Emerging Markets Corporate Debt Quarterly Review Composite Performance Periods Ending 31 March 2018 At A Glance Inception: 1 September 2014 Return 7 6 5 4 3 2 1 3.1 3.7 5.7 5.0 4.9 4.3 : J.P. Morgan CEMBI Broad Diversified AUM: $579.52 million USD 0-1 -2-1.1-1.4 Qtr 1 1 Year 3 Year Since Inception Emerging Markets Corporate Debt Gross of Fees J.P. Morgan CEMBI Broad Diversified Inception date: 1 September 2014. Source: FactSet The value of investments can fluctuate. Data assumes reinvestment of dividends and capital gains. Data reflects past performance. Past performance does not guarantee future results. Periods greater than one year have been annualized. Investment Team Margé Karner John Lovito Kevin Akioka, CFA Alessandra Alecci Thomas Youn Vice President, Senior Manager Senior Vice President, Senior Manager Vice President, Senior Manager Vice President, Manager and Senior Sovereign Analyst Manager and Senior Sovereign Analyst Attribution Analysis One Year Ending 31 March 2018 0.20 0.16 Cumulative Excess Return 0.10 0.00-0.10-0.20-0.30-0.40-0.50-0.60-0.16-0.24-0.49 Yield Curve Currency Security Selection Country Allocation -0.52 Total Effect Total Effect includes residual securities not reflected in the categories shown above. MARKETING MATERIAL/FOR PROFESSIONAL CLIENTS ONLY/NOT FOR PUBLIC USE
Investment Philosophy We believe: Misunderstood and mispriced risks within emerging markets create inefficiencies and anomalies that can be exploited. An active, research-driven, bottom-up approach to evaluate countries and companies combined with robust macro and thematic analysis is the best way to exploit these inefficiencies. A disciplined valuation framework focused on relative value is critical in pricing fundamental risks appropriately. Focus on rigorous risk budgeting and continuous stress testing are integral to achieving strong and consistent risk-adjusted results. Diversified sources of return through active positions in duration, yield curve, country allocation, sector allocation, currency allocation and security selection help generate a more consistent return profile. Goal Seeks to generate an annualized information ratio of 0.75 to 1.00 versus the JPMorgan CEMBI Broad Diversified. Risk Guidelines Duration limits: +/- 2 years versus the benchmark Country exposure: Max 25 in any one country Active risk target: 1.5 to 3.0 versus benchmark Investment Process 1 Top-Down Macro/Thematic Analysis Macro themes Asset class trends Market positioning/technicals 2 Bottom-Up Country/Corporate Analysis Ranking of country credits, currency and rates Fundamental analysis Valuation analysis 3 Construction Risk/reward analysis Security selection Position sizing 4 Stress Testing/Risk Monitoring Volatility/correlations/betas Ensure consistency with broader portfolio MARKETING MATERIAL/FOR PROFESSIONAL CLIENTS ONLY/NOT FOR PUBLIC USE 2
Sector Allocation -16.41 Weight vs. 12.86 7.05-3.40-0.11 Sector Cash & Cash Equivalents 12.86 0.00 EM Corporate 54.46 70.87 EM Sovereign / Other 7.13 0.08 EM Quasi-Sovereign* 25.66 29.05 Derivatives -0.11 0.00-20.00-15.00-10.00-5.00 0.00 5.00 10.00 15.00 **Issues that are 50+ owned or backed by a government are considered Quasi-Sovereign Industry Allocation Weight vs. 12.48 7.39 5.51 3.28 0.38 0.14-0.33-0.69-0.93-1.28-3.36-4.11-4.35-5.31-8.71-10.00-5.00 0.00 5.00 10.00 15.00 Industry Cash & Equivalents 12.48 0.00 Sovereign 7.39 0.00 Oil & Gas 20.52 15.01 TMT 15.73 12.45 Treasuries/Futures 0.38 0.00 Transport 1.03 0.89 Diversified 2.18 2.51 Industrial 4.34 5.03 Pulp & Paper 0.00 0.93 Infrastructure 0.55 1.83 Metals & Mining 3.69 7.05 Consumer 3.94 8.05 Real Estate 1.10 5.45 Utilities 4.77 10.08 Financial 22.01 30.72 Characteristics Effective Duration (yrs) 4.59 4.60 Spread Duration (yrs) 3.56 4.71 Weighted Average Life to Maturity (yrs) 6.60 8.08 Yield to Maturity 4.96 5.17 MARKETING MATERIAL/FOR PROFESSIONAL CLIENTS ONLY/NOT FOR PUBLIC USE 3
Country Allocation: Top 10 Over/Underweights Weight vs. 1.57 1.02 0.97 0.88 0.87 0.79 0.78 0.72 2.47 2.87 Country Russian Federation 8.04 5.17 Turkey 6.79 4.32 Nigeria 2.70 1.13 South Africa 3.65 2.63 Argentina 4.41 3.44 United States 0.88 0.00 Canada 0.87 0.00 Ireland 0.79 0.00 Ghana 1.00 0.22 Brazil 7.28 6.56-1.00-1.45-1.50-1.52-1.60-1.84-1.94-2.09-3.17-4.33-6 -4-2 0 2 4 Chile 3.24 4.25 Qatar 1.96 3.41 Thailand 0.86 2.37 Malaysia 0.25 1.77 Saudi Arabia 0.00 1.60 South Korea 2.50 4.33 Israel 2.05 3.99 Philippines 0.02 2.11 Hong Kong 1.82 4.99 United Arab Emirates 0.16 4.49 Credit Quality Weight vs. -0.11-1.34-8.10-8.13 7.81 1.87-0.59-4.26 12.86-10.00-5.00 0.00 5.00 10.00 15.00 Credit Quality AAA 0.00 0.11 AA 1.14 2.48 A 9.44 17.54 BBB 26.91 35.04 BB 29.84 22.03 B 17.58 15.71 CCC and Below 1.33 1.92 NR - NA 0.91 5.16 Cash and Cash Equivalents* 12.86 0.00 *Includes Forwards MARKETING MATERIAL/FOR PROFESSIONAL CLIENTS ONLY/NOT FOR PUBLIC USE 4
