Platform Review

Lazard
Emerging Markets Debt
12/14
Platform
Review
Performance Summary as of 31 December 2014
(All data in US dollars; %, unless otherwise noted)
Benchmark-Aware Strategies
Annualized
1 Month
3 Month
1 Year
2 Years
3 Years
Since Inception
(1 December 2010)
Emerging Markets Debt – Core
-3.49
-2.62
4.87
0.24
6.65
6.73
JPMorgan EMBI Global Diversified Index
-2.31
-0.55
7.43
0.89
6.13
6.18
Excess Return (bps)
-118
-207
-256
-65
+52
+55
Emerging Markets Debt – Local Debt
-5.71
-5.70
-4.80
-6.35
0.92
1.17
JPMorgan GBI-EM Global Diversified Index
-5.93
-5.71
-5.72
-7.36
0.07
0.37
Excess Return (bps)
+21
+1
+92
+101
+85
+80
Since Inception
(1 October 2011)
Emerging Markets Debt – Blend
-5.06
-4.84
-1.36
-3.54
3.81
4.54
50% JPM EMBI Global Diversified/50% JPM GBI-EM
Global Diversified Index
-4.12
-3.15
0.71
-3.28
3.12
3.68
-94
-169
-206
-26
+69
+86
Excess Return (bps)
Benchmark-Unaware Strategies
Emerging Markets Debt – Total Return
Since Inception
(1 December 2010)
-3.98
-3.68
1.25
0.49
4.60
4.17
Since Inception
(1 November 2011)
Emerging Markets Debt – Corporate
-4.85
-6.90
-1.85
-1.83
4.39
3.62
Performance is preliminary and presented gross of fees. The performance quoted represents past performance. Past performance is not a reliable indicator of future results.
Please refer to the Important Information section for a brief description of each composite.
Outlook
2014—A Year of Surprises
The major themes in 2014 were ones that most market observers (us included) thought were highly unlikely at the beginning
of that year. The first surprise was the near-100 basis point (bp)
decline in US Treasury yields even as US GDP growth met
expectations at 2.8%. The fall in yields essentially erased the
“taper tantrum,” which occurred in the second half of 2013 as
the market readjusted to an extended period of dovish policy by
the US Federal Reserve (Exhibit 1).
The second big surprise, and one that had a dramatic impact
on emerging markets debt valuations, was the near-50% collapse in oil prices in the second half of the year. Oil prices had a
delayed reaction to the global commodity price correction that
has been occurring for the better part of three years because of
the market’s assumption that OPEC (more specifically, Saudi
Arabia) would always act as the ultimate adjustment valve and
cut production when needed to balance global oil supply and
demand. Instead, in a dramatic show of strength to higher-cost
RD24668
Exhibit 1
A Year of Unexpected Yield Movements
10-Year US Treasury Yield (%)
3.5
3.0
2.5
2.0
1.5
Jan 2013 May 2013 Sep 2013 Jan 2014 May 2014 Sep 2014
As of 31 December 2014
Past performance is not indicative of future results. The indices listed above are
unmanaged and have no fees. It is not possible to invest directly in an index.
Source: Bloomberg
2
Exhibit 2
Record Divergence in Local and External Debt Returns in 2014
(%)
2003
2004
2005
2006
2007
2008
2009
2010
External
22.2
11.6
10.3
Local
16.9
23.0
6.3
Difference (bps)
+530
-1,140
+400
-530
2011
2012
2013
9.9
6.2
-12.0
29.8
15.2
18.1
-5.2
22.0
-1,210
-680
+780
2014
12.2
7.3
17.4
-5.3
7.4
15.7
-1.8
16.8
-9.0
-5.7
-350
+910
+60
+370
+1,310
As of 31 December 2014
Source: J.P. Morgan
US producers and offshore producers in Brazil and Africa, Saudi Arabia
held firm to its production targets at the most recent November OPEC
meeting, further stating that OPEC would not cut production even
if oil prices traded in the range of $50 a barrel. Needless to say, that is
exactly the level to which the market adjusted, resulting in a rout of
all sovereigns and corporates that stand to benefit from high oil prices.
The biggest casualty of falling oil prices was Russia, where external debt
prices corrected 9.2% in 2014 and where the ruble collapsed versus the
US dollar, falling more than 50%! Other oil-producing countries were
also hurt, including Venezuela, where external debt valuations fell 29%
and Ecuador, which corrected 8%. The third and final surprise was the
underperformance of local debt versus US dollar debt for a second year
in a row. External debt closed 2014 up roughly 7.4%, while local debt
lost 5.7%. That 1,300-plus bp difference in returns is the largest dispersion of returns in the history of the asset class (Exhibit 2).
2015—More of the Same?
Let’s begin by reviewing consensus views into the New Year. First,
there is nearly unanimous support for the view that the US dollar
has begun a trend of multi-year appreciation versus its global peers,
primarily as a result of divergent monetary policy between the Fed
and most other global central banks. A common belief is that the Fed
will hike its policy rate in the third quarter of this year, leading to
further US dollar appreciation. Meanwhile, the market also believes
that European quantitative easing (to the tune of almost €1 trillion)
will be announced in the first quarter, thereby resulting in sustained
euro depreciation versus the US dollar. We fully agree with the market
on the prospect, timing, and magnitude of QE in Europe and its
near-term effect on the euro. As such, we have maintained the euro as
the largest net short position in our total return strategy. In a similar
vein, we remain underweight European currencies versus the benchmark in our long-only strategies as the negative drag from the euro
ought to more than offset the concomitant fall in eastern European
local bond yields. Our largest dollar-denominated bond positions are
European credits that should also benefit from the collapse in spread
differentials in the European periphery, including those in Portugal
and Slovenia. However, investors should be reminded that the basic
rationale for large-scale monetary stimulus is to “juice” economies to
take additional risk. If (and that is a big if) QE is successful in Europe,
the market should expect higher levels of risk-taking behavior, higher
levels of forecast growth, and higher levels of expected inflation in the
continent. All of those factors are indeed positive for emerging market
assets as Europe is as significant a trading partner for the emerging
markets universe as the United States. As such, European growth,
trade, and inflation data will become critical in the quarter after QE
is announced (likely on 22 January, 2015), with potential upside
surprises in store. If European fundamental data improve, we would
reverse many of our local market underweights and shorts to position
for a near-term bounce in those same emerging markets debt assets.
