The Emerging Market Debt Local Currency Fund

Transcription

1 FUND BROCHURE The Emerging Market Debt Local Currency Fund Diversified exposure to local currency emerging market debt FOR FOR PROFESSIONAL INVESTORS USE ONLY ONLY

2 Contents 02 Introduction 02 Emerging Market Debt Market Value in US Dollars (billions) 03 Table of Country weights of fund benchmark 04 Fund Benefits 04 EM Local Currency Fixed Income Universe; historic return profile 0 Fund Structure 06 Manager Research 07 Russell s approach to Portfolio Management 08 Risk Management 09 Awards 09 Lipper Fund Awards in // Fund Brochure // The Emerging Market Debt Local Currency Fund

3 Introduction FUND OVERVIEW PORTFOLIO MANAGER James Mitchell, 23 years of experience INVESTMENT STRATEGY Multi-manager, fixedincome portfolio BENCHMARK JP Morgan GBI-EM Global Diversified Index LAUNCH DATE September 2012 Russell s Emerging Market Debt (EMD) Local Currency Fund provides a well-diversified vehicle for investors to gain exposure to local currency emerging market debt. The Fund seeks to outperform its benchmark over a market cycle, using Russell s risk-controlled multimanager approach. The Fund takes measured duration, country, currency and sector positions, combining the complementary strategies of some of the world s leading bond managers. Historically, investors tended to invest in hard currency denominated emerging debt, where the primary hard currency was US dollar. However, in recent years, as emerging market fundamentals have improved, demand has grown in the local currency debt market (where government bonds are denominated in the home currency of the issuing sovereign). The local Emerging Market debt markets, which have grown significantly, therefore offer exposure to the local interest rate markets and also to the local currencies. Emerging Market Debt Market Value in US Dollars (billions) 3,000 2,00 EXCESS RETURN AND TRACKING ERROR TARGET 200 bps excess return 30 bps tracking error US Dollar (billions) 2,000 1,00 1,000 LIQUIDITY 00 Daily UCITS IV 0 JAN-02 JAN-03 JAN-04 JAN-0 JAN-06 JAN-07 JAN-08 JAN-09 JAN-10 JAN-11 JAN-12 Hard currency corporates - CEMBI Broad Hard currency sovereigns - EMBI Global Local currency - GBI-EM Broad Yes Source: BNY Mellon, JP Morgan as of June Fund Brochure // The Emerging Market Debt Local Currency Fund // 02

4 Over the last ten years, many emerging market countries have sought to provide independence to their central banks and inflation targets have been adopted. Subsequently, local bond markets have been less volatile and more attractive to investors. Strong economic growth has been accompanied by improved fundamentals (e.g. better debt dynamics, growth in FX reserves, improved current accounts) and this has tended to be currency supportive. We believe the strong economic fundamentals of many emerging market countries are sustainable and the variety of the local debt markets make investing in EMD an attractive complement to other fixed income and equity exposures. Table of Country weights of fund benchmark Weight / Country Weight / Country Weight / Country INDONESIA POLAND 4.4% COLOMBIA MALAYSIA BRAZIL 2.% PERU MEXICO 9.0% RUSSIA 0.% PHILIPPINES TURKEY 7.2% THAILAND 0.2% CHILE S. AFRICA 6.3% HUNGARY Source: JP Morgan GBI-EM Global Diversified Index (weights in %, as at end July 2012) 03 // Fund Brochure // The Emerging Market Debt Local Currency Fund

5 Fund Benefits ATTRACTIVE PORTFOLIO DIVERSIFIER: The expanding breadth and depth of the manager universe has led to an attractively differentiated return pattern relative to longer established markets. POSITIVE EXCESS RETURNS, NET OF FEES: We expect to add value above the benchmark through manager selection and portfolio management activity. The total value-add will be preserved through careful implementation, for instance expert oversight of the manager mix and of manager changes. LOWER RISK RELATIVE TO HIRING A SINGLE MANAGER: Investing in our multi-manager fund diversifies the style risk of individual local currency emerging market debt managers, which is expected to result in a more consistent pattern of excess returns. REDUCED GOVERNANCE BURDEN RELATIVE TO MANAGING MANAGERS DIRECTLY: Our multi-manager solution saves investors significant time and resource in manager selection / beauty parades, and reduces the costs associated with managing the managers directly. Manager changes are carried out smoothly and cost-effectively. Russell s multi-manager approach controls the risk of poor manager selection EM LOCAL CURRENCY FIXED INCOME UNIVERSE; HISTORIC RETURN PROFILE 20 1 Ann Return (%) JPM GBI - EM (Local) YEAR 2 YEAR 3 YEAR 4 YEAR YEAR Vertical lines show dispersion of individual manager returns in each period. Grey and Blue box show second and third quartile manager returns. Orange circle shows benchmark return. Notes: JP Morgan GBI-EM Global Diversified Index. Source: BNY Mellon, JP Morgan as of June Fund Brochure // The Emerging Market Debt Local Currency Fund // 04