Quarterly Commentary Market Review Emerging markets struggled in risk-off climate. After a strong January, the backdrop for emerging markets debt and risk assets became more challenging. Concerns about rising inflation in the U.S. pushed up U.S. Treasury yields, triggering volatility. Furthermore, trade protectionism fears and mounting geopolitical tensions also weighed on risk assets. U.S. dollar weakness came from stronger emerging markets economies and deteriorating fiscal and external deficits in the U.S. Central banks still supportive. The Federal Reserve (Fed) raised rates in March, but U.S. rates remained relatively low. Central banks in Europe, the U.K., and Japan held rates steady and maintained stimulus programs. The European Central Bank continued to slowly taper its bond purchases, while central banks in Brazil, South Africa, and Russia cut rates. U.S. dollar declined. Despite Fed tightening, rising U.S. Treasury yields, and improving economic growth, the U.S. dollar continued to weaken versus other major currencies. A weaker dollar broadly aided emerging markets bonds. Corporates outperformed sovereigns. Emerging markets corporate bonds posted their first negative quarter since 2016, as spread widening in the wake of rising U.S. Treasury yields weighed on returns. However, corporate securities generally outperformed sovereign bonds. Financials were top performers. Corporate bonds in the financials sector were top contributors, followed by bonds in the transportation sector. The weakest sectors included technology, media, and telecommunications (TMT), metals and mining, and consumer. Regionally, Europe and Africa outperformed, while Asia and Latin America underperformed. Investment-grade bonds lagged. Investment-grade credits generally underperformed their high-yield counterparts, largely due to their relatively longer durations in the rising-rate environment. In addition, spread widening had a bigger overall influence on investment-grade bonds than high-yield securities. Performance Review Corporate underweight detracted. We maintained a modest underweight to corporate bonds relative to sovereign securities, which detracted from relative results as corporates generally outperformed. Within the sovereign component, an overweight position in Argentina, which underperformed, was a primary detractor. Sector performance was mixed. An overweight position in the consumer sector, particularly in Brazil, detracted from performance. Similarly, an overweight in TMT also weighed on results. Security selection among oil and gas companies in Russia and China hurt performance, while an underweight in the metals and mining sector and an overweight in Brazilian conglomerates aided results. Exposure in Africa lifted performance. Our overweight position and security selection in Nigeria, along with an underweight position in Morocco, contributed to portfolio performance. In particular, we participated in new issues in Nigeria, which aided results. Positioning for the Future Volatility likely to linger. Events of the first quarter suggest market volatility will remain a prominent influence on global financial markets. Specifically, we expect U.S.-China trade tensions and geopolitical unrest in the Middle East and in Russia to boost volatility. Risks warrant caution. We believe risks specific to emerging markets include key upcoming elections (Brazil, Mexico) and domestic political challenges (Turkey, South Africa). In China, deleveraging and a possible slowdown while rebalancing to a consumption-led economy remain important drivers for commodities and the economic outlooks for many countries. Mounting global trade tensions could weigh on emerging markets debt. Positioning balances risks. We will continue to balance current market dynamics, including increased volatility, with our long-term constructive view on emerging markets debt based on fundamental improvement across countries and defensive in the near term, given the current valuation levels, and remain selective. Latin American exposure remains prominent. In Latin America, we maintained some corporate exposure to Mexico due to high real interest rates. North American