Outside of European growth malaise, the other elephant in the room
for emerging markets debt investors is the expected path of global
oil prices. Unlike 2008, where oil prices bounced as quickly as they
fell, markets are correctly bracing themselves for a more drawn out
bottoming in crude prices. If we take the Saudis at their word and
believe in their commitment to maintaining market share, then the
market likely needs to wait until at least the second half of this year
for oil prices to rise again. Already, we are seeing a slowing growth rate
of US oil production, as oil prices fall below some of the higher-cost
producers’ breakeven points. However, most of these companies are
relatively well capitalized and oil prices must hover at or below current
levels for an extended period of time before they suffer credit events
or production stoppages. Lower-for-longer oil prices may be the single
most effective reason to force lackadaisical emerging markets policy
makers to enact structural change to fiscal accounts and allow emerging markets currencies to depreciate to pre-commodity-boom levels to
enhance competitiveness.
For the five-year period between 2009 and 2014, emerging markets
debt was characterized by significantly positive and negative “beta”
performance. The entire asset class rallied and corrected, with little
regard for individual country differentiation. We believe that the
market has now entered a new period of lower-beta returns, with
much greater opportunities for alpha creation. As an example, within
the oil complex, countries such as Russia, Angola, Nigeria, Ecuador,
Ghana, and Venezuela will all face fiscal deficits in the high single
digits and, in some cases, double digits. Each country will be challenged to make rapid painful adjustments in order to make it through
what will likely be a low revenue environment in 2015. It is our view
that a country like Venezuela will indeed make those adjustments,
which will likely include a maxi currency devaluation, the end to
certain energy subsidies (particularly the Petrocaribe program), and
sweeping expenditure cuts at the government level. In other cases,
such as Ghana’s, we believe there is very little political will to reduce
what were already double-digit fiscal and current account deficits
before the collapse in oil prices. Instead, Ghanaian authorities will
likely continue to rest their hopes on an IMF bailout; the likelihood of
which is inversely proportional to the level of hubris shown by senior
fiscal operatives in the country.
3
With regards to emerging markets debt expected returns for 2015,
we anticipate mid-single digit returns, which will likely fall just
short of the expected annualized volatility for the asset class. Similar
to 2013 and 2014, external (US dollar–denominated) debt will
likely outperform local currency debt. Tailwinds for external debt
outperformance are certainly more prevalent in the first half of the
year as monetary policy divergence between the United States and the
rest of the world becomes more pronounced. We may very well see the
reverse in the second half of the year, provided that stimulus efforts
result in more stable developed markets growth conditions, which
should then support emerging markets exports (and, hence, currencies
and local markets).
As investors, we believe it is critical not to live in the past. Emerging
debt markets in 2013 were all about the “Fragile Five” whose current
account deficit problems resulted in significant currency depreciation
in the second half of that year. Yet, those same countries in 2014 were
some of the best performers as markets (in retrospect) had significantly overshot as investors shed exposure to these countries, and the
countries themselves made significant positive adjustments. Similarly,
2014 was all about avoiding oil and commodity exposure and many
investors offloaded exposure in the last month of the year. It is hard
to explain how a country like Venezuela, with limited debt maturing in the next two years trades below 40 cents on the dollar. Yet,
the reality of forced stop-loss selling, coupled with the typically less
liquid markets at year-end, gives investors an opportunity for outsized
gains in 2015. Yet again, we believe that some of the most beaten-up
countries from 2014 will make much-needed adjustments in 2015 and
rise to the top of the returns table in the twelve months ahead. Success
in 2015 will rely on old fashioned bottom-up credit and currency
analysis, with a focus on the ability and willingness of sovereign and
corporate credits to adjust and stay current on debt payments. Active
management of portfolios between dollar-denominated and local
currency–denominated debt will also be critical to preserving gains in
what is likely to be an action-packed year for investors.
Strategy Positioning and Performance
Core
The Lazard Emerging Markets Debt – Core strategy had one of its
worst months relative to the J.P. Morgan EMBI Global Diversified
Index in December. The index staged a major sell-off in December
largely driven by the uninterrupted collapse in oil prices. Spreads
continued to widen, ending the year at 353 bps over US Treasuries, a
level not seen since the market started to acknowledge the end of QE
in May 2013.
The core strategy’s performance was almost entirely driven by an overweight position in oil credits. Even though we had already started to
pare exposure to these credits in November, the sell-off was faster and
more vicious than the speed at which we were able to fully shift our
positioning. Countries that exerted the most pain were oil sovereigns
such as Ecuador, Iraq, and Kazakhstan where we still had market
weights or small overweight positions as the month ended. Others
included underweight positions that outperformed the index because
they benefit from lower oil prices. Off index corporates also detracted
from performance, despite the fact that we reduced exposure to almost
half the level held since June. For the first time in months, underweight
positioning in investment-grade credits was not a major detractor.
It is interesting to note that—in line with the differentiation theme
outlined above—there was another significant dispersion of returns
in December, which ranged from 1.6% to -22%. This dispersion
was evident even among oil credits, depending on their buffers, ability to adjust and the quality of the policy framework. In this regard,
Venezuela and Ecuador were among the worst performers. Venezuela,
the index’s second worst performer in 2014 and in December, entered
the oil price collapse from a position of extreme weakness. Venezuela
has an overvalued exchange rate, among the highest inflation in the
world, and a double digit fiscal deficit. Ecuador’s very poor track
record in meeting obligations at times of low oil prices was punished
accordingly by the market. Credits, such as Iraq and Trinidad, posted
losses in the low single digits. Iraq, despite being one of the countries
most exposed to oil in the emerging markets, in terms of fiscal revenues and export proceeds (and notwithstanding ongoing violence),
continues to benefit from ever-rising oil output, which reached a
historical high in December at 3.5 million barrels per day (bpd). Its
level of foreign-exchange reserves still exceeds the entire debt stock,
leaving little question about solvency. Differentiation is a pattern
that will continue in 2015, once oil stabilizes and recovers some of its
losses. We are planning to adapt our strategy accordingly, reflecting
the maturity of the market.
In general, we entered the new year continuing to reduce risk. The
strategy has the lowest level of corporate and quasi-sovereign exposure
since its inception and still has zero exposure to local instruments, in
line with the view that currencies are likely to continue to weaken.
In addition, the strategy has continued to reduce its underweight to
investment-grade credits despite expectations of higher US interest
rates. The largest overweight positions are in countries that will clearly
benefit from lower oil prices, such as Indonesia and Turkey, and those
that will likely respond favorably to QE in Europe. Overall, we believe
external debt is fairly valued, with expected returns in the mid-single
digit range for 2015. This is still not a suitable reason to express high
conviction and be sanguine about risk, particularly given volatility
around the same level as expected returns.
