Opportunities in emerging market bonds September / October 2013

Transcription

1 FOR PROFESSIONAL CLIENTS ONLY NOT FOR RETAIL USE OR DISTRIBUTION Opportunities in emerging market bonds September / October 2013

2 Emerging market (EM) performance disappointing year-to-date Year to end August 2013 asset class performance US Equity US High Yield 3.4% Commodities -1.3% US High Grade -2.5% Intermediate UST -2.9% EM Corporate HY -3.1% EM Corporate -4.6% EM Corporate IG -5.1% EM Currency USD -6.1% EM Hard Currency Sovereign HY -7.3% EM Hard Currency Sovereign -9.8% EM Hard Currency Sovereign IG -11.1% EM Local Sovereign USD -11.5% EM Equities -11.9% 14.5% Emerging Markets have been impacted due to: Increase in US interest rates Fear of US Federal Reserve tapering quantitative easing Decoupling of developed market (DM) and emerging market growth rates EM Debt markets are looking cheap, especially: EM currency & EM rates Market is too pessimistic on EM growth Source: J.P. Morgan Asset Management EM Hard Currency Sovereign HY: JPMorgan Emerging Markets Bond Index Global High Yield; EM Corporate HY: JP Morgan Corporate Emerging Markets Bond Index Broad High Yield; EM Hard Currency Sovereign: JP Morgan Emerging Markets Bond Index Global; EM Local Sovereign USD/Local Rates: JPMorgan Global Bond Index Emerging Markets Global Diversified; US High Yield: JPMorgan Domestic High Yield Index; EM Corporate: JPMorgan Corporate Emerging Markets Bond Index; EM Equities: Morgan Stanley Capital International Emerging Markets Index; EM External Sovereign IG: JPMorgan Emerging Markets Bond Index Investment Grade; US Equities: Standard and Poor s 500; EM Corporate IG: JPMorgan CEMBI Broad Investment Grade; US High Grade: JPMorgan JULI Total Return Index; EM Currency USD: JPMorgan Emerging Local Markets Index Plus Composite; Intermediate UST: JP Morgan GBI US (US Treasury 5 year); Commodities: Thomson Reuters/Jeffries CRB Commodity Index 1

3 Our view on Q EMD roadmap Probability 20% 60% 20% Scenario Scenario 1 Scenario 2 Scenario 3 Growth Soft patch / Muddle through Cyclical recovery Upward momentum Trend Weak growth/ Decoupling risk DM pulls up EM growth Recoupled Inflation Benign Benign/isolated pressure Upward pressure Monetary policy response Selective dovish where possible Neutral EM / selective hawkishness Tighter Financial conditions Differentiation Neutral Tight (outflows) Rates Lower/Steeper Range bound Higher Market Risk off, IG rally and commodities soft Relative value, differentiation: oversold levels; stronger fundamental linked to DM strength Selective HY, high cash, equity friendly environment *EM: Emerging Markets; DM: Developed Markets; EMFX: Emerging Markets Foreign Exchange; Source: JP Morgan Asset Management, September

4 Stimulus and DM growth will help pull up EM growth Proprietary Leading Economic Indicators Standard deviation around trend growth (0.50) (1.00) (1.50) (2.00) (2.50) (3.00) EM Composite (GDP weighted) US IMF Growth Forecasts DM* EM* Jan-2006 May-2006 Sep-2006 Jan-2007 May-2007 Sep-2007 Jan-2008 May-2008 Sep-2008 Jan-2009 May-2009 Sep-2009 Jan-2010 May-2010 Sep-2010 Jan-2011 May-2011 Sep-2011 Jan-2012 May-2012 Sep-2012 Jan-2013 May-2013 Sep-2013 Source: J.P. Morgan Asset Management, IMF September *DM: IMF defined Advanced Economies, EM: IMF defined Emerging Market and Developing Economies. IMF Forecasts as of July

5 DM growth pick-up EM winners and losers... CZK MYR THB Degree of Openness** HUF KRW PLN RON Structural Risks* CLP CNY PEN COP MXN PHP ILS RUB ZAR TRY IDR INR BRL *CPI, Government Debt as % GDP and 5 year CDS spread equally weighted composite. **(imports + exports)/gdp Source: J.P Morgan Asset Management, IMF, Bloomberg, September

