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VanEck Emerging Markets Bond Strategy: Question & Answer

May 12, 2023

Read Time 3 MIN

Access emerging markets bonds with a flexible, actively managed strategy that invests across the full spectrum of EM debt.

As one of the first truly blend emerging markets bond strategies in the market, the VanEck Emerging Markets Bond Fund is actively managed with the flexibility to invest in sovereign and corporate debt in hard- and local-currency. Here we answer commonly asked questions about the VanEck Emerging Markets Bond Fund.

Why invest in EM debt?

1. Emerging Markets Have Lower Debt

Emerging markets (EM), in general, have had much lower debt levels due to consistently lower fiscal deficits compared to the U.S. and other developed markets (DM). For EM bonds, this means a powerful technical tailwind compared to DM – EM is issuing much less debt than DM, and some EMs are even issuing less debt than principal and interest coming due on their debt. Low debt also allows central bank monetary policy to have traction – it allows central banks to credibly hike rates to counter price inflation.

2. EM Has Independent Central Banks

The primary goal of EM central banks is to control inflation, which they do by maintaining high real interest rates and regulating banks. For EM bonds, the result has been higher real and nominal policy rates. This higher carry rewards investors in local-currency bonds directly.

3. EM Benefits from the New Global Economic Structure (with a Boost from China’s Reopening)

Unlike developed markets, which experience higher commodity prices as a price shock, many emerging markets export more commodities than they import, which means they benefit from higher prices. This dynamic means emerging markets are good creditors in dollar terms and have dollars on hand to stabilize their local currency if needed. China’s re-opening and the support this gives to its trading partners is clear in this regard.

Additionally, a new global financial structure dynamic is currently unfolding – EMs are opening trade and financing structures and using each other’s currencies in trade. For example, China and India can now pay for Gulf oil with CNY and INR; this forces those Gulf central banks to use that cash to buy Chinese and Indian bonds. We don’t happen to like the CNY nor INR bonds, but there are tons of great EM bond markets subject to this new dynamic.

We think EM bonds should be a key part of investors’ strategic allocations in 2023 and beyond. Learn more in The Investment Case for Emerging Markets Debt.

How does the VanEck Emerging Markets Bond team invest in EM debt?

The VanEck Emerging Markets Bond team first deploys a quantitative process that identifies the cheapest bonds in the EM debt universe. The team then screens the initially identified cheap bonds for non-systematic risks, eliminating those deemed too risky. The Fund is differentiated by investing across all components of EM debt (sovereign, corporate, hard-currency, local-currency), by being index-agnostic, and by its’ bottom-up approach. The benefit of this investment approach is potential portfolio outperformance vs the Index over a market cycle.

The VanEck Emerging Markets Bond Fund is a high active share emerging market bond investment solution with the flexibility to navigate across sovereigns, corporates, USD and local currency bonds. It is managed by an established investment team that merges industry and personal experience to develop superior understanding of global markets and local policy. The team utilizes a quantitative and qualitative process to exploit significantly undervalued opportunities within a disciplined risk management framework.

Flexibility to Invest across All Components of EM Debt

VanEck Emerging Markets Bond Allocations Over Time

VanEck Emerging Markets Bond Strategy Allocation

HC = Hard Currency; LC = Local Currency.

Source: Bloomberg and FactSet. Data for the 10YR period ending March 31, 2023.

For illustrative purposes only. The information above is intended to demonstrate VanEck’s investment process and strategies, and the types of investment opportunities VanEck may consider. During any given stage of the investment process the selection criteria may vary from those shown above. Information regarding investment opportunity selection criteria is intended as guidelines which are subject to change by VanEck at any time without notice. Any projections, forecasts or forward-looking statements do not reflect actual results, and are not intended as financial advice, a recommendation to buy or sell any securities, or any call to action.

Who is responsible for managing the Fund?

Eric Fine is the Portfolio Manager of the VanEck Emerging Markets Bond Fund, with over 34 years of industry experience and 14 years at VanEck. Eric began his career working for Harvard University in Russia. After that, he held senior leadership positions at Morgan Stanley, including running EM Economics and Fixed Income Research, and founding and managing Morgan Stanley’s Emerging Markets Proprietary Trading group. Eric advised numerous governments on economic policies and debt profiles; he also worked on restructuring sovereign debts in Russia, Turkey and the Dominican Republic. For additional detail on Eric’s unique background and how it impacts his management of the Fund.