Local Debt
In December, the J.P. Morgan GBI-EM Global Diversified Index
returned -5.93%, ending the year down 5.72%. Both currency and
duration returns were negative during the month, with spot currency
returns amounting to -4.77% and the remaining -1.16% split between
the positive carry and the negative duration returns. For the year,
spot currency returns detracted 12.8% from total index returns, when
calculated on a compounded basis, while yield added 6.7% and capital
gains from duration exposure added an estimated 1.6%. The disappointing performance of emerging markets currencies was the result of
a confluence of factors, including the divergent outlook of monetary
policies between the United States and most emerging markets, sharp
depreciation in the currencies of key trading partners such as the euro
zone and Japan, and sharply lower commodity prices that have hurt a
number of commodity exporters with a large share in the index, such
as Brazil, Colombia, Russia, and Malaysia.
4
The worst-performing emerging markets currencies were the Russian
ruble, the Colombian peso, and the Hungarian forint. The ruble
collapsed as the drop in oil prices and the sanctions in place prompted
panic selling of the currency, forcing the central bank to hike its policy
rate 750 bps in December and the government to take extraordinary
measures to try to restore currency stability, including asking large
exporters to convert their foreign-currency-export proceeds into
rubles. The Colombian peso was also a victim of the lower oil price
due to the high share of oil in Colombia’s exports. The Hungarian
forint depreciated partly as a high-beta euro move but also because
of the negative implications of the slowdown in Europe and the
repercussions from a potential full-blown Russian financial crisis
for central and eastern European countries. In December, the bestperforming currencies included the Philippines peso, the Chilean
peso, and the Thai baht. The Philippines peso got a boost from
lower oil prices and stronger manufacturing exports, as well as what
appears to be some degree of currency intervention by its central
bank to maintain a relatively stable currency around the 44 to 45
level. A similar set of factors, notably a large-scale degree of currency
intervention, was behind the stability of the Thai baht. In Thailand,
there has been a modest reversal in the collapse of domestic demand
after the military coup in May 2014, but growth forecasts continue
to be revised downwards by the central bank as private investment
demand remains extremely tepid, and the government is moving
ahead with public investment at a slower pace than anticipated by the
monetary authorities.
In rates, the worst-performing markets were Russia, Nigeria, and
Colombia. In these markets, the collapse in oil prices and the concomitant depreciation of their currencies was a key driver of the rates
actions, as the markets demanded a higher inflation premium and
anticipated that a tighter monetary stance would be needed going forward. In Russia the central bank hiked rates by 750 bps, and the curve
inverted, as long-term yields moved up by much less than the front
part of the curve. In Nigeria and Colombia there was no central bank
rates action so the curve steepened, with the five-year rate moving up
91 bps in Colombia and 155 bps in Nigeria. The best performers in
rates markets were Romania, Thailand, and Indonesia. Romanian rates
got a boost from a staff-level agreement with the IMF on the 2015
budget that is in line with the IMF/European Commission program
and predicts further fiscal consolidation. The lower-than-expected
inflation outturn for November also helped push yields lower. But
since positive surprises were also seen in peers like Hungary and
Poland, where rates performed worse, Romania’s considerable outperformance in December is not entirely explained by fundamental
factors and we believe that technical factors, such positioning, must
have played a role. In Thailand, the local rates curve continued to benefit from the disinflationary process in the country, against a backdrop
of falling oil prices and still-muted domestic demand. In Indonesia,
despite some intra-month volatility driven by heavy positioning, local
rates outperformed other markets as investors continue to anticipate
a positive impact of the impending structural reforms under the
Widodo administration, including the elimination of fuel subsidies
against the backdrop of falling global oil prices.
The Lazard Emerging Markets Debt – Local Debt strategy
outperformed the J.P. Morgan GBI-EM Global Diversified Index
in December. The lead contributor was an underweight currency
position against the US dollar. We have held this view in light of
the divergent monetary policy paths between the United States and
most G10 and emerging markets, which has been translating into US
dollar strength against most currencies. Another major contributor
in December was an off-index position in the Indian rupee, which
outperformed the index during the month. We have held a position
in the rupee for most of 2014, as we expected that a credible central
bank governor with a strong commitment to disinflation, along with
a reformist new government, would benefit the country’s external
imbalances and overall macro-framework, attracting private capital.
Meanwhile the biggest detractors included short positions in the euro
and the Singapore dollar. While both currencies depreciated against
the US dollar, the depreciation was less than the index’s performance
during the month. We continue to believe the euro is on a downward
trend against the US dollar on the back of divergent monetary policy
paths between the European Central Bank (ECB) and the Fed, and
we maintain our short position in the currency. Similarly, in the case
of the Singaporean dollar, we view it as an attractive beta-reducer in a
strong US dollar environment, due to its low carry and its explicit peg
to a basket of emerging markets and G10 currencies.
Going into 2015, we have cut overall currency risk, though we maintain an overall short currency exposure against the US dollar, mainly
via short euro and euro-related currency exposures. On the long side
we have reduced somewhat our overweight in the Indian rupee on the
grounds that the disinflation in the country is likely to lead to interest
rate cuts by the Reserve Bank of India, which could weaken the carry
support to the currency. The recent deterioration in the external balance is another factor, although we expect the short-term deterioration
to reverse as the benefit of lower global oil prices gets fully reflected
in the data. On the rates side, we have reduced our dollar duration
overweight to be closer to neutral, mainly by cutting overweight positions in Hungary and Mexico. In Hungary, the shift was motivated by
concerns that instability in Russia and/or the euro zone would prompt
risk-off outflows that would hurt Hungarian local assets. In Mexico,
the lower oil price environment and the overall de-risking mode
of investors has hurt the currency, which in turn is reflected in the
country’s local rates, as inflation expectations and, potentially, rates
expectations are increasing.
Blend
The Lazard Emerging Markets Debt – Blend strategy underperformed
the 50% J.P. Morgan EMBI Global Diversified/50% GBI-EM
Global Diversified Index. Yet again, top down macro positioning
helped the portfolio due to an overweight to better-performing dollardenominated debt (versus local debt). However, bottom up country
and corporate selection significantly underperformed versus the hybrid
benchmark. The strategy maintained an extreme 70%/30% (dollar
versus local) position for most of the month, before reducing to close
the month at 64%/36%. While we continue to expect local debt to
underperform external debt, we believe that there is potential for
local debt to rally in early 2015 as many investors reduced exposures
during the sell-off in the fourth quarter and may be looking to re-enter
positions at more attractive valuations. The renewed appetite for risk
combined with the potentially positive impact of European QE in late
January should be positive for beta assets in the first part of the year.
