Schroders Emerging Markets Multi-Sector Bond Fund

Transcription

1 Third Quarter 2013 Schroders Emerging Markets Multi-Sector Bond Fund As of September 30, 2013 Quarterly Investment Report Schroder Fund Advisors LLC, Member FINRA, SIPC 875 Third Avenue, New York, NY (800)

2 Overview Fund Objective The Fund seeks to provide a return of capital growth and income. Fund Valuation Total net assets (all share classes) Fund Value at June 30, 2013 $25,572,475 Fund Value at September 30, 2013 $25,865,543 Source: SEI Performance Periods to September 30, 2013 Total returns (%) 3 months 1 year 3 year 5 years Since Inception* Fund (Investor) 0.57 n/a n/a n/a 1.27 Fund (Advisor) 0.51 n/a n/a n/a 1.21 Blended EMD Benchmark 0.61 n/a n/a n/a 2.28 Relative Performance (Investor) n/a n/a n/a Relative Performance (Advisor) n/a n/a n/a * Inception Date: June 25, 2013 Performance versus benchmark (%) month Since Inception Fund (Investor) Fund (Advisor) Blended EMD Benchmark Performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Principal value and investment returns will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For the most recent month-end performance, visit or call (800) Performance for periods less than one year is not annualized and performance of periods greater than one year is annualized. Total return figures are net of fees and expenses and reflect reinvestment of all dividends and distributions at net asset value. As described in the prospectus, during certain periods shown the expenses borne by the fund were limited by the investment adviser; otherwise total return would have been lower.. Page 1

3 Performance Review Fund Performance & Strategy For quarter-end September 30, 2013, the Fund s first official calendar quarter, the Fund s Investor shares returned 0.57% (and our Advisor shares returned 0.51%) versus our blended benchmark return of 0.61%. Our blended benchmark consists of 1/3 JP Morgan EMBI Global Diversified, 1/3 JP Morgan GBI-EM Global Diversified, and 1/3 JP Morgan CEMBI Broad Diversified. The widely-used JP Morgan EMBI Global Index returned 0.83% over that same time period. The Fund commenced operations after much, but not all, of the asset class s 2013 performance decline had been recorded. Emerging market debt performance during the months of August and September more or less cancelled each other out, leaving the quarter s return to mostly reflect a decent month of July. The month of July provided some welcome stabilization to emerging market debt after a sharp spring drawdown, with the well-followed EMBI Global Index returning +0.95%, only its second month of positive performance in the first seven months of this year. The steadying occurred as the Fed took pains to repeatedly emphasize that rates would stay low for long even if bond purchases were to be tapered. Economic data continued to be mixed but generally on the weaker side in the US. Emerging markets growth continued to soften. Importantly, there were signs that slowing growth in China would be arrested by the government as policies eased a bit. Even the GBI-EM Index, which measures local currency sovereign issues, saw an easing of its slide, returning -0.55% for the month of July, after dropping nearly 1,050 basis points in the previous two months. We remained cautiously positioned in local currency debt. Local rates have been correlated with currencies, meaning that as currencies sell off local rates rise. This enhances the risk profile for investing in local currency debt. In corporates we held virtually no positions beyond a four-year duration. Fixed income markets wobbled again during the month of August as political concerns added to worries about the ongoing impact of the eventual decision to taper bond purchases by the Fed. Emerging markets were a special market focus as countries with current account deficits like India took the spotlight in the popular financial press. Outflows from the asset class picked up, and sentiment soured throughout the month as currencies were especially hit hard. The local currency GBI-EM Global Diversified benchmark index fell 4.09% in August. It remained the worst-performing part of the asset class by a wide margin. The local currency markets continued to be hurt by the strong correlation between local rates and currencies. In rates, we remained relatively conservatively positioned. Towards the latter part of the month we tactically removed some hedges, with initial signs of stabilization beginning to occur. Latin American yields were very attractive, but Asia was hurt by fears over both India and Indonesia where currencies spent most of the month in virtual free-fall. The EMBIG index for sovereign bonds rose 2.67%% in September. In corporates, the CEMBI rose 1.48% after generally out-performing during the prior down months. Local currency investing returns in the GBI-EM rose 4.4%, after vastly under-performing the rest of the EMD complex. With the next focus of the market being the US debt ceiling and potential shutdown, we trimmed exposure to EM currencies. The drop in volatility in US treasuries now that the Fed is out of the way has given us a window to add duration using lower priced dollar bonds. Our structural underweight in duration hurt performance in the latter weeks of September. We continued to have significant exposure to a diversified basket of lower duration bonds with substantial yields to anchor the portfolio. Page 2

