Commentary: Emerging Markets Debt Fund
Transcription
Commentary: Emerging Markets Debt Fund
NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE JPMorgan Emerging Markets Debt Fund A Shares (JEDAX) C Shares (JEDCX) Select Shares (JEMDX) Data as of November 30, 2014 Fund overview Objective The Fund's goal is to provide high total return from a portfolio of fixed income securities of emerging markets issuers. Strategy/Investment process • Invests primarily in emerging market debt investments. • Maintains duration similar to that of the JPMorgan Emerging Markets Bond Index. • May hedge its non-dollar investments back to the U.S. dollar through the use of derivatives. • Seeks individual fixed income investments that it believes will perform well over market cycles. Portfolio managers/industry experience Pierre-Yves Bareau, 23 years Matias Silvani, 16 years Portfolio characteristics Number of holdings Fund assets (in billions) Portfolio breakdown (%)* Cash/Cash-Equivalent EM Local Currency Denominated Sovereign Debt EM USD Denominated Corporate Debt EM USD Denominated Quasi-Sovereign Debt EM USD Denominated Sovereign Debt Average life (%)* Years 1-3 Years 3-5 Years 5-7 Years 7-10 Years 10-20 Years 20+ Duration1 Average life2 285 $1.08 7.3 2.7 2.3 17.8 70.0 9.0 9.4 17.8 24.9 10.2 28.7 6.84 years 11.34 years Quality (%)* AAA 6.9 AA 0.3 A 1.2 BBB 53.2 BB 17.3 B 10.9 CCC & Lower/Other 10.3 * Due to rounding, values may not total 100%. The manager receives credit quality ratings on underlying securities of the portfolio from the three major ratings agencies - S&P, Moody's and Fitch. When calculating the credit quality breakdown, the manager selects the lowest rating of the agencies when all three agencies rate a security. The manager will use the lower of the two ratings if only two agencies rate a security and will use one rating if that is all that is provided. Securities that are not rated by all three agencies are reflected as such. Please refer to the back of the page for important disclosure information including risks associated with investing in the Fund. Market review Emerging market debt spreads widened in November. J.P. Morgan Emerging Markets Bond Index Global spreads finished the month at 353 basis points (bps), 21 bps wider than the previous month. The total return of the index was -0.39%. The U.S. 10-year Treasury ended the month at 2.16%, 17 bps lower than the previous month. On the index level, local currency underperformed external sovereign debt, while corporate debt outperformed. Economic data over the month continued to point to regional differentiation. U.S. economic data showed stronger activity versus developed Europe. Emerging Europe, however, began to show some stronger gross domestic product (GDP) activity, purchasing managers indexes and export data. Data in China continued to point towards steadily slower growth, which has also been supportive of further policy easing. In particular, the Peoples Bank of China announced a surprise interest rate cut this month, highlighting concerns over the cyclical slowdown. However, the main focus continued to be declining commodity prices, oil in particular. The West Texas Intermediate crude oil price fell to a low of $66 a barrel from $80 a barrel at the beginning of the month, in part due to an OPEC decision at the end of month to not cut production. Egypt and Argentina, both idiosyncratic names with strong technical support, were the top outperformers in the month. Turkey also outperformed as investors viewed the oil importing country as a key beneficiary of lower oil prices. Other Eastern European names like Hungary and Romania also outperformed given the environment of lower oil and marginally better economic data in Emerging Europe. Oil exporters underperformed this month - in particular Venezuela, Russia, Ecuador, Kazakhstan and Angola. Venezuela was the worst performer by far as fundamental developments continued to point to potential solvency concerns and the credit lacked a buyer base. Ukraine also underperformed as headlines appeared throughout the month on persistent conflict in the Eastern region. Over the month, Fitch upgraded the Dominican Republic and Vietnam one notch to B+ and BB-, respectively. Moody's also downgraded South Africa one notch to Baa2. Portfolio review The JPMorgan Emerging Markets Debt Fund returned -0.47% (Select Class Shares) for the month ended November 30, 2014, compared with the Fund's benchmark, the J.P. Morgan Emerging Markets Bond Index Global, which returned -0.39%. The Fund underperformed the benchmark during the period, as key detractors included security selection in Mexico, in particular some corporate positions and an underweight in long-end sovereign bonds. Security selection in Brazil and Turkey also detracted from performance, as did the underweight in China. Over the month, we focused on reducing exposure to oil exporting sovereigns and quasi-sovereigns in the oil and gas space. We then used these proceeds to cover some of our underweight in South Africa, a country that should also benefit from lower oil prices. On the positive side, key contributors were underweights in Venezuela, Ukraine and Russia as well as overweights in Hungary and Morocco. Our largest