From a bottom up perspective, we significantly reduced exposure to
5
oil and gas countries and corporates in December in order to reduce
credit risk. With crude oil prices unlikely to rebound in the near term,
we believe there are few triggers for a sustained rally in energy-levered
names. We intend to continue to add local debt into weakness as the
year begins, likely reaching a more balanced position of 60%/40% by
the end of January.
Total Return
The Lazard Emerging Markets Debt – Total Return strategy declined
by slightly under 4% in December, thus reducing 2014 returns to
approximately 1%. Overall portfolio positioning between external
and local debt remained constant with the entire risk budget allocated
to dollar-denominated debt. That being said, we reduced exposure
to dollar-denominated debt by over 2000 bps in December, closing
the month at 74% net long (73% external versus 1% local). External
debt remains attractive both on a spread and carry basis, therefore we
expect to maintain current position levels in the near term. While local
debt remains unattractive in comparison to external debt, we are getting closer to adding outright long positions as QE in Europe is likely
by end-January; which should support risk assets including emerging
markets currencies.
Corporate
The Lazard Emerging Markets Debt – Corporate strategy declined
by 4.85% in December, which was the fourth worst month in the
ten-year history of the emerging markets corporate debt asset class
(outside of the 2008/2009 crisis). The strategy’s performance was hurt
by its exposure to oil and gas credits which detracted 2.72% from the
performance and to Russian credits which detracted 0.78% from the
strategy’s performance. During the month, Russian credit spreads
peaked to nearly 1200 bps (Exhibit 3) over US Treasuries as investors
abandoned (the Russian) ship. The strategy ended the month with a
3.8% exposure to Russian credits, down from 9% last month. Going
forward, the strategy continues to reduce its risk exposure to oil and
gas credits which are likely to face challenges in a sustained lower oil
Exhibit 3
Russian Credit Spreads Peaked as Investors Abandoned
Russian Corporate Bonds
price environment. The strategy remains well diversified across regions
and countries with some of its largest exposures across a variety of sectors in Mexico, China, Brazil, Chile, and Nigeria.
The past year can be characterized as a year of idiosyncratic return
drivers for emerging markets corporate issuers, which experienced
corruption probes (Petrobras in Brazil, China Property), economic
sanctions (Russia), and other shocks (50% drop in oil price and collapse of other commodity prices). Seemingly bullet-proof credits, such
as Brazil’s Odebrecht, with excellent balance sheets, strong cash-flow
generation, and growth outlook, got caught in the middle of a corruption scandal in Brazil and lost investor trust. Indeed, the past year was
full of quick fortune reversals for corporate issuers and investors alike.
During the first half of 2014, overweight high yield issuers was the
right asset allocation call offering investors higher yields and lower US
Treasury exposure. However, as US Treasuries continued their rally
throughout 2014 as growth prospects deteriorated in the rest of the
world, emerging markets investment-grade issuers held steady while
emerging markets high yield corporates declined sharply. Emerging
markets investment-grade corporates outperformed high yield issuers by over 6% in 2014, surpassed only by two other years of return
differential, in 2008 by over 13% and in 2011 by over 9%. While
emerging markets high yield issuers with exposure to the oil and gas
sector sold off the most, the risk-off sentiment in emerging markets
corporate debt affected emerging markets high yield issuers across the
board. The “good” turned into the “bad”, and the “bad” turned into
the “ugly”, so to speak, during the last month of the year during which
trading liquidity is typically thin. Faced with outflows, stop losses,
and simply fears of a meltdown, investors looked to reduce their high
yield credit exposure in a market with poor liquidity. Investors sold
high yield credits with any available liquidity and with little regard for
credit fundamentals (Exhibit 4). Markets partly rebounded towards
the last couple of weeks in 2014, however, investors continued to
avoid risk as oil prices continued to tumble.
Exhibit 4
Investors Sold High Yield Credits with Little Regard for Credit
Fundamentals
J.P. Morgan CEMBI BD Investment Grade Index Total Return versus
J.P. Morgan CEMBI BD High Yield Total Return (Normalized as of 31/12/2013)
109
Spread over UST (bps)
1200
1179 bps as of
16/12/2014
106
900
US imposes
sanctions on Russia
Additional US and
EU sanctions on Russia
103
600
100
J.P. Morgan CEMBI BD Investment Grade Index
J.P. Morgan CEMBI BD High Yield Index
300
Feb 2014
Apr 2014
Jun 2014
Aug 2014
Oct 2014 Dec 2014
97
Feb 2014
Apr 2014
Source: J.P. Morgan
Source: Bloomberg
As of 31 December 2014
As of 31 December 2014
Jun 2014
Aug 2014
Oct 2014 Dec 2014
6
In 2015, we expect continued volatility in the first half of the year as
oil prices stabilize and emerging markets countries look for adjustment
mechanisms in a lower growth-rate and oil price environment (in the
case of oil producing countries). We expect investor risk appetite to
return in the later part of the year.
In terms of asset class growth, emerging markets corporates continued
their growth path and delivered $368 billion in new issue supply in
2014, and ended the year at $1.6 trillion.1 We believe that emerging
markets corporates were well on their way to solidifying their role as
a mainstream asset class in 2014 as it continued to attract dedicated
fund flows as well as increasing interest from cross-over investors
(mainly US high yield). We do not expect 2015 to be different and
we expect the asset class to continue attracting dedicated emerging
markets investors looking for diversification from the developed
world and higher yields for better credit fundamentals versus the
developed markets.
Sincerely,
Denise S. Simon
Managing Director, Portfolio Manager/Analyst
Arif T. Joshi, CFA
Managing Director, Portfolio Manager/Analyst
George V. Varino
Managing Director, Client Portfolio Manager
7
Emerging Markets Debt – Core
Sector Allocation
Characteristics
Lazard
Benchmark3
Yield to Maturity1 (%)
5.83
5.64
Duration (yrs)
7.25
6.98
Average Coupon (%)
6.15
6.16
Cash
3.1%
External
Corporate
8.4%
External
Quasi
6.5%
External
Sovereign
82.0%
Key Hard Currency Exposure
Sovereign and Quasi-Sovereign
Lazard O/W
or U/W (%)
Côte d’Ivoire
1.8
Slovenia
1.6
Panama
1.3
Indonesia
1.2
Pakistan
0.8
Bolivia
0.7
Congo
0.7
Turkey
0.7
Hungary
0.7
Peru
-0.9
Croatia
-1.0
Serbia
-1.0
Malaysia
-1.4
South Africa
-1.4
Philippines
-1.6
Chile
-2.2
Lebanon
-2.7
China
-4.1
Corporate
Chile
1.8
Mexico
1.4
Brazil
0.9
Nigeria
0.8
Vietnam
0.6
Panama
0.5
Bulgaria
0.5
Colombia
0.5
Egypt
0.5
Kazakhstan
0.4
Quality Distribution
(%)
75
65.0 65.1
50
25
0
Investment
Grade
Lazard
14.3 16.3
13.4 12.1
BB
B
6.6
5.8
CCC
0.7
0.8
Not Rated
J.P. Morgan EMBI Global Diversified Index
Performance Attribution3
1 Month
(bps)
1 Year
(bps)
Since Inception²
(bps)
