Employing a Differentiated Approach in an Evolving Market Pioneer Funds Emerging Markets Bond EM DESK VIEW Aiming to Generate Performance in an Evolving Asset Class Requires a Flexible Strategy We believe the expertise required to generate outperformance in Emerging Markets (EM) debt is shifting as the market diversifies from a Sovereign-driven universe to one driven by corporate credit. Strategies required to perform in Corporate Credit-driven EM demand distinct diligence versus those used to manage the narrower sovereign universe. Over the last 20 years, the asset class has moved from discounting a universe that reflected inefficient, fixed monetary policy to one driven by open markets, wider trade patterns and greater global market share. The result has been a proliferation of new issuance, with some issuers offering efficient capital management, appealing growth rates and attractive valuation. In our view, these deeper, less efficient markets offer opportunity. A widening diversity of issuers in a deepening market environment creates a challenge for a portfolio manager. With scale of coverage becoming an increasingly important component of capability, we have built a research team that complements our approach to portfolio construction. Simultaneously we have deployed supporting tools including risk measures, return projections, due diligence structures and collaboration. As the landscape in EM continues to evolve, we believe retaining flexibility will continue to allow us to exploit opportunities as they arise. The EM Universe: Evolving and Expanding The EM Fixed Income universe witnessed material growth and innovation following the 2008 banking crises. Spurred by lower Sovereign debt levels and higher macroeconomic growth rates, the segment saw a substantial market deepening. This latter feature has led to an increase in the range of available products and strategies offered by the asset management industry to the investing market. Market deepening also broadened investor diversity. While market deepening can result in lower volatility, it can also crowd smaller market segments. Theoretically, this should lead to new issuance. It is important to note that participation in EM is not limited to foreign investors. A key feature of financial market deepening in EM countries has been a rise in domestic insurance industries, which have targeted both local and global investment opportunities. Credit market issuance has grown by 170% since 2009 while Sovereigns have grown at a more modest 40%, thus the value of outstanding Credit now exceeds that of Sovereign debt. This expansion has occurred across the credit curve, where we have seen a consistent 70/30 split between Investment Grade and High Yield issuers. As segments increase in size, more specialised insight contributes to value creation. Corporate vs. Sovereign Issuance ($bn) 400 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD 2015 Corporate Sovereign Source: Pioneer Investments and BofA Merrill Lynch as at 30 April 2015. 1 For Broker/Dealer Use Only and Not to be Distributed to the Public.
As Credit has drawn domestic and international institutional interest, Sovereigns have experienced significantly greater volatility in retail flows. Despite a larger issuance trend and an overall larger market, retail investor flow has been much more stable in Credit. This implies a more stable underlying investor base. ($ bn) 4 2 0-2 -4-6 -8-10 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 EM Corporates EM Sovereigns Source: JP Morgan as at 30 April 2015. ASSET CLASS PERFORMANCE Market volatility has seen a material pick-up in recent months, resulting in performance divergence across market segments, credit ratings and individual countries. EM Asset Class Performance (Indexed) 125 120 115 110 105 100 95 90 85 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Index Price Performance JP Morgan CEMBI Broad Diversified EMBI Global Diversified GBI-EM Global Diversified Source: JP Morgan and Factset as at 30 April 2015. The above illustration demonstrates one benefit of a flexible approach. By allowing dynamic reallocations when opportunities arise, and then seeking to protect capital when volatility increases and sentiment turns negative, a strategy can aim to produce a less correlated performance against the benchmark. 2 For Broker/Dealer Use Only and Not to be Distributed to the Public.