Eric is supported by Deputy Portfolio Manager David Austerweil, Chief Economist Natalia Gurushina and Senior Corporate Analyst Robert Schmieder. In addition, the team draws on the collective resources of VanEck’s extensive emerging markets fixed income and equity platform, which comprises 16 portfolio managers and analysts.

VanEck has been investing in emerging markets for three decades, and manages $6.5B in emerging markets assets across active passive equity and debt investment solutions.

How does the investment team construct its portfolio(s)?

The VanEck Emerging Markets Bond team adheres to a disciplined three-step investment process, as highlighted below.

Step 1: Valuation

This first step of the investment process is designed to identify the cheapest sovereigns and corporates, in hard and local currencies, with attractive risk/reward profiles compared to other investments with similar fundamentals. This step is 100% quantitative.

Step 2: Screening

The second step of the investment process is to screen the investments generated by Step 1 via three tests. Each test can get one of two passing or two failing grades, and strong failing grades eliminate the investment. This step is subjective, but quantitatively-informed and documented. ESG considerations are integrated into this step of the process.

  Issuer Initial Allocation Policy Test Economic Test Technical Test   Adjusted Allocation
Local currency sovereign example Country B 8.64% STRONG PASS STRONG PASS WEAK FAIL 7.64%
Hard currency sovereign example Country A 0.30% STRONG PASS STRONG PASS WEAK PASS 7.64%
  Issuer Initial Allocation Policy Test Economic Test Technical Test   Adjusted Allocation
Corporate hard currency example Corporate 1 1.00% WEAK PASS WEAK PASS WEAK PASS 1.00%

Source: Bloomberg and VanEck. For illustrative purposes only. The information above is intended to demonstrate VanEck’s investment process and strategies, and the types of investment opportunities that VanEck may consider. During any stage of the investment process, the selection criteria may vary from those shown above. Information regarding investment opportunity selection criteria is intended as guidelines which are subject to change by VanEck at any time without notice. Any projections, forecasts or forward-looking statements do not reflect actual results, and are not intended as financial advice, a recommendation to buy or sell any securities, or any call to action.

Step 3: Portfolio construction and risk management

Portfolios are constructed based on the investment process and the risk limits of the Fund.

How does the investment team conduct research?

The team conducts regular visits to key countries and their officials. These meetings include government officials (e.g., central bank, ministry of finance), private sector (e.g., banks, non-financial corporates), and independent bodies (e.g., media, official international organizations, opposition parties). In addition, the investment team has similar meetings in the U.S., and regularly attends conferences focused on risks and opportunities in the emerging markets bond space.

How can investors buy VanEck Mutual Funds?

Learn more here.

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IMPORTANT DISCLOSURES

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results, are valid as of the date of this communication, and subject to change without notice. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.

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.

Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic, or social instability.

Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.

ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within an active investment Fund’s investment objective, inclusion of this statement does not imply that an active investment Fund has an ESG-aligned investment objective, but rather describes how ESG information may be integrated into the overall investment process.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing Fund and techniques employed will be successful. An investment Fund may hold securities of issuers that are not aligned with ESG principles.

You can lose money by investing in the VanEck Emerging Markets Bond Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks which may include, but are not limited to, risks associated with active management, credit, credit-linked notes, currency management strategies, derivatives, emerging market issuers, energy sector, ESG investing Fund, foreign currency, foreign securities, hedging, high portfolio turnover, high yield securities, interest rate, LIBOR replacement, market, non-diversified, operational, restricted securities, investing in other funds, sovereign bond, and special risk considerations of investing in Latin American issuers, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. 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.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

© 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.

IMPORTANT DISCLOSURES

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results, are valid as of the date of this communication, and subject to change without notice. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.

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.

Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic, or social instability.

Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.

ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within an active investment Fund’s investment objective, inclusion of this statement does not imply that an active investment Fund has an ESG-aligned investment objective, but rather describes how ESG information may be integrated into the overall investment process.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing Fund and techniques employed will be successful. An investment Fund may hold securities of issuers that are not aligned with ESG principles.

You can lose money by investing in the VanEck Emerging Markets Bond Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks which may include, but are not limited to, risks associated with active management, credit, credit-linked notes, currency management strategies, derivatives, emerging market issuers, energy sector, ESG investing Fund, foreign currency, foreign securities, hedging, high portfolio turnover, high yield securities, interest rate, LIBOR replacement, market, non-diversified, operational, restricted securities, investing in other funds, sovereign bond, and special risk considerations of investing in Latin American issuers, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. 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.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

© 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.