Sovereign Hard Currency
-82
-128
100
Overweight/Underweight
6
-36
123
-88
-92
-22
0
-3
-15
0
0
14
Security Selection
Local Debt
Rates
FX
Corporates
0
-3
-29
-48
-114
-26
Cash
12
-11
-4
Total
-118
-256
55
As of 31 December 2014
1 All yields are calculated assuming yield-to-worst.
2 Inception date: 1 December 2010
3 Relative to the J.P. Morgan EMBI Global Diversified Index.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to change.
Attribution is based upon a representative portfolio and is versus the benchmark noted. Attribution analysis is provided for illustrative purposes only, as values are calculated based on returns gross of
fees. Performance would be lower if fees and expenses were included. Past performance is not a reliable indicator of future results.
Lazard receives credit quality ratings on the underlying securities of the portfolio from two major reporting agencies – Standard & Poor’s (S&P) and Moody’s. The credit quality breakdown is provided
by Lazard by using the S&P rating when both agencies assign the same rating to a security. In the event the ratings differ, Lazard will use the lower of the two ratings. Lazard converts all ratings to
the equivalent S&P major rating category for purposes of the categories shown. Bonds rated BBB and above are considered investment grade. Bonds rated below BBB are generally referred to as
speculative grade securities. Bonds rated BB, B, or CCC are regarded as possessing a speculative capacity to pay debt service because of the negative factors or uncertainties for which there are no
compensating positive factors. Ratings from BBB to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within each of the major rating categories. An N/R
category consists of rateable securities that have not been rated by a Nationally Recognized Statistical Rating Organization (NRSRO). Unrated securities do not necessarily indicate low quality. Ratings
and the portfolio’s credit quality distribution may change over time. The portfolio itself has not been rated by an independent rating agency.
Source: Lazard, J.P. Morgan
8
Emerging Markets Debt – Local Debt
Characteristics
Lazard
Benchmark3
(%)
7.02
4.83
6.50
4.92
Average Coupon (%)
6.53
6.55
Maturity1
Yield to
Duration (yrs)
Gross Currency Exposure
Sovereign and Quasi-Sovereign
Mexico
India
Turkey
Serbia
Kenya
Brazil
Russia
Sri Lanka
South Africa
China
Philippines
Colombia
Poland
Indonesia
Nigeria
Peru
Malaysia
Romania
Hungary
Thailand
Singapore
Euro
Key Duration Exposure
Kenya
China
Sri Lanka
Mexico
Peru
Nigeria
Serbia
Colombia
Chile
Hungary
Turkey
Philippines
Indonesia
Gross Regional Allocation
(%)
30
28.3
25.4
23.0
21.9
20
10
Lazard O/W
or U/W (%)
1.7
1.5
0.6
0.2
0.2
0.2
0.2
0.1
0.0
0.0
0.0
0.0
-0.1
-0.1
-0.6
-0.8
-1.1
-1.1
-1.1
-1.1
-1.5
-2.0
0
Eastern Europe
Latin America
Middle East
& Africa
Gross Sector Allocation
(%)
100
92.9
50
0.8
0
4.2
0.7
4.8
0.0
-3.4
-50
Sovereign Quasi-Sov Corporate Inflation
Interest Forwards/
Bonds
Bonds
Bonds
Linked Rate Swaps NDFs/
Options
USD
Cash
Gross Quality Distribution
(%)
75
66.6
57.7
Lazard O/W
or U/W (yrs)
5.2
4.0
2.8
1.6
1.3
1.2
1.1
-0.5
-0.6
-0.6
-1.0
-1.1
-1.1
Asia
50
39.4
31.2
25
0
2.2
2.9
0.0
BB
0.0
B and Below
0.0 0.0
AAA/A
BBB
Not Rated
Lazard
J.P. Morgan GBI-EM Global Diversified Index
Performance Attribution3
1 Month
(bps)
Rates
1 Year
(bps)
Since Inception²
(bps)
8
38
9
FX
13
54
71
Total
21
92
80
As of 31 December 2014
1 All yields are calculated assuming yield-to-worst.
2 Inception date: 1 December 2010
3 Relative to the J.P. Morgan GBI-EM Global Diversified Index.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to change.
Attribution is based upon a representative portfolio and is versus the benchmark noted. Attribution analysis is provided for illustrative purposes only, as values are calculated based on returns gross of
fees. Performance would be lower if fees and expenses were included. Past performance is not a reliable indicator of future results.
Lazard receives credit quality ratings on the underlying securities of the portfolio from two major reporting agencies – Standard & Poor’s (S&P) and Moody’s. The credit quality breakdown is provided
by Lazard by using the S&P rating when both agencies assign the same rating to a security. In the event the ratings differ, Lazard will use the lower of the two ratings. Lazard converts all ratings to
the equivalent S&P major rating category for purposes of the categories shown. Bonds rated BBB and above are considered investment grade. Bonds rated below BBB are generally referred to as
speculative grade securities. Bonds rated BB, B, or CCC are regarded as possessing a speculative capacity to pay debt service because of the negative factors or uncertainties for which there are no
compensating positive factors. Ratings from BBB to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within each of the major rating categories. An N/R
category consists of rateable securities that have not been rated by a Nationally Recognized Statistical Rating Organization (NRSRO). Unrated securities do not necessarily indicate low quality. Ratings
and the portfolio’s credit quality distribution may change over time. The portfolio itself has not been rated by an independent rating agency.
