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The Fund (Class A Shares) was up 2.53% in August, outperforming its benchmark by 2.43%. Performance was driven significantly by Argentina and Sri Lanka, with further contributions from Uruguay (in local currency), India (Vedanta), Mexico (in local and hard currency), Suriname and China (corporates). Importantly, the Fund did very well again by not having Brazilian exposure—Brazil’s ongoing weakness was responsible for taking 25 bps off of the performance of the Fund’s benchmark. We’d note that the Fund’s local currency exposures continue to contribute to performance in months when overall emerging markets (EM) local currency performance has been lackluster. That is the case in August, with the J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) down 33 bps in August, but Mexico, Uruguay and Indonesia were all positive and top local currency performers for the Fund. This is consistent, in our view, with the Fund having uncorrelated positions that have either defensive or re-rating characteristics.
We see three interesting themes characterizing EM debt right now: a) the relatively greater opportunities in hard currency EM debt over local currency EM debt; b) the low margin for error in many EM fixed-income markets; and c) the even greater need for selectivity with many markets approaching pre-COVID-19 highs.
EM local currency has challenges, currently. We wrote more extensively on this last month. The summary explanation is that local currency yields are low in real terms. Policy rates are also especially low, with only three (major) countries—Russia, Mexico and Indonesia—having positive real policy rates. This signals the common sense view that nobody wants their currencies stronger, whatever “USD death” theory has to say. As we’ve noted before, monetary experimentation in the developed markets (DM) has not benefited EM local currency performance. EM currencies have tended to act as shock absorbers protecting the economic health of the EM countries, therefore requiring greater selectivity.
EM hard currency has supports, currently. The U.S. Federal Reserve (Fed) is now buying U.S. corporate investment grade and high yield bonds—we think that has created a ceiling on those spreads, essentially. That leaves EM debt as the only market-priced sovereign or corporate debt around, to be, admittedly, hyperbolic. Hard currency debt has done very well in the era of DM monetary experimentation, compared to local currency. This is because the key dynamic remains—low interest rates. This clearly anchors hard currency debt (depending on credit quality), while having intermittent effects on local currency debt whose interest rates are already low and whose currencies have underperformed in the quantitative easing (QE) era.
Finally, there’s low margin for error in the many EM countries with very low interest rates (local or hard), particularly with many markets at pre-COVID-19 highs. In a risk-on scenario, shouldn’t the U.S. curve steepen? Won’t low-spread, high-duration hard currency bonds suffer in that scenario? Won’t low-yield, high-duration bonds in local currency suffer in that scenario? In a risk-off scenario, shouldn’t credit spreads, especially long duration, suffer in that scenario? Shouldn’t EM local currency markets also sell off in that scenario? If you’re down 4%-8% on a long-duration exposure (let’s “back-of-envelope” assume either a 50 bps or 100 bps rise in spreads or yields, very few exposures have the carry to make it back in under a few years. Thus, our low duration, combined with positions with re-rating and defensive characteristics.
The Fund made significant changes in August, continuing the profit taking that characterized July—Angola was reduced and Jamaica and the Dominican Republic were closed. These were our three highest VaR positions. These investments worked very well, very quickly, but they are also now, by definition, more correlated with global risk given their much higher prices. VaR was a key lens for bonds that had substantial rallies, as was upside/downside, spread/yield and spread/yield vs. duration. The three positions that were reduced or closed were Jamaica (long duration), Angola and the Dominican Republic (long duration). The Fund used these proceeds to establish exposure to lower-duration South Africa and Eskom (the state-owned utility). The thinking on Eskom is similar to our thinking on our, so far, successful Pemex view. The view is not a positive one about Eskom on a stand-alone basis, but rather simply that the over 800 bps-handle spread on Eskom is converging to the roughly 400 bps-handle sovereign spread, as the sovereign increases credit support. We are also in the process of reducing positions in Argentina, as discussed in our various publications.
We end August with carry of 5.9%, duration of 4.0 and approximately 25% in local currency. Our largest exposures are Argentina (in hard currency), Indonesia (local), Mexico (MXN-hedged Pemex local) and Uruguay (local). Cash of 7.5% is only a reflection of the final day of the month happening to capture a lot of profit taking (described below), with resources not yet deployed.
The changes to our top positions are summarized below. Our largest positions in August: Argentina, Indonesia, Mexico, Uruguay and China.
The VanEck Emerging Markets Bond Fund (Class A shares excluding sales charge) gained 2.53% in August compared to a gain of 0.10 % for the 50/50 J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM) local currency and the J.P. Morgan Emerging Markets Bond Index (EMBI) hard-currency index.