4 Market Review, Outlook and Policy We will continue to be lightly positioned in current account deficit countries. We will also stay under-weight the Euro area as we doubt that the Euro can pierce the range it has been in for the entire year. We have trimmed some currency exposure going into October given fears about a US government shutdown. The market has come to believe that the Fed will not taper in October, but with currencies already having rallied, we see little downside to a temporarily more defensive stance even with a Fed on the sidelines. We continue to believe that local rates are attractive, but in general we are in the 5-10 year range in our exposure across countries to take advantage of potential rallies without being significantly exposed to US treasury correlation should markets sell off. The highlights of our positioning remain the same and bear repeating: A well-diversified basket of corporate and sovereign bonds with durations less than 4 years totaling about 35% of the portfolio; A continued minimization of embedded US treasury rate risk; and A high, sustainable 7%+ yield balanced across all parts of the opportunity set sovereign, corporate, and local currency. As we wrote in our inaugural Quarterly Investment Report, we disaggregate the emerging market debt universe into distinct buckets that we call Strategic Market Allocations. Our approach to portfolio management is very much top down, as we are not beholden to one particular segment, either from preference and expertise or desire to adhere closely to a benchmark. Rather, we have the freedom to allocate to what we deem are the best values in this asset class at any time. The paragraphs below describe the Strategic Market Allocations and the primary risk tools we use within each segment. Local Currency Philosophy: We look for consistent positive returns with a focus on (i) yield, (ii) local rates spread compression probability, and (iii) currency appreciation probabilities. Primary risk management tool: Local curve quantitative analysis, currency trend analysis and disciplined stop loss. This is our most tactical allocation. Duration Management Philosophy: We are structurally underweight and tactically invested. High correlations with US Treasuries, so any exposure must be congruent with low dollar price, high convexity, attractive spreads and excellent liquidity. Primary risk management tool: Individual security analysis that quantifies underlying US Treasury and spread movement assumptions. Spread Beta Philosophy: Access higher yields available relative to other dollar opportunities by investing almost exclusively in 1-and 2-rated (by Schroders internal rating system) corporate credits or sound sovereigns with individual bond characteristics consistent with return objectives. Primary risk management tool: Fundamental credit analysis. Page 3

5 Short Duration Philosophy: We believe there are very attractive sovereign and corporate yields with low duration volatility. For corporates, we accept illiquidity to own bonds with attractive total return potential that we are willing to hold to maturity. Primary risk management tool: Fundamental credit analysis, both corporate and sovereign. Very low turnover. Currently our highest conviction sector. Special Situations Philosophy: Uncorrelated to rest of EM complex with virtually no interest rate risk and potential equity upside. Primary risk management tool: Fundamental credit analysis. Page 4

6 Credit Profile* The data is shown as a percentage of market value. *May not add to 100% due to rounding. Sector Profile* The data is shown as a percentage of market value. Government Related includes agency, sovereign and supranational bonds. *May not add to 100% due to rounding. Sectors are shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Top 10 Countries Page 5

7 Fund Statistics Source: Schroders The Effective Duration and Effective Yield are shown since inception and are based on Investor Shares. Page 6

8 Important Information Fees and Expenses (%) as of June 25, 2013 Investor Shares Advisor Shares Gross: Net: In order to limit the Fund s expenses, the Fund s adviser has contractually agreed through February 28, 2015 to pay or reimburse the Fund to the extent that Total Annual Fund Operating Expenses (other than Acquired Fund Fees and Expenses, other indirect acquired fund expenses, interest, taxes, and extraordinary expenses), for the Fund s Investor Shares, exceed 0.90% of Investor Shares average daily net assets and, for the Fund s Advisor Shares, exceed 1.15% of Advisor Shares average daily net assets. If there are Acquired Fund Fees and Expenses, other indirect acquired fund expenses, interest, taxes, or extraordinary expenses other than estimated amounts included in Total Annual Fund Operating Expenses above, the Net Annual Fund Operating Expenses of the Fund will be higher than shown. The expense limitation may only be terminated during its term by the Board of Trustees. Please consider a fund s investment objectives, risks, charges and expenses carefully before investing. For a free prospectus, which contains this and other information on any Schroders Fund, visit call your financial advisor or call (800) Read the prospectus carefully before investing. The views and opinions contained herein are those of the Schroders Emerging Markets Multi-Sector Bond team, and do not necessarily represent Schroder Investment Management North America Inc. s house view. These views and opinions are subject to change. All investments involve risks including the risk of possible loss of principal. The market value of a fund s portfolio may decline as a result of a number of factors, including interest rate risk, credit risk, inflation/deflation risk, mortgage and asset-backed securities risk, US Government securities risk, foreign investment risk and liquidity risk. Frequent trading of the fund s portfolio may result in relatively high transaction costs and may result in taxable capital gains. Please see the prospectus for a full description of the risks associated with the fund. This document does not constitute an offer to sell or any solicitation of any offer to buy securities or any other instrument described in this document. The information and opinions contained in this document have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. The opinions stated in document include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realized. Past performance is not a guide to future performance. The value of investments can go down as well as up and is not guaranteed. Schroder Investment Management North America Inc. ( SIMNA, Inc. ) is an investment advisor registered with the U.S. SEC. It provides asset management products and services to clients in the U.S. and Canada including Schroder Capital Funds (Delaware), Schroder Series Trust and Schroder Global Series Trust, investment companies registered with the SEC (the Schroder Funds ). Shares of the Schroder Funds are distributed by Schroder Fund Advisors LLC, a member of the FINRA. SIMNA, Inc. and Schroder Fund Advisors LLC are indirect, wholly-owned subsidiaries of Schroders plc, a UK public company with shares listed on the London Stock Exchange. Schroder Investment Management Ltd. is the UK based investment subsidiary of Schroders plc. Schroder Fund Advisors LLC, Member FINRA, SIPC 875 Third Avenue, New York, NY (800)