Emerging Market Corporate Bonds Accessing some of the world’s potential growth opportunities Fall 2013

Contents

Executive summary 03 Introduction 04 Emerging Market corporate bonds 06 - 10 key characteristics 06 Conclusion 12 - A compelling asset class 12 Risks 13 Aberdeen’s investment process for Emerging Market corporates 14 Appendix 1 15 - FAQs 15 Appendix 2 16 - Indices 16 Appendix 3 17 - Regional characteristics 17

01 of 20 City people - a street scene. 44 million people join urban populations in developing Asian countries each year. 20,000 new dwellings and 250km of new roads are constructed every day. Source: Asian Development Bank, The Economist, 2013

02 of 20 Executive summary

Emerging Markets Emerging Market corporate debt – why are they attractive? – understanding the risks • We believe Emerging Markets (EM) present some of the world’s most • EM corporate bondholders face the same issues of transparency and dynamic growth opportunities. Abundant natural resources, favourable corporate governance as EM equity investors, albeit that market demographics and structural credit improvement combined with fiscal liquidity and structure are areas of greater consideration. and corporate reforms have led to improving economic fundamentals • In terms of capital structure, priority access to cash flow is crucial in (i.e. good corporate balance sheets, strong fiscal discipline and solid determining default and recovery scenarios, which in turn drives the growth dynamics). relative valuation of a bond. It comes down to the exact position of the • We believe investing in EM corporate bonds is attractive because we debt within the company structure, which can often be more consider these companies fundamentally sound and they operate in complicated to discern in EM companies. stable macroeconomic environments. Banking systems are relatively • Accounting standards and corporate governance in EM still somewhat stronger and, unlike the fragile banking systems in developed lag those of developed economies. Comprehensive research into each economies, are robust and have the ability to provide liquidity and and the market in which it operates is therefore required. credit for these companies to grow. • Foreign securities are more volatile, harder to price and less liquid Emerging Market corporate debt than U.S. securities. As mentioned above, they are subject to different – why now? accounting and regulatory standards. These risks are enhanced in EM countries. • The size of the EM corporate bond market is currently estimated at over US$1 trillion.A Emerging Market corporate debt • Over the past six years, corporate and quasi sovereign bond issuance – Aberdeen Asset Management’s strengths A has been over US$1.2 trillion , nearly three times the level of sovereign • Aberdeen has a strong local presence, with over 70 EM investment bond issuance. We expect this trend to continue, providing a wide set professionals worldwide located in Asia, London and Sao Paulo. of opportunities to enter the asset class. • Long history of investing in both the EM debt and equity markets – up to • The majority of EM corporate debt is investment grade. a third of Aberdeen’s total Assets under Management are invested in EMs. Furthermore, bigger issuance sizes and a more dedicated investor base • Well resourced, stable and experienced team with a robust track record have improved market liquidity. of investing in EM debt across a number of market cycles. • Inflows into the entire ‘EM debt’ universe reached a new record of • We have been investing in the EM corporate markets for over 10 years. US$94 billion in 2012B, exceeding the US$80 billion reached in 2010. We expect healthy inflows to continue in 2013. • We work closely with our global EM equity team and have a history of managing combined debt and equity mandates. Together with our • Many EM countries are likely to see continued corporate bond issuance equity colleagues, we research approximately 1,000 EM companies a in the foreseeable future as domestic and international investment year - we believe this is one of our strongest competitive advantages. interest increases. • We conduct fundamental top-down and bottom-up credit analysis, providing comprehensive coverage of all factors relevant to the asset class. • We rely on proprietary research to provide a deeper insight into the companies in which we invest. • The depth of our experience enhances our ability to interpret macro and industry news allowing us to make rapid decisions and implement trades quickly.

A Source: JP Morgan, January 2013 B JP Morgan, January 2013

03 of 20 Introduction

Over the past 20 years, economic, political and technological events have led to a dramatic growth in Emerging Market economies. Increased globalization, the dissolution of the communist bloc and the opening up of previously inaccessible markets such as China have all played a part in the expansion of investment opportunities in these countries, which has in turn helped to reshape the investment universe in Emerging Markets.

04 of 20 Emerging countries have seen their economic positions improve through The market turmoil of 2011, caused by the uncertainty surrounding the a number of hard learnt lessons. The crises experienced by various regions fate of the EurozoneC, saw EM corporate bonds suffer along with other (the Tequila crisis in 1994, the Asian and Russian crises in 1997/98 and asset classes regarded as ‘risky’. The price of bonds of fundamentally the credit crisis of 2008/09) have been key tests for EM economies. In strong EM companies fell to attractive levels which proved to be a good particular, the Asian currency crisis led EM authorities to make greater time for investors to enter the asset class. efforts to protect their economies from ‘hot’ money – foreign inflows of capital that, while helpful for inward investment, left the countries vulnerable to any rapid withdrawals of this capital. Asia and other countries built up large foreign reserves, while many of the companies worst affected by the currency crisis adopted more conservative policies. As a result, emerging economies were generally less affected by the 2008/09 credit crisis than their developed market counterparts.

EMERGING MARKETS EM economies are defined by the International Finance Corporation (IFC) as economies with a low to middle per capita income. These economies largely span developing countries in three regions: Asia, Latin America, and CEEMEA (Central Eastern , Middle East and Africa). Emerging economies today are generally characterised by favourable demographics and strong financial footing and lower levels of debt than their Western counterparts. EM corporate bonds are bonds issued from countries in Emerging Market regions.

In this paper, we look at the growth in the EM corporate bond market, why we believe this market is increasingly attractive as a standalone asset class and the risks that might be associated with investment. Aberdeen’s expertise in EM companies

Central and Eastern Europe

London Budapest

Middle East Emerging Asia Africa Hong Kong Bangkok

Kuala Lumpur Singapore Latin America

Sao Paulo

Emerging Market offices

Source: Aberdeen Asset Management For illustrative purposes only.