Source: Lazard, J.P. Morgan
9
Emerging Markets Debt – Blend
Historical Allocation
Characteristics
Lazard
Benchmark2
Yield to Maturity1 (%)
6.65
6.12
Duration (yrs)
5.99
5.95
Average Coupon (%)
6.33
6.36
Hard Currency (%)
62.32
50.00
Local Currency (%)
37.68
50.00
(%)
75
50
Key Country Distribution
1.1
Panama
1.0
Honduras
1.0
Senegal
1.0
Congo
0.7
Venezuela
0.7
Bolivia
0.7
Latvia
0.7
Uruguay
-0.8
Colombia
-0.8
Indonesia
-0.8
Romania
-0.8
Russia
-0.9
Poland
-0.9
Thailand
-1.0
China
-1.3
Lebanon
-1.6
South Africa
-2.4
Hungary
-2.7
Malaysia
-3.0
Sep 14
Local Currency Exposure
Sector Allocation
(%)
50
47.3
34.7
25
2.8
9.2
0
0.8
0.6
1.4
0.2
2.9
Cash
1.1
Pakistan
Mar 14
Forwards/NDFs
Mozambique
Hard Currency Exposure
Sep 13
Local Inflation
Linked
1.1
Mar 13
Local Corporate
Bonds
Iraq
Sep 12
Local QuasiSovereign
1.5
Mar 12
Local Nominal
Sovereign
Slovenia
Sep 11
Corporate
Bonds
2.2
External
Quasi
Côte d’Ivoire
25
External
Sovereign
Lazard O/W
or U/W (%)
As of 31 December 2014
1 All yields are calculated assuming yield-to-worst.
2 Relative to a blended index consisting of 50% J.P. Morgan EMBI Global Diversified/50% J.P. Morgan GBI-EM Global Diversified Index.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to change.
Attribution is based upon a representative portfolio and is versus the benchmark noted. Attribution analysis is provided for illustrative purposes only, as values are calculated based on returns gross of
fees. Performance would be lower if fees and expenses were included. Past performance is not a reliable indicator of future results.
Lazard receives credit quality ratings on the underlying securities of the portfolio from two major reporting agencies – Standard & Poor’s (S&P) and Moody’s. The credit quality breakdown is provided
by Lazard by using the S&P rating when both agencies assign the same rating to a security. In the event the ratings differ, Lazard will use the lower of the two ratings. Lazard converts all ratings to
the equivalent S&P major rating category for purposes of the categories shown. Bonds rated BBB and above are considered investment grade. Bonds rated below BBB are generally referred to as
speculative grade securities. Bonds rated BB, B, or CCC are regarded as possessing a speculative capacity to pay debt service because of the negative factors or uncertainties for which there are no
compensating positive factors. Ratings from BBB to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within each of the major rating categories. An N/R
category consists of rateable securities that have not been rated by a Nationally Recognized Statistical Rating Organization (NRSRO). Unrated securities do not necessarily indicate low quality. Ratings
and the portfolio’s credit quality distribution may change over time. The portfolio itself has not been rated by an independent rating agency.
Source: Lazard, J.P. Morgan
10
Emerging Markets Debt – Blend
Quality Distribution
(%)
80
Performance Attribution2
1 Month
(bps)
1 Year
(bps)
Since Inception1
(bps)
65
107
81
Sovereign Hard Currency
-128
-208
-24
Overweight/Underweight
-55
-110
16
Security Selection
-73
-98
-40
-74
-144
-12
43
39
41
1
-17
-11
FX
42
57
53
Total
-94
-206
86
Overall Allocation –
Hard vs. Local
Corporate Hard Currency
Local Debt
Rates
70.8
74.1
60
40
20
0
10.4
Investment
Grade
Lazard
14.9
BB
13.6
7.7
B
3.6
2.9
CCC
1.6
0.4
Not Rated
50% JPM EMBI Global Diversified/
50% JPM GBI-EM Global Diversified Index
As of 31 December 2014
1 Inception date: 1 October 2011
2 Relative to a blended index consisting of 50% J.P. Morgan EMBI Global Diversified/50% J.P. Morgan GBI-EM Global Diversified Index.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to change.
Attribution is based upon a representative portfolio and is versus the benchmark noted. Attribution analysis is provided for illustrative purposes only, as values are calculated based on returns gross of
fees. Performance would be lower if fees and expenses were included. Past performance is not a reliable indicator of future results.
Lazard receives credit quality ratings on the underlying securities of the portfolio from two major reporting agencies – Standard & Poor’s (S&P) and Moody’s. The credit quality breakdown is provided
by Lazard by using the S&P rating when both agencies assign the same rating to a security. In the event the ratings differ, Lazard will use the lower of the two ratings. Lazard converts all ratings to
the equivalent S&P major rating category for purposes of the categories shown. Bonds rated BBB and above are considered investment grade. Bonds rated below BBB are generally referred to as
speculative grade securities. Bonds rated BB, B, or CCC are regarded as possessing a speculative capacity to pay debt service because of the negative factors or uncertainties for which there are no
compensating positive factors. Ratings from BBB to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within each of the major rating categories. An N/R
category consists of rateable securities that have not been rated by a Nationally Recognized Statistical Rating Organization (NRSRO). Unrated securities do not necessarily indicate low quality. Ratings
and the portfolio’s credit quality distribution may change over time. The portfolio itself has not been rated by an independent rating agency.
Source: Lazard, J.P. Morgan
11
Emerging Markets Debt – Total Return
Currency Exposure
Characteristics
United States
Lazard (%)
Lazard
Yield to
Maturity1
(%)
5.56
Duration (yrs)
5.34
Average Coupon (%)
6.42
Long Exposure (%)
88.98
Short Exposure (%)
15.18
Net Exposure (%)
73.83
Gross Exposure (%)
104.18
Cash (%)
0.00
Key Hard Currency Exposure
2.51
Mexico
1.96
Brazil
1.50
Indonesia
1.01
South Africa
0.73
Turkey
0.73
Serbia
0.17
Kenya
0.16
Sri Lanka
0.11
Romania
0.01
Hungary
-1.02
Singapore
-4.03
Euro
-4.17
Sovereign and
Quasi-Sovereign Net
% of Market Value
Corporate
Net % of
Market Value
Total
Net % of
Market Value
Brazil
7.52
3.20
10.72
Mexico
1.53
3.92
5.45
Portugal
3.30
—
3.30
Colombia
2.05
1.02
3.07
India
Iraq
2.23
0.78
3.02
Mexico
—
2.76
2.76
Brazil
China
86.06
India
Key Local Debt Positions
FX (%)
% of Total
Market Value
Bond (%)
IRS (%)