6 Outflows from EM fixed income have stabilized at lower levels EM Fixed Income Flows (Strategic and Retail) USD billion cumulative, yearly Market capitalization (USD billion) 1,800 1,600 1,400 1,200 1, EM Corporate EM Sovereign EM Local Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec H1 Source: EPFR, Bloomberg and J.P. Morgan, as at August 29 th 2013 EM Corporate: JPMorgan Emerging Markets CEMBI Broad Index; EM Sovereign: JPMorgan EMBI Global Index; EM Local: GBI-EM Broad Index. Source: J.P. Morgan Asset Management, July

7 Spreads have widened out while ratings remain steady As of 31 August 2013 EM hard currency debt spreads and average credit ratings (inverted scale) Spread (basis points) 1,600 1,400 1,200 1, Aug-93 Feb-94 Aug-94 Mexico crisis Russia default / LTCM Feb-95 Aug-95 Feb-96 Aug-96 Feb-97 Asia crisis EMBI Global spread to Treasuries (left hand side) Ratings (right hand side) Aug-97 Feb-98 Aug-98 Feb-99 Aug-99 Feb-00 Aug-00 Feb-01 Emerging Market Crises Argentina default Brazil fears Turkey crisis Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Developed Market Crises FED tightening fears Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Lehman bankruptcy / Global credit crisis Sub-prime fears Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Euro-zone crisis Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 B- B B+ BB- BB BB+ BBB- Credit Rating (inverted scale) Source: J.P. Morgan Asset Management. Note: The J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) is representative of the sovereign debt market. LTCM = Long-term Capital Markets 6

8 Where is the value? hard currency sovereign bonds EMBI Global Diversified Yield and Spread Spread (LHS, basis points) and yield (RHS, %) 500 EMBI Global Diversified Spread EMBI Global Diversified Yield Sep-2010 Feb-2011 Jul-2011 Dec-2011 May-2012 Oct-2012 Mar-2013 Aug Source: J.P. Morgan Asset Management, 4 September EM Corporate IG: CEMBI Broad Diversified IG; US Corporate IG: JULI (ex-em) BBB 5-7, EM Corporate HY: CEMBI Broad Diversified HY, and US Corporate HY : JPMorgan US High Yield Index 7

9 And value in local rates and currency EM local currency bond yield versus DM bond yield* Yield differential (%) Median + 2SD Median + 1SD Median Median - 1SD Median - 2SD EM currency (FX) versus USD Valuation 30% EM FX overvalued 25% 20% 15% +1 SD 10% 5% Mean 0% -5% -1 SD -10% -15% -1.87% % EM FX undervalued -25% Source: Bloomberg and J.P. Morgan, as at 31 August * GBI-EM Global Diversified versus GBI Global Yield. 8

10 Q2 earnings on the weak side, but EM Corporate fundamentals remain strong versus DM Cash Balance for IG companies (as % of Debt) US IG Corporates EM IG Corporates - Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Cash Balance for HY companies (as % of Debt) US HY Corporates EM HY Corporates 0 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Source: Bank of America Merrill Lynch, December IG = Investment grade. HY = High yield. 9

11 Q2 earnings on the weak side, but EM Corporate fundamentals remain strong versus DM Net Leverage for IG companies (Net debt/ebitda) Net Leverage for HY companies (Net debt/ebitda) EM IG Corporates US IG Corporates US HY Corporates EM HY Corporates Source: Bank of America Merrill Lynch, December IG = Investment grade. HY = High yield. 10

12 EM corporate debt offers attractive yield pick-up over DM EM Corporate IG yield US Corporate IG yield Yield Difference (bps) EM Corporate HY yield US Corporate HY yield Yield Difference (bps) bp bp 0 Dec-09 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Source: J.P. Morgan Asset Management, 4 September EM Corporate IG: CEMBI Broad Diversified IG; US Corporate IG: JULI (ex-em) BBB Dec-09 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Source: J.P. Morgan Asset Management, 4 September EM Corporate HY: CEMBI Broad Diversified BB; US Corporate HY: JPMorgan Domestic HY BB. 11

