BlueBay Emerging Market
Absolute Return Bond Fund – CAD Hedged
Q2 2016
Quarterly Report
Performance
As of June 30, 2016
Three
Month
Year to
Date
One
Year
Three
Year
Since
Inception*
BlueBay Emerging Market Absolute Return Bond Fund - CAD Hedged
5.76%
6.12%
2.16%
-0.12
0.82%
*Inception date is February 2012. Series F, net of fees performance
Market Review
Emerging market (EM) fixed income started and
finished the quarter strongly which more than
offset the sell-off in May.
Risk assets benefited from the ongoing
backdrop of supportive global central bank
policy, improving oil and commodity prices and
more positive economic data from the US and
China.
The key external factor which affected EM fixed
income performance was the market’s
perception of US monetary policy. There was a
period in May when the US Federal Reserve’s
stance became increasingly hawkish but this
swiftly changed after the far-weaker-thanexpected payrolls number at the beginning of
June.
The long-awaited “Brexit” vote was a surprise for
global risk markets and EM markets were
weaker for two days before rallying back
strongly into quarter end.
Hard currency markets were the stellar
outperformers with a large contribution from the
rally in US duration in addition to modest
compression of spreads by 22bps.
Local currency markets were less positive than
in the first quarter as EMFX produced a negative
return.
FOR QUALIFIED INVESTORS ONLY
One of the biggest stories over the quarter and
indeed the year so far was in Argentina as the
government returned to the sovereign debt
market for the first time in 15 years. The new
paper was heavily oversubscribed with
US$16.5bn of issuance receiving bids of nearly
US$70bn as investors were attracted to the
higher yields on offer and the positive economic
reform potential from the new government.
Secondary market sovereign paper also rallied
strongly following the issuance.
Within local currency markets, Brazil was the
stand-out performer over the quarter as a whole,
continuing its run of strong performance over
first half of the year, albeit from a low base, as
positive sentiment continues to surround the
Temer government. Ilan Goldfajn took office
mid-month as the new central bank governor,
the well-respected former Chief Economist at
Brazil’s largest private bank. The real was the
strongest currency, rising close to 15% against
the US dollar.
Within hard currency markets, Venezuela had a
strong quarter, buoyed not only by the risk-on
sentiment but also as the country reached a deal
with China, where a grace period for principal
payments was agreed covering 2016 and 2017.
At the other end of the spectrum, Mozambique
was the only country to generate a negative total
return over the period, as concerns continued to
grow over the government’s ability to service its
external debt creditors.
Page 1 of 3
BlueBay Emerging Market Absolute Return Bond Fund – CAD Hedged
Portfolio Performance
The fund had a particularly strong quarter,
returning +5.76%. This was due to robust
performance in April and June, which more than
offset a small negative return in May where
performance was hurt by EMFX positioning,
particularly in some of the higher-beta
currencies in which we were long and which sold
off on the back of increasingly hawkish Fed
comments. However, over the quarter as a
whole it was our predominantly long exposure
across the sub-asset classes which contributed
to returns, given the strong rally across EM fixed
income in Q2.
Our quasi-sovereign exposure contributed
positively over the quarter, in particular our
holdings of state owned Venezuelan oil
company PDVSA. Long positions in other higher
yielding oil & gas quasi-sovereign credits also
contributed to the strong return, including
Petrobras, Ecopetrol and Pemex (we closed
the latter to lock in performance). This was
against a backdrop of a renewed search for
higher-yielding assets in a low-yielding world.
In the investment grade sovereign space, long
positions in Argentina benefited performance;
we participated in April’s sovereign new
issuance and the paper traded well throughout
the quarter (we locked in some gains during
April). The positive sentiment surrounding the
country also benefited our holdings of local
currency Argentine Treasury bills (LEBACS) and
our holdings of Argentine quasi sovereign
provincial debt particularly the provinces of
Neuquen and Buenos Aires.
Our exposure to longer-dated hard currency
sovereign credit also performed well in June in
particular, in what was a duration friendly
environment. In this respect, holdings in long
end bonds in Brazil, Colombia, Turkey and
Bulgaria helped generate robust returns.