overweights by spread duration in the portfolio are Hungary, Morocco, South Africa, Brazil, and Argentina. Outlook Our outlook for emerging market debt remains supported by relatively attractive valuations and technicals, in particular limited sovereign issuance and still-accommodative global monetary policies. However, we have become more cautious on risks, including sharp turns in risk sentiment, a potential aggressive Treasury sell-off and significantly lower liquidity into year-end. We remain very cautious in the major high-yield countries with negative fundamental developments, namely Venezuela and Ukraine. We are also quite cautious about Russia and Brazil, names we see at risk of losing investment-grade status over the next few years. Instead, we continue favor investment-grade names with positive fundamental trends and investor support, in particular in Emerging Europe. We also continue to favor lower-beta idiosyncratic credits that offer diversification and a pick-up in yield (i.e., Dominican Republic, Jamaica). We also remain cautious on commodity exporters and especially oil exporters, even despite the adjustments we have already seen. We will continue to monitor the impact of lower oil not just as a differentiation factor across countries but also in terms of potential contribution to lower inflation and stronger economic activity on a global scale. The manager seeks to achieve the stated objectives. There is no guarantee the objectives will be met. The securities highlighted above have been selected based on their significance and are shown for illustrative purposes only. They are not recommendations. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE A Shares (JEDAX) C Shares (JEDCX) Select Shares (JEMDX) JPMorgan Emerging Markets Debt Fund Data as of November 30, 2014 Contact JPMorgan Distribution Services, Inc. at 1-800480-4111 for a fund prospectus. You can also visit us at www.jpmorganfunds.com. Investors should carefully consider the investment objectives and risks as well as charges and expenses of the mutual fund before investing. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing. MORNINGSTAR DISCLOSURE: ©2014, Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its providers; (2) may not be copied or distributed; (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damage or losses arising from any use of this information. For each fund with a three-year history, Morningstar calculates a Morningstar Rating™ metric each month by subtracting the return on a 90-day U.S. Treasury Bill from the fund's loadadjusted return for the same period, and then adjusting this excess return for risk. The top 10% of funds in each broad asset class receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. Past performance is no guarantee of future results. Different share classes may have different ratings. INDEXES DEFINED: The J.P. Morgan Emerging Markets Bond Index Global tracks total returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds. The performance of the index does not reflect the deduction of expenses associated with a fund, such as investment management fees. By contrast, the performance of the Fund reflects the deduction of the fund expenses, including sales charges if applicable. An individual cannot invest directly in an index. The performance of the Lipper Emerging Market Hard Currency Debt Funds Index includes expenses associated with a mutual fund, such as investment management fees. These expenses are not identical to the expenses charged by the Fund. DURATION: 1 Duration: Measures price sensitivity of fixed income securities to interest rate changes. AVERAGE LIFE: 2Average Life: The length of time the principal of a debt issue is expected to be outstanding. RETURNS: 3The quoted performance of the Fund includes performance of a predecessor fund/share class prior to the Fund's commencement of operations. Please refer to the current prospectus for further information. ©2014, American Bankers Association, CUSIP Database provided by the Standard & Poor's CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. All rights reserved. Total return assumes reinvestment of dividends and capital gains distributions and reflects the deduction of any sales charges, where applicable. Performance may reflect the waiver of a portion of the Fund's advisory or administrative fees for certain periods since the inception date. If fees had not been waived, performance would have been less favorable. J.P. Morgan Funds are distributed by JPMorgan Distribution Services, Inc., which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds. JPMorgan Distribution Services, Inc. is a member of FINRA/SIPC. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, JPMorgan Chase Bank, N.A., J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. ©JPMorgan Chase & Co., December 2014 FC-EMD-1114 Fund performance** Month-end total returns at NAV (%) as of 11/30/2014 A Shares3 C Shares3 Select Shares J.P. Morgan Emerging Markets Bond Index Global Lipper Emerging Market Hard Currency Debt Funds Index With sales charges (%) A Shares with 3.75% max. sales charge3 C Shares with 1.00% max. CDSC3 Quarter-end total returns at NAV (%) as of 9/30/2014 A Shares3 C Shares3 Select Shares J.P. Morgan Emerging Markets Bond Index Global Lipper Emerging Market Hard Currency Debt Funds Index With sales charges (%) A Shares with 3.75% max. sales charge3 C Shares with 1.00% max. CDSC3 Yields (%) as of 11/30/2014 30-day SEC yield 30-day SEC yield (unsubsidized) Total returns 1 month 3 month -0.59 -1.88 -0.59 -1.96 -0.47 -1.72 -0.39 -1.19 -1.05 -2.14 YTD 6.70 6.17 7.01 8.64 5.26 Average annual total returns 1 yr 3 yrs 5 yrs 10 yrs 7.23 6.42 7.56 7.12 6.78 5.93 7.03 6.69 7.56 6.69 7.83 7.36 9.28 6.77 7.96 8.27 6.33 6.00 6.82 7.54 -4.33 -1.59 -5.61 -2.96 2.75 5.17 3.15 5.78 5.08 5.93 6.74 7.03 6.71 6.69 -2.90 -2.91 -2.90 -2.41 -2.22 -2.66 -2.77 -2.63 -1.65 -2.10 5.60 5.14 5.72 7.30 5.18 6.30 5.82 6.50 8.28 6.59 7.11 6.61 7.38 7.69 7.21 7.54 7.01 7.81 7.95 7.17 7.39 6.97 7.61 8.38 7.91 1.69 2.28 4.14 4.82 C Shares 3.94 3.71 5.73 6.61 Yields (%) as of 9/30/2014 30-day SEC yield 30-day SEC yield (unsubsidized) Must be preceded or accompanied by a prospectus. Calendar-year returns (%) A Shares at NAV3 J.P. Morgan Emerging Markets Bond Index Global Lipper Emerging Market Hard Currency Debt Funds Index A Shares 4.52 4.43 -6.58 -6.34 -3.91 -3.77 A Shares 4.29 4.07 2009 41.27 28.19 35.05 C Shares 4.18 4.09 2010 13.06 12.06 13.35 2011 5.95 8.46 2.19 6.73 6.98 7.01 6.97 Select Shares 4.70 4.55 Select Shares 4.95 4.86 2012 20.10 18.53 19.19 2013 -7.02 -6.58 -5.26 ** The performance quoted is past performance and is not a guarantee of future results. Mutual funds are subject to certain market risks. Investment returns and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than original cost. Current performance may be higher or lower than the performance data shown. For performance current to the most recent month-end, please call 1-800-480-4111. Morningstar ratings as of 11/30/2014 Overall 3-Year 5-Year 10-Year Rating/number of funds in category ★★★★/209 ★★★/209 ★★★★/103 Not yet rated C share class: Emerging Markets Bond Category The Overall Morningstar Rating™ for a fund is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. Annual operating expenses A Shares C Shares Select Shares Expense cap expiration date 11/1/2015 11/1/2015 11/1/2015 Expense cap (%) 1.20 1.70 0.95 Total annual Fund operating expenses (%) 1.45 1.97 1.14 4 Fee waivers and/or expense reimbursements (%) (0.24) (0.26) (0.18) 4 Net expenses (%) 1.21 1.71 0.96 4 The Investment Advisor, Administrator and Distributor (the "Service Providers") have contractually agreed to waive fees and/or reimburse expenses to the extent that Total Annual Operating Expenses (excluding Acquired Fund Fees and Expenses, dividend expenses relating to short sales, interest, taxes, expenses related to litigation and potential litigation, extraordinary expenses and expenses related to the Board of Trustees’ deferred compensation plan) exceed the expense cap of the average daily net assets through the expense cap expiration date. This contract continues through that date, at which time the Service Providers will determine whether or not to renew or revise it. Portfolio statistics A Shares C Shares Select Shares Inception date 6/30/2006 6/30/2006 4/17/1997 Investment minimum $1,000 $1,000 $1M Fund number 1204 1205 1203 CUSIP 4812A3684 4812A3676 4812A0748 RISKS ASSOCIATED WITH INVESTING IN THE FUND: The Fund's fixed income securities are subject to interest rate risk. If rates increase, the value of the Fund’s investments generally declines. International investing involves special risks, including economic, political, and currency instability - especially in emerging markets. The Fund's investments in emerging markets could lead to more volatility in the value of the Fund's shares. The small size of securities markets and the low trading volume may lead to a lack of liquidity, which leads to increased volatility. Emerging markets may not provide adequate legal protection for private or foreign investment or private property. The Fund will invest at least 80% of its total assets in foreign and emerging markets. The Fund may invest in securities that are below investment grade (i.e., “high yield” or “junk bonds”) that are generally rated in the fifth or lower rating categories of Standard & Poor's and Moody's Investors Service. Although these securities tend to provide higher yields than higher-rated securities, there is a greater risk that the Fund's share price will decline. The Fund may invest in futures contracts and derivatives. Many derivatives create leverage that can cause the Fund to be more volatile than it would be if it had not used derivatives. The Fund may engage in short sales. There is no guarantee that the use of long and short positions will succeed in limiting the Fund's exposure to domestic stock market movements, capitalization, sector-swings or other risk factors. Investment in a portfolio involved in long and short selling may have higher portfolio turnover rates. This will likely result in additional tax consequences. Short selling involves certain risks, including additional costs associated with covering short positions and a possibility of unlimited loss on certain short sale positions. The Fund anticipates a very high degree of portfolio turnover. This will likely result in additional tax consequences.