Turning to the market’s performance, GBI-EM’s biggest winners were Indonesia, Mexico, and South Africa. Its biggest losers were Brazil, Turkey and Hungary. The EMBI’s biggest winners were Sri Lanka, Turkey and Egypt. Its losers were Saudi Arabia, Philippines and Qatar.
|Average Annual Total Returns (%) as of August 31, 2020|
|1 Mo†||3 Mo†||YTD†||1 Year||5 Year||Life|
|Class A: NAV (Inception 7/9/12)||2.53||14.96||4.97||12.09||4.98||2.48|
|Class A: Maximum 5.75% Load||-3.37||8.35||-1.06||5.65||3.74||1.73|
|50 GBI-EM GD / 50% EMBI GD||0.10||5.53||-1.51||2.21||5.49||2.84|
|Average Annual Total Returns (%) as of June 30, 2020|
|1 Mo†||3 Mo†||YTD†||1 Year||5 Year||Life|
|Class A: NAV (Inception 7/9/12)||6.93||22.09||-2.35||0.25||1.94||1.60|
|Class A: Maximum 5.75% Load||0.79||15.07||-7.97||-5.51||0.74||0.85|
|50 GBI-EM GD / 50% EMBI GD||1.99||11.05||-4.80||-1.10||3.89||2.46|
†Monthly returns are not annualized.
Expenses: Class A: Gross 2.69%; Net 1.26%. Expenses are capped contractually until 05/01/21 at 1.25% for Class A. Caps exclude acquired fund fees and expenses, interest expense, trading expenses, dividends and interest payments on securities sold short, taxes and extraordinary expenses. Please note that, generally, unconstrained bond funds may have higher fees than core bond funds due to the specialized nature of their strategies.
The tables above present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect temporary contractual fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investors’ shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at Net Asset Value (NAV). An index’s performance is not illustrative of the Fund’s performance. Certain indices may take into account withholding taxes. Index returns assume that dividends of the index constituents in the index have been reinvested.
Prior to May 1, 2020, the fund was known as the VanEck Unconstrained Emerging Markets Bond Fund.
Value at risk (VaR) is a statistic that measures and quantifies the level of financial risk within a firm, portfolio or position over a specific time frame. Beta is a measure of the volatility–or systematic risk–of a security or portfolio compared to the market as a whole. Correlation a statistic that measures the degree to which two securities move in relation to each other.
Duration measures a bond’s sensitivity to interest rate changes that reflects the change in a bond’s price given a change in yield. This duration measure is appropriate for bonds with embedded options. Quantitative Easing by a central bank increases the money supply engaging in open market operations in an effort to promote increased lending and liquidity. Monetary Easing is an economic tool employed by a central bank to reduce interest rates and increase money supply in an effort to stimulate economic activity. Correlation is a statistical measure of how two variables move in relation to one other. Liquidity Illusion refers to the effect that an independent variable might have in the liquidity of a security as such variable fluctuates overtime. A Holdouts Issue in the fixed income asset class occurs when a bond issuing country or entity is in default or at the brink of default, and launches an exchange offer in an attempt to restructure its debt held by existing bond holding investors.
Carry is the benefit or cost for owning an asset.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. The Fund’s benchmark index (50% GBI-EM/50% EMBI) is a blended index consisting of 50% J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified and 50% J.P. Morgan Emerging Markets Bond Index (EMBI). The J.P. Morgan GBI-EM Global Diversified tracks local currency bonds issued by Emerging Markets governments. The J.P. Morgan EMBI Global Diversified tracks returns for actively traded external debt instruments in emerging markets, and is also J.P. Morgan’s most liquid U.S. dollar emerging markets debt benchmark.
Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The index may not be copied, used or distributed without J.P. Morgan’s written approval. Copyright 2020, J.P. Morgan Chase & Co. All rights reserved.
Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time and portfolio managers of other investment strategies may take an opposite opinion than those stated herein. Not intended to be a forecast of future events, a guarantee of future rsults or investment advice. Current market conditions may not continue. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.
Investing involves risk, including loss of principal. You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment pro- gram, not a complete program. The Fund is subject to risks associated with its investments in below investment grade securities, credit, currency management strategies, debt securities, derivatives, emerging market securities, foreign currency transactions, foreign securities, hedging, other investment companies, Latin American issuers, management, market, non-diversification, operational, portfolio turnover, sectors and sovereign bond risks. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. As the Fund may invest in securities denominated in foreign currencies and some of the income received by the Fund will be in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s return. Derivatives may involve certain costs and risks such as liquidity, interest rate, and the risk that a position could not be closed when most advantageous. The Fund may also be subject to risks associated with non-investment grade securities.
Investors should consider the Fund’s investment objective, risks, charges, and expenses of the investment company carefully before investing. Bond and bond funds will decrease in value as interest rates rise. The prospectus and summary prospectus contain this and other information. Please read them carefully before investing. Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a free prospectus and summary prospectus.
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