13 Key overweights and underweights Hard Currency Sovereign (USD) Local Currency Corporates (USD) Mexico Chile (Rates- via inflation linkers ) Mexican Corporates (ex telecoms) Overweights Quasi- Sovereigns (Indonesia, Kazakh) CEE (Russia, Romania, Poland) Peru - Corporates Idiosyncratics (Sri Lanka, Vietnam, Dom Rep) Mexico (Rates and FX) Chilean - Corporates Underweights Lebanon Poland South Africa Turkey (Rates and FX) Indonesia (Rates) Malaysian (rates) Brazil - Corporates Turkish - corporates Global Metals and Mining Source: J.P. Morgan estimates., J.P. Morgan Asset Management, August 2013.The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager s targets and aims only. There is no guarantee that these targets and aims will be achieved. Allocations are made at the manager s discretion and can be changed without notice. 12

14 Current Positioning: JPMorgan Funds - Emerging Markets Local Currency Debt Fund As of 31 July 2013 Key Characteristics Fund Benchmark Diff Duration (yrs) Avg. Yield (%) Avg. Quality BBB BBB+ Avg. Coupon Avg. Maturity (yrs) Number of holdings Sector distribution (%MV) Local currency sovereign Cash Corporates Quasi-sovereigns/ Local gov't Hard currency sovereign 4.4% 0.6% 0.3% 0.0% 94.7% Quality distribution (%MV) BBB, 62.8% A, 17.3% BB, 11.1% AAA, 4.5% Top 15 Country allocations (%MV) South Africa Poland Russian Federation Mexico Indonesia Brazil Malaysia Turkey Thailand Hungary Romania Nigeria Chile Colombia Fund Benchmark Treasuries 0.0% AA, Peru 2.8% 0% 25% 50% 75% 100% 0% 4% 8% 12% *Includes cash The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager s targets and aims only. Past performance and yield are not necessarily a guide to future performance. B, 1.5% NR, 0.0% 13

15 Current Positioning: JPMorgan Funds - Emerging Markets Corporate Bond Fund As of 31 July 2013 Key Characteristics Sector distribution (%MV) Fund Benchmark Diff Duration (yrs) Avg. Yield (%) Avg. Quality BBB- BBB Avg. Coupon Avg. Maturity (yrs) Number of holdings Corporates Quasi-sovereigns/ Local gov't Cash Hard currency sovereign Local currency corporate Treasuries 0.0% 0.0% 0.0% 12.2% 5.7% 82.1% Quality distribution (%MV) BBB, 46.45% BB, 19.65% B, 13.67% >BBB, 17.6% <B-, 0.16% NR, 2.50% Top 15 Country allocations (%MV) China Russian Federation Mexico Brazil United Arab Emirates Peru Chile Indonesia India Turkey Colombia Hong Kong Thailand Kazakhstan Panama Fund Benchmark 0% 25% 50% 75% 100% 0% 4% 8% 12% The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager s targets and aims only. Past performance and yield are not necessarily a guide to future performance. 14

16 JPMorgan Funds Emerging Markets Strategic Bond Fund To capture the value in EMD, it is important to look across all EMD sectors STRATEGY Alpha investment strategies are crucial to add value Systematic downside protection is key to deliver strong total returns in the long term and protect the portfolio from regular volatile periods Best Ideas, themes driven, defensive fund FUND FACTS One of the largest dedicated EMD teams in the market Managed by EMD CIO, Pierre Yves Bareau Captured 86% of the upside while restricting downside to 52% FUND STATISTICS Systematic hedging against specific scenarios and themes Best ideas from across 36 member strong team Source: JPMorgan Asset Management. The Investment Manager (Portfolio Manager) seeks to achieve the stated targets/objectives. There can be no guarantee the objectives/targets will be met. 15

17 Current Positioning: JPMorgan Funds - Emerging Markets Strategic Bond Fund As of 31 July 2013 Key Characteristics Sector distribution (%MV) Fund Duration (yrs) 4.12 Avg. Yield (%) 4.01 Avg. Quality BBB Avg. Coupon 5.66 Avg. Maturity (yrs) 5.70 Number of holdings 134 Local currency sovereign Cash Hard currency sovereign Corporates Quasi-sovereigns/ Local gov't Treasuries 0.0% 16.0% 15.2% 21.1% 19.9% 27.9% 0% 10% 20% 30% 40% Quality distribution (%MV) BBB, 37.8% BB, 18.4% >BBB*, 30.1% B, 10.4% <B-, 3.4% Top 15 Country allocations (%MV) Russian Federation South Africa Romania Mexico Brazil Turkey Chile Hungary Poland Indonesia Argentina Nigeria Venezuela Ghana Peru 0% 4% 8% 12% * Includes cash. The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager s targets and aims only. Past performance and yield are not necessarily a guide to future performance. 16

