Fund Guide Emerging Market Debt Unconstrained Fund August 2016 This document is for investment professionals only and should not be distributed to or relied upon by retail Usage statementclients. It is only intended for use in jurisdictions where This communication the Emerging relevant is intended funds Market for are investments Debt authorised Unconstrained professionals for distribution Fund or 101 and should not be where relied no on such by authorisation anyone else. is required.
About Standard Life Investments Standard Life Investments is a leading asset manager with an expanding global reach. Our wide range of investment solutions is backed by our distinctive Focus on Change investment philosophy, disciplined risk management and shared commitment to a culture of investment excellence. As active managers, we place significant emphasis on rigorous research and a strong collaborative ethos. We constantly think ahead and strive to anticipate change before it happens, ensuring that our clients can look to the future with confidence. As at 31 December 2015, Standard Life Investments managed 253.2 billion ( 343.5 billion) on behalf of clients worldwide. Our investment capabilities span equities, fixed income, real estate, private equity, multi-asset solutions, fund-of-funds and absolute return strategies. With our headquarters in Edinburgh, Standard Life Investments employs more than 1,500 talented individuals. We maintain offices in over 20 locations around the world across Europe, North America, Asia and Australia. In addition, we have close relationships with leading domestic players in Asia, including HDFC Asset Management in India and Sumitomo Mitsui Trust Bank in Japan. Our parent, Standard Life plc, was established in 1825. A leading provider of long-term savings and investments, Standard Life floated on the London Stock Exchange in 2006 and is now a FTSE 100-listed company. Standard Life Investments launched as a separate company in 1998 and has quickly established a reputation for innovation in pursuit of our clients investment objectives. Our investors rank among some of the world s most sophisticated and high-profile institutions. They include pension plans, banks, mutual funds, insurance companies, fund-of-fund managers, endowments, foundations, charities, official institutions, sovereign wealth funds and government authorities. Contents 1 Introducing the Emerging Market Debt Unconstrained Fund 4 What is our investment expertise? 2 Why take an unconstrained approach? 3 What is our investment approach? 5 Fund information 5 Summary of benefits 102 Emerging Market Debt Unconstrained Fund
Introducing the Emerging Market Debt Unconstrained Fund The Standard Life Investments Emerging Market Debt Unconstrained Fund offers exposure to a growing and diverse asset class by investing across various types of emerging market debt (EMD). Our dedicated emerging market debt team adopts an unconstrained approach that allows it to invest without reference to a country s weight in a particular index. We believe this affords the team the greatest potential to maximise riskadjusted returns and build a genuinely diverse portfolio for investors. Why invest in emerging market debt? Emerging markets (EM) now account for almost 40% of global GDP, with growing recognition of the general improvement in macroeconomic fundamentals and fiscal policymaking. For example, public debt/gdp ratios across EM countries average around 40%, considerably less than many developed economies. At 6%, meanwhile, EMD comprises a much smaller share of overall global market capitalisation. However, the asset class has become much broader and deeper over the last decade. It now comprises three distinct subsets with individual characteristics. Hard currency sovereign debt bonds issued by EM sovereigns in developed market currencies, most commonly US dollars. Although issuance has slowed in recent years, this is a diverse asset class with over 63 countries accounting for around $700 billion of outstanding debt. World GDP Local currency sovereign debt bonds issued by EM sovereigns in their local currencies. This is a more concentrated universe, with only 15 countries currently represented in the traditional benchmark index. However, it is by far the largest subset with outstanding debt of almost $6 trillion. Hard currency corporate debt bonds issued by EM companies, most commonly in US dollars. Most of the net new issuance in hard currency markets now comes from corporates, with the representative benchmark including many different corporate issuers from a multitude of different sectors across 51 countries. EMD has now reached an average credit quality of investment grade status. However, the need to differentiate between countries is as important as ever and, for active fund managers, this creates plenty of opportunities to add value. Total Market Capitalisation 15% 11% 28% 39% 23% 46% 13% 6% 7% 11% 2% Advanced economies ex G7 G7 - Canada, France, Germany, Italy, Japan, United Kingdom, and United States Emerging market and developing economies US Equities US Bonds Japan Equities Japan Bonds EM Equities EM Bonds Other Advanced Equities Other Advanced Bonds World GDP source: IMF WEO, as of April 2015 Total Market Capitalisation source: IMF Global Financial Report, as of April 2015 Emerging Market Debt Unconstrained Fund 1