—
—
2.51
2.51
0.62
—
1.34
1.96
1.47
—
0.03
1.50
—
—
1.01
1.01
0.73
Paraguay
2.19
0.30
2.49
Indonesia
Panama
2.09
0.32
2.41
South Africa
—
—
0.73
Chile
0.22
1.95
2.17
Turkey
—
—
0.73
0.73
Turkey
2.07
0.08
2.15
Hungary
—
—
-1.02
-1.02
Bolivia
2.03
—
2.03
Singapore
—
—
-4.03
-4.03
Angola
2.02
—
2.02
Euro
—
—
-4.17
-4.17
Mozambique
2.00
—
2.00
Indonesia
1.02
0.96
1.98
Venezuela
1.96
—
1.96
Bahrain
1.94
—
1.94
Côte d’Ivoire
1.68
—
1.68
Kazakhstan
0.50
1.04
1.54
Congo
1.47
—
1.47
CDX
-3.33
—
-3.33
Key Relative Value Exposures
% of Market Value
No relative value positions
0.00
As of 31 December 2014
1 All yields are calculated assuming yield-to-worst.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to change.
12
(%)
48
216
219
-34
-85
-10
Quasi-Sovereign
-28
-4
24
Long Corporates
-152
-121
28
Short Corporates
0
0
-1
Long Rates
-1
72
122
-7
128
146
Short Rates
0
-1
-4
Long FX
-6
-70
-49
12
14
28
-12
47
34
Short FX
Relative Value
Cash
0
0
0
Total
-398
125
417
22.2
24
12
0
Asia
Cash
Long Credit
Short Credit
Long Local
Short Local
Relative Value
24.6
19.4
10.9
5.6
0
Hard Currency
Sovereign
90
Middle East
& Africa
20
10
135
Latin America
(%)
39.7
40
Hard Currency
Quasi-Sovereign
(%)
180
Eastern Europe
Gross Sector Allocation
30
Historical Gross Exposure Allocations
20.8
19.0
1.9
1.5
0.0
0.6
0.0
0.0
Cash
-171
Short Sovereign
FX/NDFs/Options
Long Sovereign
36
Local Corporate
Bonds
261
Local QuasiSovereign Bonds
6
Local Inflation
Linked Bonds
-385
Local Debt
42.3
Since Inception1
(bps)
Local Nominal
Sovereign Bonds
1 Year
(bps)
Hard Currency
Corporate
1 Month
(bps)
Interest Rate
Swaps
Performance Attribution
Hard Currency
Gross Regional Allocation
CDX/CDS
Emerging Markets Debt – Total Return
45
0
2010
2011
2012
2013
2014
Historical Long/Short Exposures
(%)
160
Long
Short
Net
Nov 10
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Jul 11
Aug 11
Sep 11
Oct 11
Nov 11
Dec 11
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
Aug 13
Sep 13
Oct 13
Nov 13
Dec 13
Jan 14
Feb 14
Mar 14
Apr 14
May 14
Jun 14
Jul 14
Aug 14
Sep 14
Oct 14
Nov 14
Dec 14
124
110
111
111118
109108
101
98
95 95
97
96
96
91
84
92
90
92
89
89
88
86
86
90 89
88
83
85
83
81
79 79 83 85
76
76 80 69
75
94
80
80
89
67 66 68 66
65
100
86
62 53
60
82
56
88
51
72
74
74
70
63
78
64 68 77
67 64 71 74 80
59
60 63
67
36
57 49
53 64
55
56 60
57
52 63
47 71
47 46
51
44
34
42
36 35
30 52
23 51
0
-1
0
-4
-3 -3
-5 -11
-6 -5
-11 -12 -10 -14
-12 -10 -8 -15 -15
-16 -17 -16 -22 -19 -18 -21
-15
-15
-21-28 -23 -23 -21 -24
-23 -31
-25
-27
-31-28
-28 -24
-33
-36 -31
-52-43 -53
-61 -65 -58
-80
As of 31 December 2014
1 Inception date: 1 December 2010
There is no benchmark for this strategy as it has an absolute return investment objective.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to
change. Contribution is based upon a representative portfolio. Contribution analysis is provided for illustrative purposes only, as values are calculated based on returns gross of fees. Performance
would be lower if fees and expenses were included. Past performance is not a reliable indicator of future results.
13
Emerging Markets Debt – Corporate
Characteristics
Lazard
Yield to Maturity1 (%)
8.00
Duration (yrs)
3.88
Average Coupon (%)
7.44
Gross Sector Allocation
(%)
100
86.6
50
0
Total Country Distribution
12.3
1.1
Hard Currency
Corporate Bonds
Hard Currency
Quasi-Sovereign Bonds
Cash
Lazard (%)
Mexico
13.6
China
11.6
Brazil
9.1
Nigeria
5.8
Chile
4.9
Indonesia
4.5
Russia
3.9
Singapore
3.8
Peru
3.2
Guatemala
2.6
Bulgaria
2.6
Iraq
2.6
Colombia
2.2
Georgia
2.1
Vietnam
2.0
Industry Exposure
Gross Quality Distribution
(%)
40
20
0
Oil & Gas
21.0
Utilities
9.0
TMT
8.6
Consumer
6.2
Real Estate
5.8
Transport
3.7
Pulp & Paper
3.4
Industrial
2.9
Metals & Mining
2.6
Infrastructure
1.9
Other
1.1
Cash
12.3
11.9
1.1
Investment
Grade
BB
B
CCC
Not Rated
12.5
12.3
Middle East
& Africa
Cash
Gross Regional Allocation
(%)
45
30
21.6
27.2
24.0
Lazard (%)
Financial
35.8
40.7
23.9
15
0
10.6
Asia
Eastern
Europe
Latin
America
Performance Attribution
Corporate
Investment Grade
Below Investment Grade
Quasi-Sovereign
Investment Grade
Below Investment Grade
1 Month
(bps)
1 Year
(bps)
Since Inception²
(bps)
-456
-123
370
-59
16
149
-397
-139
221
-29
-62
-8
0
5
-30
-29
-67
22
Cash
0
0
0
Total
-485
-185
362
As of 31 December 2014
1 All yields are calculated assuming yield-to-worst.
2 Inception date: 1 November 2011
There is no benchmark for this strategy as it has an absolute return investment objective.
The allocations and specific securities are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations and security selection are subject to change.
Contribution is based upon a representative portfolio. Contribution analysis is provided for illustrative purposes only, as values are calculated based on returns gross of fees. Performance
would be lower if fees and expenses were included. Past performance is not a reliable indicator of future results.
Lazard receives credit quality ratings on the underlying securities of the portfolio from two major reporting agencies – Standard & Poor’s (S&P) and Moody’s. The credit quality breakdown is
provided by Lazard by using the S&P rating when both agencies assign the same rating to a security. In the event the ratings differ, Lazard will use the lower of the two ratings. Lazard converts
all ratings to the equivalent S&P major rating category for purposes of the categories shown. Bonds rated BBB and above are considered investment grade. Bonds rated below BBB are generally
referred to as speculative grade securities. Bonds rated BB, B, or CCC are regarded as possessing a speculative capacity to pay debt service because of the negative factors or uncertainties for
which there are no compensating positive factors. Ratings from BBB to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within each of the major rating categories. An N/R category consists of rateable securities that have not been rated by a Nationally Recognized Statistical Rating Organization (NRSRO). Unrated securities do not necessarily
indicate low quality. Ratings and the portfolio’s credit quality distribution may change over time. The portfolio itself has not been rated by an independent rating agency.