Key Conviction Positions Historically, investors viewed Sovereign bonds as a fair proxy of the EM investable universe. Given the developing trends within the sector, the market is recognising that this is an overly narrow view. An above average pace of new issuance has grown the investable pool of securities faster than the benchmark, leading to a shift in allocations away from the benchmark-defined universe. Pioneer Investment s team has been a leader in this regard, employing an aggregate approach since 2002, thereby evolving the process and allocations with market trends and expansions. This has led us into a number of high convictions and non-consensus positions. 01 OVERWEIGHTING CORPORATE CREDIT We believe that, in general, companies are more efficient allocators of capital than Sovereigns are. As such, we have built a structural exposure to Credit within our portfolio to profit from the associated spread and efficiency gains. We implement this in an active manner, where convictions reflect the ability of our analyst team to identify mispriced securities. 02 CONVICTION POSITIONS IN HIGH YIELD OVER INVESTMENT GRADE The Portfolio runs around a 10% overweight to High Yield. This in itself is not a significant deviation from key peers, where allocations to High Yield have materially increased over the past 18 months. The difference arises in the composition of the underlying exposure where we have chosen to exploit the Credit market. In contrast, key peers have concentrated their positions in the Sovereign space with holdings in higher spread countries, for example, the Ukraine and Venezuela. Our research process drives our positioning - our analysts are mandated with finding the most compelling investment cases. This has led us to favour High Yield Credit where we note the relative resilience of fundamentals (higher coverage ratio and lower gearing relative to other Credit markets) and significant technical support in the form of the underlying institutional investor base and deepening of the new issuance market. We believe this strategy is a more effective way to exploit the opportunity High Yield securities offer, particularly in the current environment. 03 DURATION OVERLAY AS A RISK MANAGEMENT TOOL AND ALPHA GENERATOR We actively deploy duration management both as a risk management tool and as an alpha generating strategy. The Portfolio runs a material short duration position relative to the index. This is a function of our belief that rates will gradually normalise upwards into a recovering global economy. This is a significant deviation from key peers where, on aggregate, they have positioned much closer to benchmark duration (circa 7 years). This view is predicated on our outlook for U.S. Treasury (UST) rates, which we believe are artificially low. This was a detractor from recent performance as the UST rallied. 04 COUNTRY COMPOSITION: EXPLOITING THE GROWTH DRIVERS The Portfolio runs a significant overweight position in both China and India, which is a notable deviation from key peers. While access to the Sovereign markets in these countries is restricted, we have chosen to invest in the Corporate Bond market to gain exposure to these leading Asian economies. We are constructive on reform policy agendas in both. In China, we note that growth is moderating, but we believe this process of rebalancing will lead to a more mature and sustainable economy, which will be supportive for debt servicing. In India, we see significant potential to expand and broaden the economy, which should lead to a continued deepening of financial markets and further liberalisation of the economy. 05 PORTFOLIO LIQUIDITY AND DEFENSIVENESS The Portfolio began to build a liquidity buffer in 2014. This was based on our expectation that we would see increased volatility in the market on the back of Federal Reserve tapering and a likely strengthening of the U.S. Dollar. This largely played out but other factors further complicated the outlook for EM, including Western sanctions on Russia and a significantly weaker oil price. These factors fuelled a large market selloff, particularly in the Corporate High Yield space. Retaining a cash buffer has shielded the Portfolio somewhat from this disruption but overall it cost relative performance. Cash is a very important portfolio management tool. We deploy this activity in a barbell strategy, where it is used to bolster liquidity against the High Yield Portfolio allocation. Using cash in this way allows us to implement decisions in a more efficient manner. 3 For Broker/Dealer Use Only and Not to be Distributed to the Public.