18 JPMorgan Funds - Emerging Markets Strategic Bond Fund Performance (USD) As of 31 July 2013 Trailing Performance (Gross of Fees) 16% 11% 6% JPMorgan Funds - Emerging Markets Strategic Bond Fund BBA LIBOR 1M USD Excess Returns 1/3 GBI-EM Global Diversified, 1/3 CEMBI Broad Diversified, 1/3 EMBI Global Diversified Blend 6.57% 6.34% 7.02% 6.76% 4.00% 1% -4% -9% 0.47% 0.02% 0.46% 0.48% 0.05% 0.12% 0.21% 0.24% -0.15% -0.93% -1.04% -3.75% -3.80% -5.69% -7.53% 1 Month 3 Month Year to Date 1 Year Inception Source: J.P. Morgan Asset Management, All performance numbers are provisional. Inception: April Geometric Excess Returns Fund performance includes reinvestment of income and is in Base. Returns for periods greater than one year, where available, are annualised. Past performance is not indicative for future performance. Blended returns are an equally weighted arithmetic average of CEMBI Broad Diversified, EMBI Global Diversified and GBI-EM Global Diversified returns 17

19 1. Macro themes lead to risk budgeting and flexibility in sector allocations As of July 31, 2013 Duration in Yrs Local Debt External Debt Corporate Debt Overlay Total Monthly Market Return (RHS) 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% % Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Source: J.P. Morgan Asset Management..*Excludes CDS and FX options, average monthly market returns are calculated using the average monthly returns of EMBI Global diversified, CEMBI Broad Diversified and GBI-EM Global Diversified 18 18

20 Ability to take short position offers downside protection and flexibility As of July Ability to take short position offers flexibility in volatile and uncertain markets The short positions have been in treasury (10yr and 30yr) and through sovereign CDS and corporate CDS instruments In June, we initiated short strategies in China through short CDS positions on the leading banking names due to the liquidity squeeze in the system 10% Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 0% -10% -20% -30% -40% -50% China and related South Africa SovX ex EU Abu Dhabi Brazil Vale SA Indonesia Russia Mexico Turkey Treasury 30yr Treasury 10yr Treasury 5yr Source: J.P. Morgan Asset Management, short positions shows with notional as percentage of fund assets. CDS = credit default swap. SovX ex EU = Markit itraxx SovX CEEMEA ex-eu. China and related: China sovereign and quasi-sovereign Chinese entities. 19

21 Emerging Markets Debt - Key takeaways Value has been created in the market yields are attractive Differentiation is required at the country and corporate level Expect soft growth to increase to trend led by DM recovery, monetary and fiscal stimulus JPMorgan Emerging Markets Corporate Bond Fund top quartile over 3 years* JPMorgan Emerging Markets Local Currency Debt Fund top quartile over 3 years* JPMorgan Emerging Markets Strategic Bond Fund best ideas fund with a total return focus, top quartile over 1 year* Source: J.P. Morgan Asset Management. * Morningstar to 31/07/2013 JPM EM Mkts Local Curreny Debt A EUR Acc, JPM EM Corporate Bond A (acc) - EUR Hedged, JPM EM Strategic Bond A EUR Hedged 20

22 Appendix 21

23 Current Positioning: JPMorgan Funds - Emerging Markets Local Currency Debt Fund As of 31 July 2013 Rates allocation Weighted duration deviation from benchmark Chile Romania Russian Federation South Africa Nigeria Peru Mexico Kenya Uruguay Dominican Republic Sri Lanka Brazil Ghana Thailand Colombia Hungary Turkey Indonesia Philippines Malaysia United States Currency allocation %MV deviation from benchmark PHP NGN RON LKR DOP UYU EUR GBP CLP INR CNY HUF THB MYR MXN ZAR PLN TRY BRL IDR USD SGD -0.05% -0.07% -0.07% -0.09% -0.09% -0.12% -0.12% -0.52% -1.10% -1.60% -2.04% 2.00% 1.85% 1.02% 0.34% 0.27% 0.17% 0.11% 0.10% 0.04% 0.03% 0.01% -4% -2% 0% 2% 4% Source J.P. Morgan Asset Management The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager's targets and aims only. 22

