Managed by BlueBay Asset Management Full Rating Report Fixed Income Funds / Luxembourg Key Rating Drivers Emerging Markets Bond Fund: BlueBay Emerging Market (EM) Bond Fund invests primarily in hard currency EM government bonds. It employs relative value, fixed-income strategies with the goal of generating 300bp above benchmark, gross of fees, with a 6% maximum tracking error. Relative Value Key Driver: The fund seeks to outperform by capturing spread movements, with yield curve management a lesser source of returns. Figure 1 Fund Features Portfolio managers Inception date 3 Sep 2002 Size David Dowsett Rodrigo Da Fonseca USD1.1bn as of Jan 2015 Lipper category Global Bond Emerging Markets HC Strategy Hard Currency Emerging Market Sovereigns Reference index JP Morgan EMBI Share classes Legal form Source: Fitch Global Diversified Primary share classes: R, I, B USD Other share classes in EUR, GBP, CHF, AUD, NOK, SGD and SEK Part I Luxembourg SICAV (UCITS IV) Disciplined Portfolio Construction: Portfolio construction is based on bottom-up, high conviction trade selections. The fundamental analysis combines scoring of country, interest rates, and foreign exchange metrics, which are then assessed on a relative value basis to select exposures. Risk taking is a function of conviction and is monitored against exposure limits by the risk management team. Specialised, Complementary Resources: Senior Portfolio Manager (PM) David Dowsett has 20 years investment experience. The fund benefits from the depth of BlueBay s EM fixed income resources (42 team members with an average of 13 years industry experience). Specialist Credit Asset Manager: Founded in 2001 and now owned by the Royal Bank of Canada (AA/Stable/F1+), BlueBay Asset Management is a specialist credit asset manager with assets under management (AUM) of USD62.9bnat end-december 2014 (USD17.8bn in EM). BlueBay has managed EM funds since 2002. Appropriate Operational Framework: The operational set-up complies with Fitch Ratings operational assessment criteria (see page 5). The operational framework is appropriate, with standard terms and third parties. The IT platform is built around third-party systems feeding a central database. Performance Driven by Country Selection: Since its launch, the fund has outperformed its benchmark in some years, but not consistently, driven by the fund s country allocations. The fund had an annualized excess return of 0.99%, gross of management fees, and a tracking error of 2.44% since inception to December 2014. Analysts Greg Fayvilevich +1 212 908-9151 gregory.fayvilevich@fitchratings.com Richard Woodrow, CFA +44 203 530 1388 richard.woodrow@fitchratings.com Figure 2 Net Fund Performance and Assets (Base = 100) 150 140 130 120 110 100 Assets (RHS) BlueBay Emerging Market Bond I USD (LHS) JP Morgan EMBI Global Diversified TR (LHS) Lipper Global Bond Emerging Markets Global HC (LHS) 90 0 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Source: Lipper (USDm) 1,400 1,200 1,000 800 600 400 200 www.fitchratings.com 1
Figure 3 Fund Statistics At End-Feb 2015 Year Fund Ref. index a Lipper category Calendar returns b (%) YTD 2015 2.1 1.8-0.9 2014 5.9 7.4-2.7 2013-6.0-5.3-8.2 2012 17.4 17.4 15.1 Statistics b (1 year) Volatility (%) 5.2 Information ratio -1.1 Max drawdown (%) -3.1 a Reference index is JP Morgan EMBI Global Diversified b Share class: I Source: Lipper Figure 4 Key Investment Features Objective: 300bp per annum above benchmark gross of fees Target tracking error: 0-6% Target information ratio: >0.5 Positions: 80-100 issuers. Leverage: below 150% of net asset value (NAV), based on sum of notional, through derivatives Single country exposure: <15% Corporate/quasi-sovereign exposure: <20% 12 month rolling turnover (2-sided): 689% Source: BlueBay, Fitch Qualitative Assessment Investment Process Investment Philosophy BlueBay has an investment philosophy of capital preservation and alpha/excess return generation in all markets. A research-driven investment process, embedding risk management, allows clear traceability of sources of returns. The fund invests predominately in the hardcurrency sovereign debt of EM countries. The fund seeks to exploit disparities that occur between credits, both sovereign and quasisovereign, through high conviction relative value trades as a primary source of return. Yield curve management is a secondary source of return. Derivatives typically make up a small portion of the fund s portfolio, less than 1% as of October. Sovereign credit alpha is derived from a combination of relative value trades and selection of countries, sovereign issues and instruments. The fund has adhered to its philosophy and process throughout its history, as demonstrated in its ability to manage return, volatility and drawdown in line with objectives and guidelines. The fund has outperformed its benchmark in some years recently, but not in others. Given the high conviction nature of the fund s investments, underperformance is typically driven by credit selection. The high conviction trades mean that the fund, like other BlueBay funds, typically performs better in market regimes where there is a wide dispersion of performance. Research Research for EM sovereign bonds concentrates on interest rates, currency, and credit metrics. Fundamental sovereign credit research is produced by the analysts and PMs of the fund, with input from BlueBay s Head of Credit Strategy, David Riley. They cover credits included in the JP Morgan EMBI Global Diversified index, as well as off-index securities. While the index acts as a guideline for the PMs, they have wide latitude to invest in related securities, such as quasisovereigns, euro-denominated bonds, floating-rate notes, or bonds with maturities that are not eligible for the index. Fundamental analysis focuses on