C Eurozone refers to the bloc of nations that have adopted the euro as common currency and legal tender.

05 of 20 Emerging Market corporate bondsD - 10 key characteristics

As with developed market corporate bonds, EM corporate bonds are 1. Size of the market publicly traded debt instruments issued by companies that wish to raise The EM corporate bond market is an extremely large and fast growing capital through both public and private markets. Corporate bonds may be asset class. more attractive to investors than sovereign bonds because of the higher yield available in compensation for the fact that corporations are, in Chart 1: EM corporate bond market – growing into a mainstream aggregate, more likely to default on their debt than governments. asset class There has always been a compelling story for EM corporates due to a Relative size of markets much greater capacity for growth of their relevant markets and improving (USD millions) demographics. Over the past ten years, growth in EM has accelerated 5,000 against a backdrop of recovering financial systems and strong regulation 4,500 – the result of various crises experienced in these regions – and easing 4,000 credit conditions, which has in turn been beneficial for EM companies. 3,500 3,000 We highlight 10 key characteristics of the Emerging Market corporate 2,500 bond market that make it an increasingly viable alternative for fixed 2,000 income investors: 1,500 1. Size of the market has increased significantly 1,000 500 2. Liquidity has been supported by greater issuance 0 3. More than two-thirds of the bonds are investment grade US High US Euro High Euro EM EM Sovs EM Sovs Yield Investment- Yield Investment- Corps (HC) (LC) 4. Diverse by region, quality and sector grade grade 5. The investor base has broadened US HY: ML US High Yield Master II Index, US IG: ML US Corporate Master Index, Euro HY: ML Euro High Yield Index, Euro IG: ML EMU Financial Corporate Pfandbrief Index, 6. Default rates have been low EM Corps: ML Emerging Market Corporate Plus Index, EM Sovs (HC): Emerging Market 7. Valuations are attractive External Debt Index, EM Sovs (LC): ML Local Debt Markets Plus.Source: Merrill Lynch, as at 31 Dec 2012. For illustrative purposes only. Indexes are unmanaged and are provided 8. Market fundamentals have been very positive for comparison purposes only. No fees or expenses are presented. You cannot invest 9. Coupons may provide a valuable source of return directly in an index. (HC) - Hard currency; (LC) - Local currency. 10. Emerging economies have strengthened their capital position 2. Liquidity has been supported by greater issuance Issuance picked up in 2009, with US$125 billion corporate bonds issued. Issuance in 2010 surpassed expectations by reaching a record US$204 billion. In 2011, corporate issuance remained strong and far outstripped that of sovereign bonds. 2012 proved to be another strong year with US$329 billion issued.

Chart 2: Total external issuance (USD bn)

US$ bn 350

300

250

200

150

100

50

0 2006 2007 2008 2009 2010 2011 2012 2013F D As per convention, the JP Morgan corporate bond index (JP Morgan CEMBI Broad EM Quasi-Sovs & Corporates EM Sovereign Diversified Index) definition of corporate bonds includes issuance by sovereign-owned entities (quasi-sovereigns) that are less than 100% sovereign owned. For the purpose Source: JP Morgan, January 2013. For illustrative purposes only. of this document, the quasi-sovereigns referred to are entities that are 100% sovereign Forecasts are offered as opinion and are not reflective of potential performance, are not owned. guaranteed and actual events or results may differ materially.

06 of 20 3. More than two-thirds of the bonds are investment grade 4. Diverse by region, quality and sector EM corporate bonds is an investment grade asset class on average. 72% The EM corporate bonds market is well diversified, providing investors of EM corporate debt stock is rated BBB- or above. with interesting opportunities across the board (see charts 4 and 5). New issuance has increased diversity not only in regional but also in Chart 3: Corporates by rating quality and sector terms. Currently, there are 405 issuersE in the EM corporate bonds index.

AAA The breakdown of issuers shows a larger proportion in Asia and Latin America. Companies in Central and Eastern Europe have been traditionally more reliant for funding on bank lending rather than capital markets, leading to less corporate bond issuers in this region. However, as European AA banks withdraw from the global markets in general and emerging Europe in particular, we are likely to observe a significant increase in issuers from the region. The Middle East is seeing more issuance too through the A growth of the Islamic financing sector.

Chart 4: Regional diversity of corporate debt stock BBB

BB Asia % Latin America % Emerging Europe % B Africa & Middle East %

CCC

0 100 200 300 400 500 Source: Merrill Lynch, January 2013 For illustrative purposes only. US$ bn Diversification does not ensure a profit or guarantee against a loss.

Source: Merrill Lynch, January 2013 Chart 5: EM corporate debt diverse by sector as well For illustrative purposes only. Standard & Poor’s credit ratings are expressed as letter grades that range from “AAA” to “D” to communicate the agency’s opinion of relative level of credit risk. Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show Banking & Finance 24% relative standing within the major rating categories. The investment grade category is a Energy 22% rating from AAA to BBB-. Basic Industry 12% Agency 9% Telecommunications, Media and Technology 8% Utility 6% Real Estate 4% Capital Goods 4% Services 4% Other 7% Source: Merrill Lynch, January 2013 For illustrative purposes only. Diversification does not ensure a profit or guarantee against a loss.