6 Fund Structure The fund initially has a two-manager structure; a combination of Stone Harbor Investment Partners (40%) and Pictet Asset Management (60%). We have chosen these managers for the fund launch as they are both high conviction research picks who have complementary characteristics; one has a Fundamental investment process while the other is more Marketoriented in their approach. Stone Harbor is a Fundamental manager who emphasises country selection (rates and FX) but who will also make tactical allocations to hard currency sovereigns and corporates. The firm has a deep and experienced team that assesses relative fundamentals across the emerging market universe. Their style is relatively long-term and aggressive in nature, which tends to see them have a high beta and tracking error and can lead them to underperform in down markets. In contrast, Pictet is a Marketoriented manager who has a more top-down, globally-aware approach. They have a dynamic approach and look to perform in a variety of market conditions. Because of their shortterm tactical approach they look to operate in the more liquid markets and often trade the G10 markets as a proxy in order to express a view in a more cost effective manner, for instance, in order to hedge against the risk of lower commodity prices and its impact on emerging markets they may short the Australian dollar rather than going short the Brazilian real. In terms of outperformance drivers Pictet places most emphasis on currency management. Their approach also differs to that of Stone Harbor s in that they adopt a regional approach, with portfolio managers dedicated to taking risk in their own region (Asia, Europe, Latin America). Pictet s tracking error tends to be lower than that of Stone Harbor and they are more sensitive to performance drawdowns (meaning they will look to close out losing positions). The lower weight to Stone Harbor (40% vs. 60% for Pictet) in our structure is driven by the differing risk tolerances of these two managers. We believe this weighting will lead to a similar risk contribution from each manager, while bringing a good blend of return drivers. The chart below shows the different style dimensions of our proposed two-manager structure. We believe the complementary nature of these two managers should deliver strong risk-adjusted returns which should compare favourably to that of any single manager offering. Source: Russell investments. For illustrative purposes only. 0 // Fund Brochure // The Emerging Market Debt Local Currency Fund

7 Manager Research Russell has been researching fixed income managers for over 3 years and managing fixed income portfolios for over 2 years. We manage US$ 12 Billion of client assets, of which US$ 4 Billion is invested in our fixed income funds*. Russell has been researching managers in emerging market debt for 14 years. Today, we research more than 60 emerging market debt products, of which approximately half are local currency only mandates. Through our comprehensive due diligence process, we have distilled this list to a small group of products that have been awarded our top Hire research rank. Over 3 years Researching fixed income managers Over 2 years Managing fixed income portfolios We have a global team of 22 experienced fixed income investment professionals based in London (where the emerging market debt portfolio manager and lead research analyst are located), Seattle, New York, Toronto and Sydney. Our experience covers the entire fixed income spectrum, including global, regional and specialised sectors such as emerging markets and high yield. *As at 30 June 2012 We have established relationships with the manager community and a reputation for commitment to the market and a long term investing outlook. We believe this means our proprietary portfolio and return data give us an information advantage over peers as well as giving our clients consistently better access to the best manager talent. US$12 bn We manage US$12 Billion of client assets Global Team of 22 Experienced fixed income investment professionals based in London 14 years Russell has been researching managers in emerging market debt for 14 years >60 Emerging market debt products Fund Brochure // The Emerging Market Debt Local Currency Fund // 06

8 Russell s approach to Portfolio Management Russell s approach to portfolio management combines the most fundamental tenets of advanced portfolio theory with practical lessons learned from managing open architecture portfolio solutions for over three decades. As pioneers in multi-manager and multi-asset investing Russell has often had to innovate to solve particularly troublesome portfolio management challenges. Our views and techniques continue to evolve but the following represent a summary of the key tenets that have guided our process through the years: Outcome-oriented investing our investment decisions promote our clients best interests though designing solutions to meet specific goals Open architecture selecting investment strategies from a rich opportunity set of managers, based on possible and understood options. No single firm has a monopoly on investment skill. Investment discipline carefully design incentives and protocols, resulting in a disciplined investment process that helps mitigate the risk of making bad decisions often grounded in natural, human responses. Effective risk management the biggest risk investors face is that they will not achieve their investment goals. Russell manages all other risks to focus the portfolio on the overall objective. Dynamic portfolio management portfolio should integrate several critical competencies, including active management of the manager mix and portfolio risk exposures. Russell portfolio managers ability effectively to manage portfolio exposures is bolstered by four critical capabilities: - A market strategist team charged with forecasting the outlook for the economy as a whole and the short run impact on asset returns. - Direct investment and overlay services teams boasting tremendous capability to fashion and deploy tools to help portfolio managers control and actively manage portfolio exposures. - Our portfolio risk measurement technology is multi-layered and continually evolving through the use of both bespoke tools and off-the-shelf models, including Wilshire Axiom, RiskMetrics and Altsoft. - Our integrated trading team is dedicated to implementing our portfolios with maximum control of costs and risks. The goal of our process and all of the supporting capabilities is to ensure that our portfolios continuously reflect our best thinking. If recent markets have taught us anything, it is that small exposures can result in outsized returns. By seeking to track and control the magnitude and direction of our positions, we aim to focus portfolios where our managers and our own advantage are greatest. We believe this gives us the best opportunity to succeed in the long-run. 07 // Fund Brochure // The Emerging Market Debt Local Currency Fund