Allocation Decisions 80% 60% 40% 20% 0% 40.1% 71.7% 22.7% 19.4% 21.7% 11.4% 0.2% 0.4% 7.5% 5.0% HY Credit IG Credit Quasi Government Cash & Equilivants Credit Rating 60% 55.4% 50% 51.5% 40% 39.6% 30% 26.2% 20% 21.7% 10% 0% 5.0% Investment Grade High Yield Cash & Equilivants Fund Benchmark Fund Benchmark Source: Pioneer Investments as at 30 April 2015. Fund data refers to Pioneer Funds Emerging Markets Bond Class A EUR Non-Distributing. The benchmark against which the fund s performance is measured is JPM EMBI Global Diversified 95%, JPM Cash 1 Mnth Euro 5%. The sub-fund is actively managed; sector allocations will vary over periods and do not reflect a commitment to an investment policy or sector. Key EM Country Over/Underweights 12% 6% 0% 8.9% 5.6% 6.6% 3.8%3.4% 2.5% 2.5% 4.6% 4.6% 2.8% 3.9% 1.9% 1.6% 0.7% 0.5% 0.4% 0.2% 0.8% 1.7% 1.6% 0.9% 0.5% 0.8% -6% -0.4% -1.1% -1.5% -2.1% -2.3% -3.0% -3.8% China Nigeria Russia India Argentina Brazil Mexico Ukraine Turkey Venezuela South Africa Colombia Chile Hungary Philippines Fund Weight Relative Weight Source: Pioneer Investments as at 30 April 2015. Fund data refers to Pioneer Funds Emerging Markets Bond Class A EUR Non-Distributing. The benchmark against which the fund s performance is measured is JPM EMBI Global Diversified 95%, JPM Cash 1 Mnth Euro 5%. Pioneer Funds Emerging Market Bond: An Aggregate and Flexible Approach We have adopted a research-led, flexible investment approach to the management of this Portfolio. Performance is sometimes proposed as a function of skill and breadth of coverage; for this reason, we have built broad coverage and capability seeking to capitalise on semi-efficient and non-homogenous markets. We do not constrain our investment universe to an arbitrary set of benchmark instruments. Instead, we look across the widest possible investable universe in an effort to exploit pricing inefficiencies and capitalise on under-researched segments of the market. The Key Features of our Approach 01 02 03 Alignment By seeking to align ourselves with the client s core interest, we are able to look broadly for returns. Capability We have grown our team to reflect the demands of an expanding EM universe. Research is the cornerstone of our philosophy. Eight Portfolio Managers and ten Credit Research Analysts drive the Portfolio positioning process, with analysts focusing on sector leadership. Discipline Managed through our structured risk budgeting approach and propriety portfolio construction tools 4 For Broker/Dealer Use Only and Not to be Distributed to the Public.
The Result: Top Quartile Performance over Three and Five-Year Periods Return Trailing Returns 32.0 30.0 28.0 26.0 24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 YTD 1 Year 3 Years 5 Years Top Quartile 2nd Quartile 3rd Quartile Bottom Quartile Pioneer Fds Emerg Mkts Bd A EUR ND JPM EMBI Global Diversified TR USD EAA OE Global Emerging Markets Bond Peer Group (5-95%): Open End Funds - Europe/Africa/Asia - Global Emerging Markets Bond Trailing Returns YTD % Rank 1 Year % Rank 3 Years % Rank 5 Years % Rank Pioneer Fds Emerg Mkts Bd A EUR ND 11.57 42 25.94 44 10.96 10 9.79 24 JPM EMBI Global Diversified TR USD 11.96 27 31.23 4 11.38 5 11.00 5 EAA OE Global Emerging Markets Bond 10.49 62 21.88 64 7.85 56 7.90 61 25th Percentile 12.02 27.92 9.94 9.78 50th Percentile 11.26 25.13 8.34 8.60 75th Percentile 8.92 19.55 6.45 6.81 Source: Morningstar and Pioneer Investments as at 30 April 2015. The correct legal name of the fund is Pioneer Funds: Emerging Markets Bond Class A Euro ND. Performance data refers to Class A EUR non-distributing units net of fees 5 For Broker/Dealer Use Only and Not to be Distributed to the Public.
Important Information Morningstar: Copyright 2014 Morningstar UK Limited. All Rights Reserved. The information contained herein: (1) may not be copied or distributed; and (2) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Unless otherwise stated, Morningstar overall ratings and rankings are based on Class A EUR non-distributing units. Morningstar quartile rankings are based on a comparison of the relevant Pioneer Investments fund s Morningstar relative performance to all the other funds in the same Morningstar category. Unless otherwise stated all information contained in this document is from Pioneer Investments and is as at 30 April 2015. Pioneer Funds Emerging Markets Bond, is a sub-fund (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. 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 the 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 +353 1 480 2000 Fax +353 1 449 5000 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 1933. 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 does not carry the protection provided by the UK regulatory system. Pioneer Funds Distributor, Inc., 60 State Street, Boston, MA 02109 ( 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. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. For Broker/Dealer Use Only and Not to be Distributed to the public. Date of First Use: 20 May 2015 Doc ID: 15895 0480_0515