E Source: JPM CEMBI Broad Diversified Index, February 2013

07 of 20 Emerging Market corporate bonds – 10 key characteristics CONTINUED

5. The investor base has broadened Chart 7: EM corporate default rates are typically lower There has been a shift away from the regional investors that previously 12 month rolling speculative grade default ratesH dominated the market to an increase in the number of investors that 12 recognise EM corporates as a fully fledged asset class. At the beginning of 2010, dedicated corporate funds totalled just US$7 billion and this 10 has quickly increased over five times to US$47 billion as at January 2013F. Long-term investor interest in all three EM regions – Asia, Latin 8 America, and *CEEMEA – has helped to improve the market and made it 6 a more stable place to be invested. Recently the market has been driven by inflows from the retail sector. We expect increased inflows from 4 institutional investors given their current under-allocation to EM debt. In recent years, we have seen a proliferation of dedicated funds indicating 2 more interest in this asset class. 0 2007 2008 2009 2010 2011 2012 Chart 6: AuM benchmarked to EM Indices (US$ million) Emerging Markets USG EuropeH Global US$mn Source: Standard & Poor’s CreditPro®, January 2013 For illustrative purposes only. 350000 PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS. 300000 Chart 8: Default rates in high yield EM corporates 250000 200000 12 month trailing high yield default rates 16 150000 Would have been lower if Kazakhstan banks had 100000 14 not defaulted 50000 12 0 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 10

Corporate Hard Currency debt (JPM CEMBI) Sovereign Local Currency 8 Sovereign Hard Currency debt (JPM EMBI) debt (JPM GBI-EM) 6 Source: JP Morgan, January 2013. For illustrative purposes only. Indexes are unmanaged and are provided for comparison purposes only. No fess or expenses are reflected. You 4 cannot invest directly in an index. 2

6. Default rates have been low 0 2009 was the year of particularly high default rates. Even then, the default default rate (%) Yield High issuer-weighted LTM 2012 1996 1998 2010 2002 2006 2004 2008 rate for high yield EM corporate bonds was 6.1% (of which approximately 2000 3/4 came from the Kazakhstan banking sector), compared with 9.5% for Developed Market High Yield Default Rate global corporate bonds and 11.2% for US high yield corporate bonds. Emerging Market High Yield Default Rate Outside of the Kazakhstan banking sector, 2009 default rates were Source: BofA Merrill Lynch, June 2012 very low in EM corporate bonds. Over the past 12 months default rates For illustrative purposes only. decreased to approximately 2%, below the world average and that for ‘LTM’ – Last twelve months. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS. US companies.G This may help to disprove the previously held perception that this asset class is more risky than other areas of the world. The developed world has experienced unprecedented turmoil in recent years but EM companies have been relatively unscathed, in our view, due to the underlying quality of the asset class.

F Source: JP Morgan, January 2013 G Source: JP Morgan, January 2013 G Data through 30 November 2012. Subject to revision. H U.S. default rate includes issuers incorporated in U.S. tax havens (for example, Bermuda and Cayman Islands). H Europe refers to , Belgium, Bulgaria, Channel Islands, Cyprus, Czech Republic, , Estonia, Finland, , Germany, Greece, Hungary, Iceland, , Italy, Latvia, Lithuania, , Malta, the , Norway, Poland, Portugal, Romania, Slovakia, Slovenia, , , , and the U.K. * CEEMEA - Central & Eastern Europe, Middle East and Africa

08 of 20 7. We believe valuations are attractive: We particularly favour corporate bonds of the previously mentioned The JP Morgan Corporate EM Bond Broad Diversified Index (CEMBIBD) countries like Brazil, Mexico, Russia and Indonesia, where we are very has a higher average credit rating of BBB versus the JP Morgan EM Bond confident of the macroeconomic fundamentals. Global Diversified Index (EMBIGD), whose average rating is BBB-. The Chart 10: Russian bonds spreads two indices have different definition of EM in determining whether the country is eligible to be part of the index. The sovereign bond index Basis points % defines ‘EM’ as countries classified as low to middle income, while  2.8 corporate bonds index encompasses bonds issued by any country 2.6 in the EM regions. This means that corporate bonds issued in Hong 2.4 Kong, Singapore or United Arab Emirates are part of the CEMBIBD, but  sovereign bonds of these countries would not be eligible for inclusion in 2.2 the EMBIGD. This is also the reason behind higher spreads on sovereign bonds observed in 2004/05 for both high grade and high yield bonds. 2.0 Investors are now focused on corporate fundamentals (i.e. balance  1.8 sheets and senior management) which helped support the asset class. As can be seen in chart 9, spreads have tightened recently, following their 1.6 late 2011 and early 2012 peak.  1.4

Chart 9: EM corporate bond spreads are at attractive levels compared 1.2 to sovereign bond spreads - investment grade  1.0 Basis points Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 03 04 05 06 07 08 09 10 11 12 13 300 Russian corporate bonds Russian sovereign bonds Russian corporate bonds / Russian sovereign bonds

250 Source: Russian corporate bonds represented by Russian subcomponent within the CEMBI Broad Diversified Index, Russian sovereign bonds represented by Russian subcomponent within the EMBI Global Diversified Index, Bloomberg, January 2013 200 For illustrative purposes only.

Chart 11: Brazilian bonds spreads 150 Basis points % 600 2.60 100

500 2.28 50

0 400 1.96 Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 02 03 04 05 06 07 08 09 10 11 12 EM Investment-grade corporate bonds - EM IG sovereign bonds 300 1.64 Source: CEMBI Broad Diversified investment grade blended spread - EMBI Global Diversified investment grade blended spread, Bloomberg, January 2013 For illustrative purposes only. 200 1.32 The profile of non-investment grade bonds is also of higher quality for EM corporates and EM sovereigns. Non-investment grade EM sovereign 100 1.00 bonds are issued by countries like Venezuela, Argentina and Ecuador Feb 10 Aug 10 Feb 11 Aug 11 Feb 12 Aug 12 Feb 13 where ratings represent the higher political risk. Brazilian corporate bonds Brazilian sovereign bonds Non-investment grade corporate bonds are typically issued by companies Brazilian corporate bonds / Brazilian sovereign bonds operating in countries widely regarded as safer, like Brazil, Mexico, Russia and Indonesia. Source: Brazilian corporate bonds represented by Brazilian subcomponent within the CEMBI Broad Diversified Index, Brazilian sovereign bonds represented by Brazilian subcomponent within the EMBI Global Diversified Index, Bloomberg, January 2013 For illustrative purposes only.