Why take an unconstrained approach? As EMD has become increasingly broad and diverse, asset allocation decisions have become more complex. Rather than one homogenous asset class, it now comprises three distinct subsets, each of which can play an important role in portfolios, depending on how they meet an investor s specific objectives and risk tolerance. Understandably, many investors are either unwilling or unable to monitor and assess the merits of each subset and are increasingly seeking to devolve the allocation decision to a specialist investment manager. This comes at a time when the need to be discerning when selecting assets across EMD is more important than ever. In such an environment, it is our view that an unconstrained approach to investing in the asset class affords the manager flexibility to select only the most attractive ideas from across each of the three subsets within a single integrated portfolio. Importantly, an approach such as this, where portfolios are constructed in awareness of the opportunity set but without being constrained by a specific index, is designed to avoid large drawdowns that sometimes occur. Over the last few years, there has been a significant dispersion in performance between individual countries and across the different subsets. As a result, there is likely to be greater focus on unconstrained investing in EMD. Initial steps in this regard have already been taken with the launch of blended funds which seek exposure to two or more EMD asset class segments. A common criticism of such products, however, is that many start with a top-down beta allocation to the separate EMD segments, which are then managed in isolated portfolios against normal asset class benchmarks. The unconstrained approach is markedly different. We believe that within an unconstrained approach, the manager should have full flexibility to build a single portfolio of best ideas across all three subsets of the market, irrespective of benchmark indices. Positions should be managed in an integrated and risk-controlled manner and overall portfolio risk should be cognisant of the composite index as well as the broad opportunity set. However, the primary role of the composite index should be as a reference when measuring the performance of the manager relative to the opportunity set. To read more about the merits of this type of investment strategy, please see Emerging Market Debt - the benefits of an unconstrained approach at www.standardlifeinvestments.com 2 Emerging Market Debt Unconstrained Fund
What is our investment approach? We adhere to a distinctive investment philosophy called Focus on Change. Its application helps us to analyse the key factors driving the market price of an investment and to identify drivers that the wider market may have missed. We recognise that different factors drive markets at different times in the investment cycle. This means that we have an opportunity to outperform throughout the cycle. To develop the most compelling opportunities across the broad emerging market debt universe, we have developed a distinct, repeatable investment process which combines quantitative research with broader qualitative and market insights. Our macroeconomic-focused process recognises that each country is different. Using our Focus on Change philosophy, we aim to understand each country s unique macroeconomic drivers. When our assessment of a country s fundamentals is inconsistent with those expectations priced in the market, we look to exploit the opportunity. Key steps in our investment process Country selection Our first decision is whether, based on individual country macroeconomic fundamentals, it is attractive to invest in a country at all. We operate debt sustainability models at a country level to determine the path of debt over time based on our own assumptions of key macroeconomic variable factors. We supplement this with analysis of a broad range of key economic indicators. We recognise that political risks also drive asset returns contact with policymakers and local market participants helps us to assess these risks. Asset allocation Trade implementation Portfolio construction & risk management For hard currency debt, both sovereign and credit, we assess the market risk premium (spread) associated with a particular country. We understand that different factors have the potential to drive each country s spread. We seek to identify value in local markets by using a proprietary value screen that compares quality and potential returns available from currency unhedged investments in countries bond markets. We rank countries in terms of a variety of risks to their economies such as fiscal risk, productivity and growth potential. We also consider factors that will impact international investors such as currency and inflation. Once a decision has been made to invest in a country and an appropriate asset class within that country has been identified to express the fundamental view, we then determine an appropriate trade implementation. Typically, this will take the form of a long position via bonds, but we can also hold a portion of the portfolio in relative value positions. These enable us to express high conviction bearish views and could involve, for example, a curve position within a particular country or a position between two countries within the same asset class. In constructing the portfolio, we seek to follow our convictions by taking decisive positions. High strength of conviction and high expected returns in US dollars will result in a larger risk allocation. We adjust exposure by market beta to ensure that sizing is appropriate in the context of an asset s sensitivity to changes in the overall market environment. We practice our investment process within the context of our comprehensive view of the global macroeconomic environment. We leverage Standard Life Investments world class macro investment platform and our own extensive experience of managing EMD portfolios to determine which global macroeconomic risks may influence our country selection within the asset class. Emerging Market Debt Unconstrained Fund 3
