SW1E 5BH. Pioneer Global Investments Limited is authorised and regulated by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority ( FCA ) are available from us on request. The Fund is an unregulated collective investment scheme under the UK Financial Services and Markets Act 2000 and therefore do not carry the protection provided by the UK regulatory system. Pioneer Funds Distributor, Inc., 60 State Street, Boston, MA ( PFD ), a U.S.-registered broker-dealer, provides marketing services in connection with the distribution of Pioneer Investments products. PFD markets these products to financial intermediaries, both within and outside of the U.S. (in jurisdictions where permitted to do so) for sale to clients who are not United States persons. For Broker/Dealer Use Only and Not to be Distributed to the Public. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. Date of First Use: 14 January 2016