Fund Guide
Emerging Market
Debt Unconstrained Fund
August 2016
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Emerging
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Debt
Unconstrained
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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,
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we have close relationships with leading
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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
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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
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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?
5 Fund information
3 What is our investment
approach?
102 Emerging Market Debt Unconstrained Fund
5 Summary of benefits
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
¬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.
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.
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.
World GDP
Total Market Capitalisation
11%
15%
28%
23%
39%
13%
46%
2%
6%
Advanced economies ex G7
US Equities
G7 - Canada, France, Germany, Italy,
Japan, United Kingdom, and United States
Japan Bonds
11%
7%
US Bonds
EM Equities
Other Advanced Equities
Emerging market and developing economies
Japan Equities
EM Bonds
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
2
Emerging Market Debt Unconstrained Fund
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
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
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.
Trade
implementation
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.
Portfolio
construction &
risk management
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
Collectively better
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.
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.
Richard House
Head of Emerging Market Debt
Richard has 22 years’ investment experience, with a focus on emerging market fixed income. Previous
positions include five years as Head of Emerging Market Debt at Threadneedle Asset Management
where his role covered fund management responsibilities for the Threadneedle Emerging Market
Bond Fund (AA rated by Standard and Poor’s and A rated by OBSR under his management). Richard
has an honours degree in Economics and Computer Science and an MSc in Finance and Investment.
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.
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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
Richard House & Kieran Curtis
Legal structure
SICAV Fund
Benchmark
50% JPM EMBI Global Diversified (USD), 50% JPM GBI-EM
Global Diversified (USD)
Types of shares available
Income and Accumulation
Fund currency
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:
The Fund may not be suitable for investors who:
¬are looking for actively managed exposure to
emerging market debt
¬are unwilling to take any risk with
their capital – fixed income is not a
risk-free investment
¬are looking to diversify an existing fixed
income or broad portfolio
¬are willing to accept some fluctuations in
the value of their investments.
¬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
Managers can capture emerging trends across asset classes, eliminating
the need for investors to physically change their asset allocation.
Benchmark agnostic
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.
Devolve responsibility
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.
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