09 of 20 Emerging Market corporate bonds – 10 key characteristics CONTINUED

Investment grade 8. Market fundamentals have been very positive After the increase during the 2008/09 financial crisis, spreads on bonds EM companies on the whole have been strengthening their balance sheets returned to the range at which they historically traded. For similar rating and capital positions. As can be seen in charts 14 and 15, the difference in categories, EM investment grade companies generally have better leverage between EM and developed countries, both in investment grade management and stronger balance sheets than their U.S. peers and there and high yield, remains strong. is more diversification across the regions, allowing investors to gain access to the key growth markets of Brazil, Russia, India and China (BRIC). Chart 14: IG leverage trends: EM vs US Chart 12: EM investment grade corporate debt still trades at a premium to developed market bonds Net Leverage (x) 2.0 Basis points 800 1.5 700 600 1.0 500 400 0.5 300 200 0.0 100        0 EM IG Net Leverage US IG Corporates -100 Leverage = Net Debt/Earnings before Interest, Taxes, -200 Jan Jan Jan Jan Jan Jan Jan Jan Depreciation and Amortization (EBITDA) 04 05 06 07 08 09 10 11 Source: BofA Merrill Lynch Global Research, September 2012 US BBB-rated bonds EM investment grade bonds (BBB) For illustrative purposes only. Leverage potentially amplifies certain risks such as US BBB-rated bonds - EM investment grade bonds (BBB) higher volatility of net asset value and price, which increase the risk of loss under adverse market conditions. Source: Bloomberg, August 2012 For illustrative purposes only. Chart 15: HY leverage trends: EM vs US High yield Net Leverage Compared to US high yield, EM high yield corporate bonds are still trading 4.5 with a greater risk premium. For each rating category (see chart 13), EM 4.0 high yield bonds in general have a higher yield than respective developed 3.5 market companies. We believe they offer better diversification across 3.0 regions and have a lower default risk, making them more attractive. 2.5 2.0 Chart 13: ...as do higher yielding corporate bonds 1.5 1.0 Basis points 0.5 2500 0.0        EM HY Net Leverage US HY Corporates 2000 Leverage = Net Debt/Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) 1500 Source: BofA Merrill Lynch Global Research, September 2012 For illustrative purposes only. Leverage potentially amplifies certain risks such as higher volatility of net asset value 1000 and share price, which increase the risk of loss under adverse market conditions.

500 9. Coupons provide a valuable source of return In our view, income is a widely under appreciated quality of EM corporate 0 bonds. Coupons constitute a significant part of the bond’s total return and Jan Jan Jan Jan Jan Jan Jan Jan Jan 04 05 06 07 08 09 10 11 12 provide investors with income over the life of the bond. Coupon income US BB-rated bonds EM High Yield bonds explains, in part, why EM corporate bonds have only ever recorded one year EM High Yield bonds - US BB-rated bonds of negative total returns - 2008. As can be seen in charts 16 and 17, interest Source: Bloomberg, August 2012 income enhances return in “good” times and provides investors with a For illustrative purposes only. cushion in times of turmoil, to some extent smoothing out total return.

10 of 20 Chart 16: Interest income significant part of total return: for 10. EM economies have strengthened their capital position investment grade... Historically, governments in these regions used debt to help fuel growth. % However, prudent fiscal management and economic prosperity led to 30 deleveraging as governments repaid debt and reduced their budget 25 deficits. Companies in EMs naturally benefited from this but they required 20 more capital in order to achieve economies of scale; this need for capital 15 contributed to the significant growth of the corporate debt market. 10 5 We believe a healthier macroeconomic backdrop is necessary for an 0 improved business and political environment where local companies can -5 thrive. Developing countries have often introduced plans and provided -10 support to develop key industries. -15 -20 € ­         CEMBI Brd Div IG Interest Return CEMBI Brd Div IG Price Return CEMBI Broad Div IG Total Return

Source: JP Morgan, Aberdeen Asset Management, January 2013 For illustrative purposes only. * IG: Investment-grade, HY: High Yield JP Morgan Corporate Emerging Markets Bond Index (CEMBI) is a market capitalization weighted index consisting of U.S. -denominated emerging markets corporate bonds. It is a liquid global corporate benchmark representing Asia, Latin America, Europe and the Middle East/Africa. The index is unmanaged and is presented for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS.

Chart 17: ... and high yield

% 80 60 40 20 0

-20 -40 -60 ‚ € ­        CEMBI Brd Div HY Interest Return CEMBI Brd Div HY Price Return CEMBI Broad Div HY Total Return

Source: JP Morgan, Aberdeen Asset Management, January 2013 For illustrative purposes only. * IG: Investment-grade, HY: High Yield PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS.