What is our investment expertise? We are a major investor in fixed income markets, with our highly experienced team managing assets worth 53.7 billion ( 72.9 billion) as at 31 December 2015. Dedicated emerging markets team In recognition of the specialist nature of the asset class, we have an experienced team of emerging market fixed income professionals. The team will leverage the expertise of our global credit team that has a reputation for stock-picking excellence, a crucial attribute when investing across the truly diverse EM credit universe. Collectively better The emerging market debt team is part of our wider fixed income capability, which also spans global government bonds, high-yield bonds and investment grade corporate bonds. Our fixed income team comprises over 60 investment professionals, all of whom share their unique insights on the key drivers of the fixed income market. Kieran Curtis Investment Director Kieran has 13 years investment experience, including seven years at Aviva Investors where he was a portfolio manager and Head of Local Currency Bonds. Prior to that he worked at Standard Bank and Invesco Asset Management. He has a masters degree in Biochemistry from Oxford University. Mark Baker Investment Director Mark has 14 years experience in the industry. He joined Standard Life Investments from Threadneedle where he was part of the EMD investment team. He previously worked for Citigroup Asset Management and Henderson Global Investors. He has an honours degree in Business Studies and is also a CFA Charterholder. Nicolas Jaquier Investment Director Nicolas has 10 years industry experience, including two years at Threadneedle where he was a quantitative analyst. Previously he worked at the Swiss National Bank and Pictet Asset Management. He has a masters degree in International Economics and International Relations and is a CFA Charterholder. 4 Emerging Market Debt Unconstrained Fund
Fund information Fund aim The Emerging Market Debt Unconstrained Fund aims to provide a return over the longer term from a combination of capital appreciation, foreign currency movements and income. The Fund will achieve this by investing mainly in bonds that are issued by governments, quasi-government entities or corporations in emerging market countries and currencies. The Fund is actively managed by our investment team, which will select positions without reference to index weight or size. The team may also invest a proportion of the Fund s assets in other bonds, derivatives and/or money market instruments to try and take advantage of opportunities it has identified. Technical specifications Fund manager Legal structure Benchmark Types of shares available Fund currency Mark Baker & Kieran Curtis SICAV Fund 50% JPM EMBI Global Diversified (USD), 50% JPM GBI-EM Global Diversified (USD) Income and Accumulation USD For further information, including on different shareclasses and charges, please read the Prospectus and Key Investor Information Document (KIID). You can find these in the literature section of our website www.standardlifeinvestments.com The Fund may be suitable for investors who: are looking for actively managed exposure to emerging market debt are looking to diversify an existing fixed income or broad portfolio are willing to accept some fluctuations in the value of their investments. The Fund may not be suitable for investors who: are unwilling to take any risk with their capital fixed income is not a risk-free investment are looking for currency exposure to be hedged back to sterling have an investment time horizon of less than five years. The Fund offers investors the opportunity to benefit from a number of attractive features. Broad opportunity set A variety of opportunities affords the managers the greatest potential, within a risk-controlled framework, to maximise risk-adjusted returns and build a genuinely diverse portfolio. Flexible and dynamic Benchmark agnostic Devolve responsibility Managers can capture emerging trends across asset classes, eliminating the need for investors to physically change their asset allocation. There is no obligation to hold a benchmark asset, and the breadth of mandate provides ample opportunity to avoid being exposed to undesirable countries and assets. The need for investors to monitor and assess the relative attractiveness of each of the three subsets of EMD individually is eliminated. Instead, this decision rests in the hands of an experienced and specialist EMD investment managers. Emerging Market Debt Unconstrained Fund 5
standardlifeinvestments.com To find out more about the Emerging Market Debt Unconstrained Fund, visit our website www.standardlifeinvestments.com. Alternatively, please speak to your usual contact at Standard Life Investments. This material is for informational purposes only. This should not be relied upon as a forecast, research or investment advice. It does not constitute an offer, or solicitation of an offer, to sell or buy any securities or an endorsement with respect to any investment vehicle. The opinions expressed are those of Standard Life Investments and are subject to change at any time due to changes in market or economic conditions. The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested. Past performance is not a guide to the future. Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated by the Financial Conduct Authority in the UK. Standard Life Investments Global SICAV is an umbrella type investment company with variable capital registered in Luxembourg (no. B78797) at 2-4, rue Eugéne Ruppert, L-2453 Luxembourg, Grand Duchy of Luxembourg. Calls may be monitored and/or recorded to protect both you and us and help with our training. www.standardlifeinvestments.com 2016 Standard Life, images reproduced under licence INVBBRO_15_1494_EBD_EMD_Unconstrained_Fund_Guide_TCM 0816