Within local rates markets, our long exposure to
local currency sovereign bonds in South Africa,
also contributed strongly to Fund performance,
FOR QUALIFIED INVESTORS ONLY
towards the end of the quarter in particular. Our
holdings of local currency sovereign bonds in
Indonesia was another notable contributor to
fund performance. We continue to favour this
country on the positive reform momentum, and
attractive real rates against a backdrop of falling
inflation levels.
Market Outlook
The market is still coming to terms with the
aftermath of the Brexit vote, and what it means
for the UK, Europe, global growth and risk
assets more broadly. Whilst longer-term
implications (in particular the drag on Central
and Eastern European growth) are yet to be felt,
the immediate fallout (via financial contagion
and sentiment) has been limited due to prompt
and decisive action by central banks globally.
The promise of further easing from the BoE and
ECB, and most importantly for EM the pricing
out of rate hikes by the Fed, have pushed DM
government bond yields to historically low levels,
triggering resurgent demand for yield products
globally. In this context, we believe EM fixed
income is well positioned to benefit from
increased inflows in the months ahead, being
relatively removed from political reverberation in
the developed world, whilst benefiting from
easier financing conditions globally, attractive
valuations and, for the moment, a stable growth
backdrop.
In terms of strategy, recent developments have
only confirmed our conviction in EM local rates
and we maintain our preference for the asset
class via markets with steep yield curves which
benefit from high and declining real rates and
likely further monetary easing. We are keeping
our EMFX positioning relatively light, as while
fundamental support for EM currencies
continues to improve in general, EMFX as an
asset class remains vulnerable to bouts of risk
aversion and temporary periods of US dollar
strength, causing us to remain nimble and
tactical in our strategy.
Page 2 of 3
BlueBay Emerging Market Absolute Return Bond Fund – CAD Hedged
This information is not intended to be an offer or solicitation to buy or sell securities or to participate in or subscribe for any
service. No securities are being offered, except pursuant and subject to the respective offering documents and subscription
materials, which may be provided to qualified investors only. This document is for general information only and is not, nor does it
purport to be, professional advice or a complete description of an investment in any fund managed by RBC Global Asset
Management Inc. (RBC GAM). If there is an inconsistency between this document and the respective offering documents, the
provisions of the respective offering documents shall prevail. Information obtained from third parties is believed to be reliable, but no
representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy,
completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions.
This document may contain forward-looking statements about the Fund, its future performance, strategies or prospects, and
possible future Fund action. The words “may”, “could”, “should”, “would”, “suspect”, “outlook”, “believe”, “plan”, “anticipate”,
“estimate”, “expect”, “intend”, “forecast”, “objective” and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent risk and
uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We
caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results
to differ materially from those expressed or implied in any forward-looking statement. All opinions in forward-looking statements are
subject to change without notice and are provided in good faith but without legal responsibility.
Investments in alternative funds are speculative and involve significant risk of loss of all or a substantial amount of your
investment. Alternative funds may: (i) engage in leverage and other speculative investment practices that may increase the risk of
investment loss; (ii) can be highly illiquid; (iii) are not required to provide periodic pricing or valuation information to investors; and
(iv) are not subject to the same regulatory requirements as prospectus-offered mutual funds. In assessing the suitability of this
investment, investors should carefully consider their personal circumstances including time horizon, liquidity needs, portfolio size,
income, investment knowledge and attitude toward price fluctuations. Investors should consult their professional advisors and
consultants regarding any tax, accounting, legal or financial considerations before making a decision as to whether the funds
mentioned in this material are a suitable investment for them.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please
read the fund’s offering documents before investing. The performance data provided assumes reinvestment of distributions only
and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that
would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be
repeated.
®/™ Trademark(s) of Royal Bank of Canada. Used under licence.
© RBC Global Asset Management Inc. 2016.
FOR QUALIFIED INVESTORS ONLY
Page 3 of 3