24 Current Positioning: JPMorgan Funds - Emerging Markets Corporate Bond Fund Data as of 31 July 2013 Sector distribution (%MV) 25% 20% 15% 10% 5% 0% 22.00% Banking 5.38% Telecommunicat 4.40% Food/Beverage 3.98% Electric 3.81% Metals & Mining 3.80% Finance Comp. 3.34% Other Industrial 2.92% Independent 2.73% Building Materials 2.62% Real Property 2.45% Home Construct. 2.09% Chemicals Corporate bonds Quasi/Agency bonds High yield** Unrated Cash Current exposure 82.1% 12.2% 35.0% 2.5% 5.7% 1.74% Other Utility 1.70% Oil Field Services 19.1% Others* Maturity distribution relative to benchmark (Wtd Dur) From to to to to to to Source J.P. Morgan Asset Management Others* Diversified Manufacturing, Pharmaceuticals, Transportation Services, Conv Prefer, Utility, Supermarkets, Airlines, Lodging, Railroads, Automotive, Media - Noncable, Retailers, Technology, REITs, Preferred, Utility, Integrated Energy, Brokerage, Natural Gas **Includes unrated securities The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager's targets and aims only

25 JPMorgan Emerging Market Bond Funds Investment Objective Risks Investment Objective JPMorgan Funds Emerging Markets Corporate Bond Fund To achieve a return in excess of corporate bond markets of emerging market countries by investing primarily in emerging market corporate fixed and floating rate debt securities, using derivatives where appropriate. The value of your investment may fall as well as rise and you may get back less than you originally invested. The value of debt securities may change significantly depending on economic and interest rate conditions as well as the credit worthiness of the issuer. Issuers of debt securities may fail to meet payment obligations or the credit rating of debt securities may be downgraded. These risks are typically increased for emerging market and below investment grade debt securities. In addition, emerging markets may be subject to increased political, regulatory and economic instability, less developed custody and settlement practices, poor transparency and greater financial risks. Emerging market currencies may be subject to volatile price movements. Emerging market and below investment grade debt securities may also be subject to higher volatility and lower liquidity than non emerging market and investment grade debt securities respectively. The credit worthiness of unrated debt securities is not measured by reference to an independent credit rating agency. The Sub-Fund may be concentrated in a limited number of emerging market corporate issuers and as a result, may be more volatile than more broadly diversified funds. The value of financial derivative instruments can be volatile. This is because a small movement in the value of the underlying asset can cause a large movement in the value of the financial derivative instrument and therefore, investment in such instruments may result in losses in excess of the amount invested by the Sub-Fund. Movements in currency exchange rates can adversely affect the return of your investment. The currency hedging that may be used to minimise the effect of currency fluctuations may not always be successful. JP Morgan Funds Emerging Markets Local Currency Debt Fund To achieve a return in excess of government bond markets of emerging markets countries through exposure primarily to local currency emerging market fixed and floating rate debt instruments, using derivatives where appropriate. Risks The value of your investment may fall as well as rise and you may get back less than you originally invested. The value of debt securities may change significantly depending on economic and interest rate conditions as well as the credit worthiness of the issuer. Issuers of debt securities may fail to meet payment obligations or the credit rating of debt securities may be downgraded. These risks are typically increased for emerging market and below investment grade debt securities. In addition, emerging markets may be subject to increased political, regulatory and economic instability, less developed custody and settlement practices, poor transparency and greater financial risks. Emerging market currencies may be subject to volatile price movements. Emerging market and below investment grade debt securities may also be subject to higher volatility and lower liquidity than non emerging market and investment grade debt securities respectively. The credit worthiness of unrated debt securities is not measured by reference to an independent credit rating agency. The Sub-Fund will be concentrated in a limited number of securities and as a result, may be more volatile than more broadly diversified funds. The value of financial derivative instruments can be volatile. This is because a small movement in the value of the underlying asset can cause a large movement in the value of the financial derivative instrument and therefore, investment in such instruments may result in losses in excess of the amount invested by the Sub-Fund. Movements in currency exchange rates can adversely affect the return of your investment. The currency hedging that may be used to minimise the effect of currency fluctuations may not always be successful. Source: J.P. Morgan Asset Management. 24