9 Risk Management Fund risk management is built upon three pillars: thorough manager research, tailored guidelines and risk analysis. THOROUGH MANAGER RESEARCH: Russell s dedicated manager research analysts meet and review fund managers on an on-going basis, which is crucial in today s world where reliability, integrity and stability are at a premium. Our manager research analysts aim to identify potential issues in the underlying investment process or organisation before they become problems that can negatively impact portfolios. TAILORED GUIDELINES: Our funds are built upon and managed according to bespoke guidelines written and managed by Russell. Each underlying fund manager has their own set of guidelines tailored to their specific capabilities and mandate. This gives our portfolio manager greater flexibility and control than simply buying units in a manager s pooled fund. RISK ANALYSIS: Russell maintains a wide array of risk analysis software that allows the portfolio management team to monitor and control all the transactions and positions held by the underlying managers. We perform detailed analysis across various risk metrics from a high level sector basis down to granular, individual holdings. Russell s analytical tools enable us to decompose the Fund s exposure to multiple risk factors in order to understand and manage sources of volatility. Russell also employs a third party to independently monitor adherence to guidelines on a daily basis at both the manager and the fund levels. Separately, every time a new manager is appointed to the fund, a dedicated Money Manager Oversight (MMO) team carries out a comprehensive, on-site operational and compliance review. Russell requires managers to submit to regular MMO reviews for as long as they are employed in the fund. Fund Brochure // The Emerging Market Debt Local Currency Fund // 08

10 Awards Our London-based fixed income team has been managing multi-manager multicurrency funds since 1994 and in 2012 the Global Bond Fund (Euro hedged share class) received more than 10 Lipper Fund Awards. The Lipper Fund Awards program honors funds that have excelled in delivering consistently strong riskadjusted performance, relative to peers. In addition, the Lipper Fund Awards program recognizes fund families with high average scores for all funds within a particular asset class or overall. Lipper designates award-winning funds in most individual classifications for the three-, five-, and ten-year periods and fund families with high average scores for the three-year time period. In addition, two share classes of our Russell s PLC Global Bond Fund were awarded a th (highest) Morningstar rating in January In May 2012 Morningstar also ranked Russell 2nd best fund house for Fixed Income in Italy. With thousands of funds in existence, the star rating can serve as a way to narrow the universe down to a subset of funds with strong records of performance. Because the rating takes volatility into consideration, investors who focus on top-rated funds are not ignoring the painful drops that have occurred, and they are also sticking with funds that have been able to justify their total expense ratios over time. Moreover, because the rating emphasizes long-term performance, it helps investors avoid funds with alluring short-term performance but poor long-term records. Lipper Fund Awards* in 2012 Timeframes (Years) Geography Timeframes Geography Timeframes Geography (Years) (Years) 3 AUSTRIA 10 GERMANY FRANCE AUSTRIA 3 EUROPE SPAIN 10 AUSTRIA EUROPE 3 UK GERMANY 3 FRANCE *Awarded to Russell IC II Global Bond Euro Hedged B Acc 09 // Fund Brochure // The Emerging Market Debt Local Currency Fund

11 For more information: Call: +44 (0) Visit: IMPORTANT INFORMATION This material is not intended for distribution to retail clients. This material does not constitute an offer or invitation to anyone in any jurisdiction to invest in any Russell product or use any Russell services where such offer or invitation is not lawful, or in which the person making such offer or invitation is not qualified to do so, nor has it been prepared in connection with any such offer or invitation. Unless otherwise specified, Russell Investments is the source of all data. All information contained in this material is current at the time of issue and, to the best of our knowledge, accurate. Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and, unless it relates to a specified investment, does not constitute the regulated activity of advising on investments for the purposes of the Financial Services and Markets Act Issued by Russell Investments Limited. Company No Registered in England and Wales with registered office at: Rex House, 10 Regent Street, London SW1Y 4PE. Telephone Authorised and regulated by the Financial Services Authority, 2 The North Colonnade, Canary Wharf, London E14 HS. 093/September 2012