11 of 20 Conclusion: A compelling asset class

EM corporate bonds have come into their own as a standalone asset EM CORPORATE BONDS – REGIONAL CHARACTERISTICS class. The asset class was previously only viewed in piecemeal fashion The Emerging Europe corporate debt segment is mostly made up of by regional investors, or was viewed as a specialist source of returns for financial institutions and Russian companies. Russian corporates bonds I investors seeking ‘risky’ alpha . In our opinion, dedicated infrastructure are separated into two distinct tiers with the top tier dominated by oil such as investable market indices, dedicated research and the rapid and gas companies and banks partially owned by the government. growth in market capitalisation from increasing issuance has now brought this burgeoning asset class into the spotlight. Corporate bonds in Latin America are dominated by Brazilian companies, followed by Mexico. Lately we have also seen a strong The fundamental case for EM companies is also compelling. Default rates pipeline of issuance from ASEAN countries such as Peru, Chile and have dropped significantly since 2010. Additionally, valuations, especially Colombia. Regional bonds are diversified across sectors and ratings, when considering how strong EM economies have been, are compelling, which is also reflected in small issue sizes and more esoteric names, with potential opportunities within the investment grade and high yield which offer potential opportunities for investors with credit analysis J sector. Mean reversion to long term trends and a change in relative credit expertise. risk perceptions for EM corporates has caused credit spreads to tighten since their peak in October 2011. Asian bonds are dominated by investment grade issues, mostly out of Hong Kong. These tend to trade in a very similar way to the CORPORATE BONDS ISSUED IN LOCAL CURRENCY US investment grade corporate bonds. High yield bonds are mostly In recent years, emerging economies have made considerable progress issued out of Indonesia and China. Commodity and utility companies in developing local currency markets. Investors seeking exposure to dominate the Indonesian corporate bond market and most are local currency and local yields have increasingly started to turn to this second-time issuers with whom investors have familiarity. asset class. Local currency credit markets have been further boosted The Middle East market has been dominated by quasi-sovereign by lengthening average maturity of EM sovereign bonds, which has and government related entity issuance out of the Gulf Corporation also enabled companies to issue longer-dated bonds. Council (‘GCC’), most of which have been issued only in the past Local currency corporate bonds have three specific risks – credit risk, couple of years. There is little issuance from Africa at the moment – interest rate risk and currency risk. The reason investors should be even at the sovereign level. South Africa is the only market with the cautious on this asset class is the lack of liquidity and lack of depth of occasional corporate bond, which tend to be rather illiquid. the investor base. Please see Appendix 3 for more detail on each region.

I Alpha is a common measure of performance on a risk-adjusted basis. J Mean reversion is a theory suggesting that prices and returns eventually move back towards the mean or average.

12 of 20 Risks

EM corporate bondholders face the same issues of transparency and Whereas financial information in developed markets can be found in corporate governance as EM equity investors, albeit in a different part a comparable manner between companies of the same industries, of the capital structure. Corporate bonds are often issued by private EM companies, if publicly listed, often report according to their local family-held companies which may have complicated and opaque Generally Accepted Accounting Principles (GAAP). Accounting standards company structures. There may also be issues with the quality and in EMs still somewhat lag those of developed economies and so timeliness of financial disclosures. Information can often only be gleaned company reports require careful and in-depth analysis of primary data from contacts within the local markets and from repeated management to differentiate and understand the true cash position and operating meetings and site visits. Other risks include market liquidity which, whilst results of companies. The trend is to transition towards the International improving, is thinner than developed market bonds. In this environment, Financial Reporting Standards (IFRS), which will ease future ‘apples-to- it is critical to carry out comprehensive research into the corporate apples’ comparisons. bond and the market in which it operates. At Aberdeen we have a highly experienced team and we carry out fundamental research and due ONE WAY TO MITIGATE THESE RISKS IS TO DO GROUND WORK diligence before we include a corporate bond in our portfolios. Of course, Visiting the country to meet management, to see the operations, and investors should gauge their risk profile and investment objectives before to ‘kick the tires’ is important. We do this at Aberdeen. making any EM investments. Bond covenants also help to mitigate the risks of lack of transparency and corporate governance by legally limiting companies in capital Fundamental Risks raising decisions and from taking excessive operational risks. Some • Structural Risks issues even have cash account management agreements embedded In the unfortunate event of a company defaulting on its debt, priority within the bond structure, directing the company’s use of cash. access to cash flow is crucial in determining the default and recovery Other bonds have additional attached which allow specific scenarios, which in turn drives the relative valuation of a bond. It comes protections on assets that can be detached solely to repay the bonds down to the exact position of the debt in the company structure – largely in an event of default. It is important to thoroughly analyse the bond called structural issues and subordination risks. Companies often built up and identify these covenants before investing. various subsidiaries for tax and legal planning purposes. It is important to know the entity from which the bonds are issued, the seniority of the Market Risks bond; and map that to how cash flows between different entities of the The total size of the debt stock, at approximately US$1 trillion, is same company. It pays to thoroughly research the company as well as comparable to other credit bond markets. The size of each issue varies the bond, firstly to ensure the company is what it says it is and has the depending on the company and the region. In times of stress, bid-ask necessary financial stability and management to be well run, profitable spreads can widen to levels comparable with Euro high yield and US high and to grow. Secondly, it is important to ensure the characteristics of the yield markets. As the debt stock increases, and the number of dedicated EM bond are sound and they fit well with the existing portfolio. corporate investors grow, liquidity should continue to improve. • Transparency and Corporate governance Companies are increasingly aware of reputational risks, motivated by their continuous need to access international capital markets. Dialogue between investors and companies has started to improve in EMs, though significant distinctions can be seen between different countries with differing corporate governance cultures.