country selection, initially using a primarily quantitative process to assess each sovereign according to four criteria: economics, solvency, liquidity and political stability. The quantitative scoring system uses ten main economic indicators, such as debt/gdp, primary balances, GDP growth. Country credit scores are standardized and compared across the investment universe in standard deviation terms. Forecast credit scores for each country are compared with current market spreads to assess relative value. BlueBay s credit research analysts (see Staffing) are consulted in the case of government-guaranteed securities and other non-sovereign securities considered. Although foreign-exchange analysis is not as important to this fund as others managed by BlueBay given its focus on hard currency, it still factors in BlueBay s holistic view of a sovereign and its operating environment. BlueBay does 12-month forward forecasts of foreign exchange and rates to understand potential central bank policy implications. Every six weeks BlueBay s EM credit analysts and PMs meet to agree on a fundamental analysis framework that includes views on central bank policy, an economic analysis of key countries, and forecasting spread scenarios. Weekly meetings cover portfolio and market developments and reviews of relative value assessments, which inform the tactical positioning of the fund. BlueBay has good access to various EM government officials and central banks, and meet regularly to assess potential policy responses to economic conditions. Related Criteria Fund Quality Ratings Criteria (September 2011) Decision Making and Portfolio Construction The fund s lead PM is accountable for the fund s performance and is, therefore, the ultimate investment decision maker. The overall investment process is highly idea-generative and collaborative, fostering dialogue between research, PMs and traders, in Fitch s view. 2
Asset allocation decisions are made at country level based on the quantitative credit scores on a relative value basis. The risk-adjusted expected returns are compared against best- and worst-case scenarios to control risk. Country and issue weightings are done on a highconviction basis, taking into account each bond s duration and yield compared to a reference CDS curve. Portfolio duration is managed through security selection. In constructing portfolios, PMs take into account tactical investment themes and macro perspectives discussed at regularly scheduled meetings. Portfolio weightings are also based on regional and single country exposures, as well as liquidity assessments. Technical analysis is incorporated into the process, such as by reviewing local and international market flows. Risk management is embedded in the portfolio construction process, with risk-taking a function of convictions. PMs use exposures and sensitivities as the key risk factors to be considered in portfolio construction. Volatility is used as a control tool rather than a risk budgeting tool to calibrate trades and strategies. Portfolio Monitoring The front office tools enable PMs to monitor the portfolio in terms of daily risk exposures, performance attribution and profit and loss. Daily reports produced by the risk management team allow the monitoring of key market risk parameters: concentrations, VaR, stress tests, exposures and sensitivities. Exposures and key risk metrics are monitored independently by risk management against pre-defined guidelines. The limits are conservatively set to encourage risk management to engage with and challenge PMs. A weekly market risk committee reviews all risk and performance issues. The risk management department has the ability to require PMs to cut risk in extreme circumstances. Liquidity risk is monitored through pre-defined metrics on a daily basis. BlueBay has designed a proprietary liquidity risk indicator, providing a score for each fund. Most (68%) of the fund is within the internally-defined most liquid bucket (out of four). Risk management conducts weekly redemption stress tests. Figure 5 Key EM Dedicated Investment and Shared Support Functions Team Number EM PMs 21 Institutional portfolio 3 managers EM credit research 12 EM traders 6 EM total 42 Leverage finance/high yield 38 Investment grade 24 Convertible bonds 10 Risk & performance a 16 Operations 54 a Includes an investment risk team of three Source: BlueBay, Fitch as at February 2015 Counterparty risk exposure is monitored daily (notional and marked to market), in addition to other counterparty risk indicators (CDS and equity price movements). Counterparties have to be approved by the market risk committee to be eligible for trading, who are defined and ranked through a formal process. As a rule, a single counterparty cannot represent more than 8% of the NAV of each fund (and more than 3% of total company AUM). Operational Front Office Workflows Front office work flows are well automated. Charles River Investment Management (Charles River) supports straight-through processing for order management, including pre-trade controls for all securities, with the exceptions of swaps which are processed separately. The PM s administrative burden is further limited by the reliance on dedicated assistants. All trades are executed by an independent trading desk. Resources Staffing BlueBay s EM team consists of 42 investment professionals with 13 years industry experience on average (see Figure 5), covering both corporates and sovereigns. BlueBay has 19 professionals that focus on EM sovereign credits. The lead PM, David Dowsett, has 20 years investment experience. All PMs and analysts are accountable for their trade ideas within their dedicated area of responsibility for alpha generation. BlueBay s EM analysts and PMs are based in London and not the local markets they cover, as BlueBay believes that the increased communication generated by the cohesiveness of the group outweighs the disadvantage of not having a local presence. At the same time the EM analysts maintain strong contacts, including with government officials, across the geographies they cover. 3