Free Trade Agreement (NAFTA) negotiations appear to be progressing smoothly, but we are keeping a close watch on the presidential election campaign. Despite recent underperformance, we continue to favor Argentina due to favorable economic reforms and better-than-expected fiscal performance. Positioning favors higher-yielding securities. We are focused on higher-yielding sovereigns and corporates and in opportunities that are less-sensitive to global factors. We believe these positions should perform better than higherquality names, particularly those tied to commodities. Latin America weighed on results. Our positioning in Latin America was a main detractor, largely due to an overweight and security selection in Brazil, where regulatory issues and weak earnings pressured bond returns. Also, an overweight in Asia detracted, where exposure to high-quality China-based issuers detracted. MARKETING MATERIAL/FOR PROFESSIONAL CLIENTS ONLY/NOT FOR PUBLIC USE 5
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You should conduct appropriate checks to ensure that these materials are made available only to eligible recipients, pursuant to private placement exemptions, or are otherwise used in accordance with applicable law. If you wish to invest, it is your duty to inform yourself of, and to observe, all applicable laws and regulations of any relevant jurisdiction. In particular, you should inform yourself as to the legal requirements of so applying, and any applicable exchange control regulations and taxes in the countries of your respective citizenship, residence or domicile as well as any other requisite governmental or other consents or formalities which you might encounter which might be relevant to your purchase, holding or disposal of the investment. Past performance is no indication as to future performance and the value of any investment may fall as well as rise. Any investment is done at the This promotion has been approved with limitations, in accordance with Section 21 of the Financial Services and Markets Act, by American Century Investment Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. This promotion is directed at persons having professional experience of participating in unregulated schemes and units to which the communication relates are available only to such persons. Persons who do not have professional experience in participation in unregulated schemes should not rely on it. American Century Investment Management (UK) Limited is registered in England and Wales. Registered number: 06520426. Registered office: 12 Henrietta St, 4th Floor, London WC2E 8LH. American Century Investment Management (Asia Pacific), Limited currently holds Type 1 and Type 4 registrations from the Securiti Management, Inc. is not registered with the SFC. Composite returns are gross of investment management fees. Sector weights, portfolio characteristics and holdings are of a representative account in the composite. Holdings are current as of the date indicated, are subject to change and may not reflect the portfolio's current holdings. construction guidelines document operational policies and not necessarily investment restrictions imposed on management of the strategy. Material presented has been derived from industry sources considered to be reliable, but their accuracy and completeness cannot be guaranteed. Opinions expressed are those of the portfolio investment team and are no guarantee of the future performance of any portfolio. Nothing in this document should be construed as offering investment advice. Please note that this is for informational purposes only and does not take into account whether an investment is suitable or appropriate for a specific investor. For purposes of compliance with the Global Investment Performance Standards (GIPS with the Global Investment Performance Standards (GIPS ). Emerging Markets Corporate Debt composite invests in investment grade and high-yield corporate debt and derivative securities in U.S. dollar and local emerging markets-denominated currency. Index futures (and currency forwards and futures, where applicable or appropriate) are occasionally used to equitize cash and manage portfolio risk. Other derivative instruments may be used, as allowed, as part of the investment strategy. Returns are calculated and stated in U.S. dollars. The return may increase or decrease as a result of currency fluctuations. Returns for periods less than one year are not annualized. 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