13 of 20 Aberdeen’s Investment Process

EM Corporate Debt Investment Process Bottom-up - Issuer research Our investment process for EM corporate debt is comprised of three We undertake proprietary research on-the-ground to assess the main steps: underlying creditworthiness of each of the companies in which we invest. ‘Kicking the tires’ and meeting management means you have a better idea of the drivers of the business and their corporate culture. In particular, we will look at the ability of a company to generate cash and its willingness to pay back its debt. We will also take a close look Step 3: Portfolio at corporate governance, which is particularly pertinent in EM as many construction companies are equity-focused family businesses. We gain additional insight through speaking to our colleagues in the EM equity team. Step 2: Pricing the risks Step 2: We always scrutinise the structure of a corporate bond to determine Pricing the risks which part of the capital structure we should invest in. We typically look at what covenants are in place to protect bondholders and what limitations the issuer may have as to its ability to incur more debt. Other things we consider are whether there is any security available to us in the event of default, or if a cash priority payment structure is embedded in Step 1: the bond issue. Fundamental analysis We also consider the technical factors of the market; for example, a company in the Philippines with a well-regarded family shareholder will always be attractive to investors in the Philippines; and therefore provide For illustrative purposes only. strong support for the bonds. Step 1: Fundamental analysis Through a thorough understanding of a bond’s fundamentals and We believe in a top-down, bottom-up approach, with proprietary analysis structure, we are able to determine the level of adequate return required conducted on-the-ground to determine the quantitative and qualitative and see if the bond is attractive on a risk-return basis by comparing it to strengths and weaknesses of sovereigns, industries and companies. the broader market. Top-down – Country research Step 3: Portfolio construction With regards to corporate securities, we only invest in companies Before making an investment, we will analyse the entire investable where we have a fundamental view on the sovereign’s creditworthiness. universe and understand what is driving the performance. Within our EM Fundamental research is undertaken for each country including key corporate debt portfolios we invest across the entire ratings spectrum in macroeconomic variables, political risks and fiscal and monetary companies from Latin America, Central and Eastern Europe, the Middle policy developments. We research over 50 countries and hold over East and Africa as well as Asia. We constantly monitor the breakdown in 500 meetings per annum with senior policy makers and corporate regions, countries, sectors and ratings of these bonds to make sure we management teams. have a diversified portfolio. We will also ensure investment guidelines are adhered to and always take into account risk management inputs. Top-down - Industry research We conduct rigorous research to assess how strong the industry is in each country. The key factors we consider while conducting industry analysis are as follows: • Growth share matrix • Cyclicality • Competition analysis • Social/technological trends • Regulations

14 of 20 Appendix 1 - FAQs

EM Corporate bonds – what are they? How do we mitigate liquidity risks? • Mostly a US dollar-denominated, publicly-traded fixed income • Firstly, we mitigate risks by understanding the trading technicals of asset class comprising of debt -issued by companies in Emerging each bond. Factors that are important include: who are the book Market Regions. runners who issued the bonds? Which type of investors (by • Emerging Market Regions include Latin America, Asia, Emerging Europe, geographical region, and type – private banks, hedge funds, real money Middle East and Africa. institutional type) first bought, and subsequently traded the bonds? Which traders have the bonds? How big is the asset class? • The size of the EM corporate bond market is currently estimated at • Secondly, we make sure that we size our position according to the issue over US$1 trillion. size and hence the subsequent ability to trade the position. Currently, we How do EM corporate bonds look versus developed market buy less than 10% of the issue size. This is an important factor towards (“DM”) bonds? capacity of assets under management for the portfolio manager. • Within the same rating buckets, DM bonds are generally characterised Why choose Aberdeen to help you invest in EM Corporate bonds? by poorer credit metrics such as leverage ratios and debt service ratios • The asset class is growing rapidly and a lot of resources are needed to compared to EM. So a BB-rated DM company might have higher invest properly in this asset class. Aberdeen has a strong local presence, leverage and worse interest coverage than a BB-rated EM company. with over 70 EM investment professionals worldwide. Furthermore, Despite the difference in fundamentals, within the same rating bucket, Aberdeen has been investing in Emerging Market corporate bonds since a DM company will issue debt at lower yields than an EM company. the early 2000s (in blended vehicles), and as a house we have a strong Simply put, we believe you get better fundamentals in EM and global emerging equity platform in Asia, London and Sao Paulo who investors can potentially get better returns for it. have been investing in Emerging Market companies since the early • Secondly, default rates are not hugely divergent either, in fact, in the 1990s, gaining critical local knowledge and relationships. We work turbulent 2009, Emerging Markets had lower default rates in the higher closely with our equity team in research, and also co-manage portfolios yielding sector than developed markets. together. • Finally, investors may get better diversification in a EM corporate • Our resources and our investment process allow us to understand the portfolio compared to US or Euro-centric portfolios. risks of our investments and to have the conviction to price the risk of these bonds. This disciplined approach towards investing is crucial in Is illiquidity an issue with this asset class? reining back in periods of exuberance and being contrarian in periods of • Liquidity has improved as we have more dedicated EM corporate stressed markets. investors. There were no funds that were benchmarked to the JP Corporate Emerging Market Bond Indices in mid 2007, but recently the number of dedicated EM corporate funds has increased dramatically. • As a fast-growing asset class, we expect to see liquidity further improve.