Figure 6 AUM Breakdown by Asset Class Convertibles 6% Multi-strategy 8% HY 11% EM 28% Source: BlueBay IG 47% The depth of BlueBay s specialist fixed income resources is illustrated in Figure 5. The company had 436 employees including 122 investment professionals at end-february 2015. Technology Overall, the IT environment built around third-party systems is strong, matching the needs of the fund well. Charles River is the company s core system for position holding and order management. The core risk management system is RiskMetrics. Performance attribution is based on StatPro. BlueBay also uses Markit and Superderivatives for derivatives analytics, pricing and trade processing. An internal database fed by Charles River, InvestOne (accounting system) and external data providers support data management and reporting capabilities through webbased proprietary applications. Asset Manager Ownership and Financial Conditions BlueBay was founded in 2001 as a credit specialist, listed on the London Stock Exchange in 2006 and acquired in 2010 by Royal Bank of Canada (AA/Stable/F1+). Now a 100% subsidiary and part of the asset management division of the bank, BlueBay preserves its operational and investment autonomy. Client Base BlueBay s client base is mostly institutional investors, of which 75% were European at end-may 2014. The investor base of BlueBay has expanded rapidly and is now well diversified. However, the largest investor represents 29.6% of the fund. Institutional Experience & Market Presence BlueBay has USD62.9bn in AUM (including USD17.8bn in EM) at end-december 2014. The company has invested in EM debt since 2002. Historically focused on European fixed income, BlueBay has expanded to global products since 2010. Figure 7 BlueBay AUM Growth (USDbn) 70 60 50 40 30 20 10 0 2006 2008 2010 2012 2014 Stability The organisation has experienced rapid development since its creation in 2001, with increased staff, geographic expansion, and strong asset growth (see Figure 7). The organisation has enjoyed good stability in its core team of PMs and maintained its strategic focus on credit management capabilities. In January 2014, planned changes in management became effective: A. Khein, previously COO, became CEO and R. Robelin and D. Dowsett became co- CIOs, succeeding two of BlueBay s founding partners (previously CEO and CIO), who stepped down to take an oversight role in the company. Source: BlueBay 4
Figure 8 Operational Assessment Pass Attention required x Fail Service providers & asset segregation Custodian Brown Brothers Harriman (Luxembourg) S.C.A. rated A+ / F1 ( BBH ) Segregation of assets Assets are segregated as per regulation Administrator BBH Auditors Deloitte S.A. Stability in service Change of auditor (from PWC) in 2011. providers BBH has been admin/custodian for all BlueBay funds since inception Others Annual review of counterparty and custodial relationships Regulation & governance Regulated vehicle Part I Luxembourg SICAV (UCITS IV) Governance Fund board of 5 includes 3 independent directors Control framework - Existence of independent compliance and risk group, reporting to CEO - Daily risk reporting by Risk team - Weekly market risk committee - BlueBay is in the scope of RBC internal Audit - UCITS Global exposure is calculated using an Absolute Value At Risk method (limited to 20% of the NAV) Valuation & pricing Pricing responsibility Pricing policy Back-office reconciliations Source: Fitch BBH - Prices are sourced by Pricing team from independent market data providers and external brokers (Level 2 assets) - BlueBay s monthly Valuation Committee defines and validates the firm s valuation policies and procedures and reviews the pricing of portfolios Daily reconciliation of cash and positions between BlueBay and Custodian/ counterparty and BlueBay and Administrator Fund terms Liquidity management Fee structure Conflicts of interest Management of conflicts of interest Alignment of interests Disclosure & transparency Clear strategy representation Level of disclosure - Daily liquidity - Subscriptions/ Redemption prior to the 12:00 CET cut-off; settlement is T+3 - Existence of gate provision in prospectus - Monitoring of proprietary liquidity risk indicator and internal liquidity guidelines - Weekly redemptions liquidity stress tests Management fees of 100bps (with no performance fees) or 60bps (and 20% performance fees), for share classes B and B(perf), respectively - Existence of a conflict of interest policy - BlueBay is a 100% subsidiary of RBC, but BlueBay is operationally independent -The proportion of RBC money managed by BlueBay is negligible (mainly seed money) - PMs have long-term incentivisation. Compensation: 40% deferral ratio invested in fund and/or shadow equity with a 3-year lock-up period - Research analysts are assessed on the quality of their recommendation (through a formalised quantitative and qualitative process) The fund has a broad mandate, but investment objectives and policies are clearly stated in legal and marketing documentation Good monthly reporting, including all important key risk metrics and PM's commentary Important Notice A report providing a Fitch Rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the fund advisor and its agents in connection with the distribution of the fund. Investors should review the prospectus and/or legal information, which Fitch understands includes, inter alia, the jurisdictions in which the fund is registered for sale. 5
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