26 JPMorgan Emerging Market Bond Funds JPMorgan Funds Emerging Markets Investment Grade Bond Fund Investment Objective Risks Investment Objective To achieve a return in excess of investment grade bond markets of emerging countries by investing primarily in USD denominated investment grade emerging market bonds and other debt securities, using derivatives where appropriate. The value of your investment may fall as well as rise and you may get back less than you originally invested. The value of debt securities may change significantly depending on economic and interest rate conditions as well as the credit worthiness of the issuer. Issuers of debt securities may fail to meet payment obligations or the credit rating of debt securities may be downgraded. These risks are typically increased for emerging market and below investment grade debt securities. In addition, emerging markets may be subject to increased political, regulatory and economic instability, less developed custody and settlement practices, poor transparency and greater financial risks. Emerging market and below investment grade debt securities may also be subject to higher volatility and lower liquidity than non emerging market and investment grade debt securities respectively. The credit worthiness of unrated debt securities is not measured by reference to an independent credit rating agency. The value of financial derivative instruments can be volatile. This is because a small movement in the value of the underlying asset can cause a large movement in the value of the financial derivative instrument and therefore, investment in such instruments may result in losses in excess of the amount invested by the Sub-Fund. JPMorgan Funds Emerging Markets Debt Fund Investment Objective To achieve a return in excess of the bond markets of emerging countries by investing primarily in emerging market fixed and floating rate debt securities, including corporate securities and securities issued in local currencies, using derivatives where appropriate. Risks The value of your investment may fall as well as rise and you may get back less than you originally invested. The value of debt securities may change significantly depending on economic and interest rate conditions as well as the credit worthiness of the issuer. Issuers of debt securities may fail to meet payment obligations or the credit rating of debt securities may be downgraded. These risks are typically increased for emerging market and below investment grade debt securities. In addition, emerging markets may be subject to increased political, regulatory and economic instability, less developed custody and settlement practices, poor transparency and greater financial risks. Emerging market currencies may be subject to volatile price movements. Emerging market and below investment grade debt securities may also be subject to higher volatility and lower liquidity than non emerging market and investment grade debt securities respectively. The credit worthiness of unrated debt securities is not measured by reference to an independent credit rating agency. The value of financial derivative instruments can be volatile. This is because a small movement in the value of the underlying asset can cause a large movement in the value of the financial derivative instrument and therefore, investment in such instruments may result in losses in excess of the amount invested by the Sub-Fund. Movements in currency exchange rates can adversely affect the return of your investment. The currency hedging that may be used to minimise the effect of currency fluctuations may not always be successful. Source: J.P. Morgan Asset Management. 25

27 JPMorgan Emerging Market Bond Funds JPMorgan Funds Emerging Markets Strategic Bond Fund Investment Objective Risks To achieve a return in excess of the benchmark by exploiting investment opportunities in emerging market fixed income and emerging market currency markets, using derivatives where appropriate. The value of your investment may fall as well as rise and you may get back less than you originally invested. The value of debt securities may change significantly depending on economic and interest rate conditions as well as the credit worthiness of the issuer. Issuers of debt securities may fail to meet payment obligations or the credit rating of debt securities may be downgraded. These risks are typically increased for emerging market and below investment grade debt securities. In addition, emerging markets may be subject to increased political, regulatory and economic instability, less developed custody and settlement practices, poor transparency and greater financial risks. Emerging market currencies may be subject to volatile price movements. Emerging market and below investment grade debt securities may also be subject to higher volatility and lower liquidity than non emerging market and investment grade debt securities respectively. The credit worthiness of unrated debt securities is not measured by reference to an independent credit rating agency. Asset-backed securities may be highly illiquid, subject to adverse changes to interest rates and to the risk that the payment obligations relating to the underlying asset are not met. The Sub-Fund may be concentrated in a limited number of countries, sectors or issuers and as a result, may be more volatile than more broadly diversified funds. The value of financial derivative instruments can be volatile. This is because a small movement in the value of the underlying asset can cause a large movement in the value of the financial derivative instrument and therefore, investment in such instruments may result in losses in excess of the amount invested by the Sub-Fund. The possible loss from taking a short position on a security may be unlimited as there is no restriction on the price to which a security may rise. The short selling of investments may be subject to changes in regulations, which could adversely impact returns to investors. Movements in currency exchange rates can adversely affect the return of your investment. The currency hedging that may be used to minimise the effect of currency fluctuations may not always be successful. Source: J.P. Morgan Asset Management. 26

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