15 of 20 Appendix 2 - Indices

There are a few relevant indices for EM corporate bonds. The most CEMBI Broad – Sectors by market capitalisation commonly used one is the J.P. Morgan CEMBI Broad Diversified Index. For a representation of the broader market below, we have used the Financial .% CEMBI Broad Index; this index, unlike the Diversified version, does not cap Oil & Gas . % TMT .% the contribution of individual issuers. Metal Mining .% CEMBI Broad Composition Real Estate .% Country Market Cap % Utilities .% 1 Brazil 21.37 Consumer .% Diversified .% 2 Russia 14.30 Industrial .% 3 China 9.06 Pulp & Paper . % 4 Hong Kong 8.05 Transport .% 5 Mexico 6.76 Infrastructure .% 6 Korea 5.53 For illustrative purposes only. 7 India 4.64 8 UAE 3.54 CEMBI Broad – Average rating by market capitalisation 9 Qatar 3.05 10 Singapore 2.65 11 Turkey 2.31 12 Chile 2.23 13 Colombia 1.96 14 Peru 1.85 Investment Grade % 15 Thailand 1.82 High Yield % 16 Israel 1.36 17 South Africa 1.21 18 Malaysia 1.16 19 Indonesia 1.04 20 Philippines 0.99 For illustrative purposes only. 21 Jamaica 0.67 22 Kazakhstan 0.62 23 Ukraine 0.47 24 Saudi Arabia 0.43 25 Argentina 0.35 26 Macau 0.30 27 Nigeria 0.29 28 Kuwait 0.26 29 Poland 0.25 30 Taiwan 0.23 31 Czech Republic 0.17 32 Egypt 0.14 33 Bahrain 0.13 34 El Salvador 0.12 35 Barbados 0.11 36 Mongolia 0.09 37 Venezuela 0.09 38 Dominican Republic 0.09 39 Croatia 0.05 40 Paraguay 0.05 41 Oman 0.05 Source: J.P. Morgan, March 2013 For illustrative purposes only. The index is unmanaged and has been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.

16 of 20 Appendix 3 - Regional characteristic

Emerging Europe Latin America The Emerging Europe corporate debt segment is dominated by financial Although the slowdown in global growth inevitably affected the fastest institutions and energy companies as a number of countries in the region growing economies in Latin America, Gross Domestic Product (GDP) are energy exporters, such as Russia and Kazakhstan. A large number of increased by 4.5% in 2011 and most countries experienced steady issuers tend to be majority stated owned companies, otherwise referred growth. Their positive growth trend can be explained by strengthening to as quasi-sovereign companies, and usually benefit from favourable domestic consumption and investment across Latin America as well treatment by the state. The size of bond issues from corporates tend as stable commodity prices. These trends are supportive for energy to be fairly large, offering good levels of liquidity within the secondary companies in the region which have been growing even faster than GDP. trading market. Debt levels of certain EM companies tend to be fairly The Latin American corporate bonds market is dominated by Brazilian low when compared to other companies in the same sectors in different companies, followed by Mexico. This region enjoys the strongest technical regions, although higher political risk is usually attached to corporate support with the lowest volatility in performance. Regional bonds are well bonds within the Emerging Europe segment due to lack of democracy diversified across sectors and ratings, which is also reflected in smaller within the region. This usually leads to higher yields on offer even though issue sizes and more esoteric names and offer potential opportunities for the credit metrics appear to be stronger for companies in the EM region. investors with credit analysis expertise. There is a variety of privately owned companies operating in numerous sectors such as telecommunications, steel and financials which have Bonds issued from this region tend to be from diverse sectors, ranging shown considerable progress in deleveraging their balance sheets since from domestic plays such as the largest engineering and construction the global financial crisis. companies in Brazil that are well poised to benefit from infrastructure projects, to Mexican industrials benefitting from high cost efficiency of During the recent market turbulence caused by the sovereign debt crisis the economy. in the Eurozone, Emerging Europe was particularly affected due to its close relationship with the troubled euro countries. Emerging Europe’s After a stronger 2011, Latin American corporate bonds have done well poor performance in 2011 was reversed in 2012 as investors started but have underperformed other regions. There has been a thematic to differentiate between credits. In the environment of depressed shift in sentiment on the back of slower domestic demand and more commodity prices, many of the Emerging Europe companies still challenging credit conditions in Brazil, whilst Mexico has seen the reverse. managed healthy margins and low leverage as the world’s lowest cost We continue to find value in many Latin American corporates which have producers and robust domestic demand. Strong oil prices have also been shown resilience in navigating a slower growth environment. very supportive of countries like Russia.

17 of 20 Asia Middle East and Africa China continues to be the lynchpin of the region as the growth and The Middle East region is characterised by low-yielding bonds from demand for commodities and goods drive the Asian economy. Abu Dhabi which are owned by the government and considered to be Government Related Entities (GRE) and hence are viewed as fairly safe Asian bonds are dominated by investment grade issues, mostly out investments considering the strong ownership. The region benefits from of Hong Kong. These tend to trade very similarly to the US high grade an abundance of oil reserves, which the government uses to diversify the names. High yield bonds from this region are mostly issued from region’s future revenues by borrowing to fund ambitious projects related Indonesia and China. Commodity and utility companies dominate the to tourism and trade. Bonds issued from Dubai are higher yielding than Indonesian bond market and most are second-time issuers with whom those from Abu Dhabi due to the increased risk resulting from the debt investors have familiarity. It is only recently that companies have had restructuring of Dubai World and Dubai Holding in 2010, which was the ability to issue bonds with over five years in maturity. Most of these caused by excess leverage built up before the financial crisis of 2008 companies have decent financial metrics but their ratings are constrained and then the subsequent collapse of asset prices and the inability to roll by the sovereign rating ceiling. With 10-year Indonesian sovereign over the debt. The majority of the debt restructuring in the United Arab external debt trading with around a 3% yield, Indonesian corporates can Emirates (UAE) has now taken place and the country liquidity and asset potentially offer a very good risk return profile. quality continues to improve. Whilst China is crucial to EM, expressing a view in investments continues The Arab Spring proved to be a pivotal moment for the UAE assets to be a challenge. Investment grade financials and corporates tend to be as investors sought the relative safety of the Emirates in the face of dominated by state-owned enterprise (SOE) - related bonds with poor instability in other parts of the region. As a result, UAE bonds performed fundamentals, and high yield bonds are split into property companies and well relative to other companies in the region. varying types of industrials. All Chinese companies have to be issued by an offshore entity and are all listed on a foreign stock exchange, mainly There is little issuance from the African region due to the limited the Hong Kong Stock Exchange. The property-related bonds tend to be amount of sovereign issuance, with South Africa being the only market a macro play on China and face some headline risks from the Chinese with the occasional corporate bond. Corporate issuance from the rest authorities’ ongoing efforts to regulate the industry in the midst of fears of the region would be quite a way off, but could be a potential area of of asset bubbles in this sector. Most of the Chinese property developers interest in the future. tend to be rather large, with a turnover of over US$1 billion and a market capitalisation of over US$5 billion. The Chinese industrial companies tend to be smaller in size and varied by industry. The issuance of Chinese industrial bonds only really began at the tail end of 2010, with over US$600 billion issued in 2011 and 2012. They have increasingly been facing headline risk since sellers started writing damaging reports on companies’ businesses. This has led investors to be more cautious regarding the risks involved in investing in bonds of companies characterised by poor corporate governance. Offshore investors can also get access to Chinese renminbi bonds that are being issued in Hong Kong, which is referred to as the CNH market.