Lazard Emerging Markets Debt
Notes
1 As of 31 December 2014. Source: J.P. Morgan
Important Information
Published on 15 January 2015.
Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions
expressed herein are as of 31 December 2014 and are subject to change.
Lazard Asset Management LLC is a US registered investment advisor and claims compliance with the Global Investment Performance Standards (GIPS®). To receive a complete list and description of Lazard Asset Management’s composites and/or a presentation that adheres to the GIPS standards, please contact Henry F. Detering, CFA at Lazard Asset Management, 30 Rockefeller
Plaza, New York, New York 10112-6300 or by email at [email protected]. Provided below are descriptions of each of the composites, the performance of which appears on the preceding pages.
The Emerging Markets Debt – Core strategy seeks to outperform the benchmark, the J.P. Morgan Emerging Market Bond Index Global Diversified (EMBI Global Diversified), by +2%–4% p.a.
over a market cycle, with a tracking error of 2%–4%. The majority of the portfolio (typically 75%–100%) will be held in hard currency emerging-market debt. Typically, 0%–25% may be held in
local currency emerging market debt. Despite being benchmark-aware, the strategy is free to invest out of the benchmark (maximum non-benchmark exposure is 40%) to allow the investment
team to exploit the full universe of evolving opportunities. Key drivers of return for this strategy are moves in US Treasuries and credit premiums.
The Emerging Markets Debt – Local Debt strategy seeks to outperform the benchmark, the J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified, by +2%–4%
p.a. over a market cycle, with a tracking error of 2%–6%. The majority of the portfolio (typically 80%–100%) will be held in local currency debt. Typically 0%–20% may be held in hard currency
debt. Despite being benchmark-aware, the strategy is free to invest out of the benchmark (maximum non-benchmark exposure is 50%) to allow the investment team to exploit the full universe
of evolving opportunities. Key drivers of return for this strategy are currency appreciation/depreciation and interest-rate moves.
The Emerging Markets Debt – Blend strategy seeks to outperform the 50/50 benchmark of the J.P. Morgan Emerging Market Bond Index Global Diversified (EMBI Global Diversified) and
J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified by +2%–4% p.a. over a market cycle, with a tracking error of 2%–5%. The portfolio may hold 25%–75%
in either hard currency or local currency debt, depending on the outlook for each asset class. Despite being benchmark-aware, the strategy is free to invest out of the benchmark (maximum
non-benchmark exposure is 40%) to allow the investment team to exploit the full universe of evolving opportunities. Key drivers of return for this strategy are moves in US Treasuries, credit premiums, growth, and inflation expectations within emerging-market countries. The strategy may hold up to 25% in corporate securities.
The Emerging Markets Debt – Total Return strategy has no benchmark and uses a “best ideas” approach. The investment team looks across the entire emerging-market debt universe — hard
currency sovereign debt, hard currency quasi-sovereign debt, local currency sovereign debt, local currency quasi-sovereign debt, corporate debt, etc. — positioning the portfolio in the specific
asset classes and countries in which the team sees value. This is in contrast to the team’s benchmark-aware approaches, in which countries are overweighted or underweighted. The Emerging
Markets Debt – Total Return strategy is a long-biased approach that seeks to capture upside performance and minimize negative performance. The strategy is allowed some leverage (up to
200% maximum gross exposure) and shorting. It has typically been run with a 60%–90% net exposure and 100%–140% gross exposure. The team may invest in all emerging-market debt asset
classes, but also has the ability to allocate tactically to cash, if the team has no conviction in the market.
The Emerging Markets Debt – Corporate strategy is a long-biased approach, that seeks to capture upside performance and minimize negative performance. The strategy is allowed some leverage (up to 200% maximum gross exposure) and shorting. It has typically been run with a 60%–90% net exposure and 100%–140% gross exposure. The team may invest throughout the EMD
corporate asset class, but also has the ability to allocate tactically to cash if the team has no conviction on the market.
Emerging-market securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities
markets of emerging-market countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in emerging-market countries.
Specific to the political and military unrest in Ukraine, and as described in this presentation, there exists a heightened risk of armed conflict and subsequent economic, political, and
social repercussions to all parties involved.
The strategies invest primarily in emerging-market debt positions. The strategies will generally invest in debt investments denominated in either US dollars or emerging-market local currencies.
As such, an investment in the strategies is subject to the general risks associated with fixed-income investing, such as interest rate risk and credit risk, as well as the risks associated with emerging-market investments, including currency fluctuation, devaluation, and confiscatory taxation. The strategies may use derivative instruments that are subject to counterparty risk.
Investments in global currencies are subject to the general risks associated with fixed-income investing, such as interest rate risk, as well as the risks associated with non-domestic investments,
which include, but are not limited to, currency fluctuation, devaluation, and confiscatory taxation. Furthermore, certain investment techniques required to access certain emerging-market currencies, such as swaps, forwards, structured notes, and loans of portfolio securities, involve risk that the counterparty to such instruments or transactions will become insolvent or otherwise default
on its obligation to perform as agreed. In the event of such default, an investor may have limited recourse against the counterparty and may experience delays in recovery or loss.
The strategies will invest in securities of non-US companies, which trade on non-US exchanges. These investments may be denominated or traded in both hard and local currencies. Investments
denominated in currencies other than US dollars involve certain considerations not typically associated with investments in US issuers or securities denominated or traded in US dollars. There
may be less publicly available information about issuers in non-US countries that may not be subject to uniform accounting, auditing, financial reporting standards, and other disclosure requirements comparable to those applicable to US issuers.
The allocations, investment characteristics, and specific securities mentioned are based upon a portfolio that represents the proposed investment for a fully discretionary account. Allocations
and security selection are subject to change. The securities mentioned are not necessarily held by Lazard for all client portfolios, and their mention should not be considered a recommendation or
solicitation to purchase or sell these securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in
the future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in the portfolio
or that securities sold have not been repurchased. The securities mentioned may not represent the entire portfolio.
All index data is shown for illustrative purposes only and is not intended to reflect the performance of any product or strategy managed by Lazard.
Lazard Asset Management Pacific Co. • Level 39, 1 Macquarie Place • Sydney, NSW 2000 • www.lazardassetmanagement.com.au

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