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Emerging Markets Debt Fund —
EM debt markets advance in Q2, outpacing investment-grade issues
2nd Quarter, 2014
"We are looking to invest in countries that have the right policies in place to stimulate growth. "
– Stone Harbor Investment Partners LP

Emerging markets debt securities posted solid gains in the second quarter of 2014, outperforming both investment-grade and high yield bonds in the bonds from developing economies, returning 4.40% as measured by a blended index composed of 50% each of the JPMorgan Emerging Markets Bond Index-Global Diversified Index, and the JPMorgan Government Bond Index-Emerging Markets Global Diversified. By comparison, the broad investment-grade bond market, as measured by the Barclays U.S. Aggregate Bond Index, returned 2.04% for the latest quarter, while the BofA Merrill Lynch US High Yield Index returned 2.57%.
The Harbor Emerging Markets Debt Fund returned 4.20% for the second quarter, lagging slightly behind the blended index. The Fund is managed by Stone Harbor Investment Partners. A decision to favor hard currency, or Dollar-denominated, sovereign debt over local currency and corporate bonds enhanced Fund performance in the latest quarter, reports John DiSpigno of Stone Harbor Investment Partners.
From a country-level perspective, overweighted positions in Venezuela, Colombia, and Argentina helped relative performance, as did underweights in Thailand, South Africa, and the Philippines. Factors that detracted from performance included issue selection in Venezuela, Argentina, and Nigeria, along with an above-benchmark weighting in Indonesia.
John DiSpigno’s comments were made in a July 16, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2014.

Interview Highlights

Pro-growth policies
On the local currency side, we are overweight countries that are putting policies in place that we believe will promote economic growth. These are countries like Mexico, Colombia, Poland, and Indonesia. At the same time we are underweight, in terms of local currency bonds, in countries that we believe don’t have pro-growth policies in place; those would include Brazil, South Africa, and Russia.
Portfolio performance
It was a pretty robust quarter. The hard currency sovereign debt allocation was positive and within that, our country selection was the main driver of returns. Our overweight to Venezuela provided the lion’s share of added value during the period. This was partly offset by issue selection in Venezuela and Argentina. Country allocations in both corporate and local currency debt detracted slightly from overall returns.
Tactical overweight
Our positioning in Venezuela is more of a tactical overweight driven by valuations that in our opinion presented an attractive risk/reward tradeoff. Venezuela currently is a very high-yielding country.
Bottom-up analysis
In terms of our tactical asset allocation versus the benchmark, we are still underweight in issues denominated in local currencies versus Dollar-denominated debt. This is not a top-down decision to say we don’t want to be in local currencies. It is more the result of our bottom-up, country-by-country fundamental credit analysis. We are looking to invest in countries that have the right policies in place to stimulate growth.
Stronger currencies
The returns on the local currency side of the bonds that we own have come from rates rallying and not from the strengthening currencies. We think that will reverse at some point as current account deficits improve and as individual countries succeed in creating the growth they need for their currencies to be attractive.
Limiting exposure to volatility
We expect generally comparable returns over the next 12 months in both hard currency and local currency issues but with a much greater volatility range for local. That is one of the reasons why we are underweight on the local side. Going forward we will look to opportunistically and tactically increase both corporate and local as valuations change within the hard side.

Performance data shown represents past performance, which is no guarantee of future results. Current performance may be higher or lower than the past performance data shown. Investment returns and the value of an investment will fluctuate, and an investor's shares, when sold, may be worth more or less than their original cost. You can obtain performance data current to the most recent month-end (available within seven business days after the most recent month-end) by calling 800-422-1050 or visiting

Performance figures discussed reflect that of the institutional class shares.

The views expressed herein are those of the portfolio manager at the time of the interview and may not be reflective of their current opinions or future actions.  These views are not necessarily those of the fund company and should not be construed as such.

This information should not be considered as a recommendation to purchase or sell a particular security and the holdings or sectors mentioned may change at any time and may not represent current or future investments.