18 of 20 IMPORTANT INFORMATION PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The BofA Merrill Lynch US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. The BofA Merrill Lynch US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market. The BofA ML Euro High Yield Index is designed to track the performance of euro- and British pound sterling-denominated below investment-grade corporate debt publicly issued in the eurobond, sterling domestic or euro domestic markets by issuers around the world. The BofA Merrill Lynch Euro Financial Corporate & Pfandbrief Index tracks the performance of EUR denominated investment grade pfandbrief and non-pfandbrief financial corporate debt publicly issued in the eurobond or Euro member domestic markets. The BofA Merrill Lynch Emerging Markets Corporate Plus Index tracks the performance of U.S. dollar and euro-denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets. The BofA Merrill Lynch Emerging Markets External Sovereign Index tracks the performance of US dollar and euro denominated emerging markets sovereign debt publicly issued in the major domestic and eurobond markets. The EMBI Global Diversified index limits the weights of countries with larger debt by only including a specified portion of these countries’ eligible current face amounts of debt outstanding. The JP Morgan GBI EM Global Diversified Index tracks the performance of local currency debt issued by emerging market governments, whose debt is accessible by most of the international investor base. The index incorporates a constrained market- capitalization methodology in which individual issuer exposures are capped at 10%, (with the excess distributed to smaller issuers) for greater diversification among issuing governments. The JPM CEMBI Broad Diversified Index is a global, liquid corporate emerging markets benchmark that tracks U.S.-denominated corporate bonds issued by emerging markets entities. The JP Morgan Index - Emerging Markets Global Diversified Total Return is an index that includes only countries directly accessible to the broad international investor base. Indexes are unmanaged and are provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index. Investing involves risk, including possible loss of principal. Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase). Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks may be enhanced in emerging market countries. Derivatives are speculative and may hurt the Fund’s performance. They present the risk of disproportionately increased losses and/or reduced gains when the financial asset or measure to which the is linked changes in unexpected ways. JP Morgan Corporate Emerging Markets Bond Index (CEMBI) Broad Diversified Investment-grade is a market capitalization weighted index consisting of U.S. -denominated Broad Diversified Investment-grade emerging markets corporate bonds. It is a liquid global corporate benchmark representing Asia, Latin America, Europe and the Middle East/Africa. JP Morgan Corporate Emerging Markets Bond Index (CEMBI) Broad Diversified High Yield is a market capitalization weighted index consisting of U.S. -denominated high yield emerging markets corporate bonds. It is a liquid global corporate benchmark representing Asia, Latin America, Europe and the Middle East/Africa. JP Morgan GBI-EM Global Diversified is a comprehensive global local emerging markets index that consists of regularly traded, liquid fixed0-rate, domestic currency government bonds. The JP Morgan EMBI Global Diversified is a uniquely weighted index that tracks total returns for U.S. dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities. The JP Morgan Global High Yield Index is an unmanaged index used to mirror the investable universe of the US-dollar denominated global high yield corporate debt market. The JPMorgan US Liquid Index, or JULI, provides performance comparisons and valuation metrics across a carefully defined universe of investment grade corporate bonds, tracking individual issuers, sectors and sub-sectors by their various ratings and maturities. The S&P U.S. Treasury Bond Index is a broad, comprehensive, market-value weighted index that seeks to measure the performance of the U.S. Treasury Bond market. The S&P 500 Index is an index of 500 selected common stocks, most of which are listed on the New York Stock Exchange, that is a measure of the U.S. as a whole. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. Individuals cannot invest directly in an index. This brochure is for information purposes only and should not be considered as an offer, or solicitation, to deal in any of the investments mentioned herein. AAM does not the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials. Some of the information in this document may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment. Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither AAM nor any of its agents have given any consideration to nor have they made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or group of persons. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document. Investors should carefully consider a fund’s investment objectives, risks, fees, charges and expenses before investing any money. To obtain this and other fund information, please call 866-667-9231 to request a summary prospectus and/or prospectus, or download a summary prospectus and/ or prospectus at www.aberdeen-asset.us. Please read the prospectus carefully before investing any money. Investing in mutual funds involves risk, including possible loss of principal. There is no assurance that the investment objective of any fund will be achieved. AAM reserves the right to make changes and corrections to its opinions expressed in this document at any time, without notice. Aberdeen Funds, Aberdeen Investment Funds and Aberdeen Global Select Opportunities Fund Inc. are distributed by Aberdeen Fund Distributors LLC, Member FINRA and SIPC. 1735 Market Street, 32nd Floor, Philadelphia, PA 19103. “Aberdeen” is a U.S. registered service mark of Aberdeen Asset Management PLC. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

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