Last year was a difficult one for investors in emerging market bond funds. The question investors asked themselves was whether emerging markets would experience a sharp correction or would continue to reflect improved fundamentals in the developing world.
Pioneer's Emerging Markets Bonds Fund took a defensive position, with a high level of liquidity, during the year. External debt underperformed local markets but outperformed corporate debt and the fund's flexibility to invest in all paid off, leading to a return of 7.9 per cent.
'Our performance was helped by our exposure to the local markets,' said Yerlan Sysdykov, lead manager of the fund. 'However, it suffered from our exposure to the corporate markets, which sold off in sympathy with the general credit markets. At the end of the year we took profits in local markets and our exposure now is reduced. Our positions in corporate markets have a combination of high carry and good potential to bring capital gains in 2008.'
The fund was bearish on Venezuela, which showed a significant deterioration in management of the economy in spite of strong markets for oil - its main export and economic driver, according to Mr Sysdykov.
'Our overweight positions in Russia and Brazil, both in local and external debt, helped us to outperform the market. Our position in Turkish local markets gave a significant boost to performance as well,' he added.
In terms of industries, the fund's positive performance was driven by commodities exposure from gas in Russia, iron ore and beef in Brazil and palm oil in Indonesia. In countries experiencing a consumer boom, the fund was exposed to retail, and in Russia and Ukraine to telecommunications and the banking sector.