in the initial filing.
The Fund’s Investment Strategy
The Fund seeks to provide protection against inflation and to generate income. “Inflation” is defined as an increase in the general price level of goods and services over time. The Fund invests in bonds and other instruments linked to inflation rates in emerging markets throughout the world.
The Fund intends to provide exposure across several emerging market regions and countries. The Fund currently intends to invest in inflation-linked debt of issuers in the following regions: Asia, Latin America, Eastern Europe, Africa and the Middle East. Within these regions, the Fund is likely to invest in countries such as: Brazil, Chile, Colombia, Israel, Mexico, Peru, Poland, South Africa, South Korea, Thailand and Turkey. This list may change based on market developments and may include additional emerging market countries that conform to selected ratings, liquidity and other criteria. As a general matter, and subject to the Fund’s investment guideline to provide exposure across geographic regions and countries, the Fund generally will invest a higher percentage of its assets in countries with larger and more liquid debt markets. The Fund’s exposure to any single country generally will be limited to 20% of the Fund’s assets. The percentage of Fund assets invested in a specific region, country or issuer will change from time to time.
The Fund intends to invest in inflation-linked securities and fixed income securities issued by emerging market governments, corporations and government agencies that are denominated in emerging market currencies. The Fund also may invest in inflation-linked securities and fixed income securities denominated in an emerging market currency and issued by supranational organizations, such as the European Investment Bank, International Bank for Reconstruction and Development, International Finance Corporation, or other regional development banks. The Fund may have exposure to corporate issuers of up to 30% of the Fund’s assets.
Inflation-linked bonds are structured to provide protection against inflation by preserving purchasing power. In a typical inflation-linked bond, the principal amount of the bond and the cash flow generated by the bond (i.e., interest) are adjusted upward in response to increases in inflation rates. The U.S. Consumer Price index, or CPI, is a commonly used measure of U.S. inflation rates. Bonds tied to inflation rates outside the U.S. generally are linked to regional or country measures comparable to the CPI that measure inflation rates in non-U.S. markets. As inflation rises, upward adjustments to the principal amount or income paid on the bond increase the value of the bond and help preserve purchasing power in response to inflation. Conversely, some types of inflation-linked bonds may be adjusted downward in response to deflation (i.e., a decrease in the prices of goods and services over time).
The Fund invests in floating- and variable-rate bonds. Floating- and variable-rate bonds are bonds that have a variable payment feature tied to a reference rate, such as the federal funds rate or the London Interbank Offering Rate (“LIBOR”). Floating- and variable-rate bonds generally are less sensitive to interest rate increases because when market rates rise, the payments made by such bonds increase. Conversely, a decrease in market interest rates will adversely affect the income received from such securities and may cause the value of such bonds to decrease.
The universe of emerging market debt currently includes securities that are rated “investment grade” as well as “non-investment grade.” The Fund intends to provide broad-based exposure to emerging market inflation-linked securities and therefore may invest in both investment-grade and non-investment-grade securities. Securities rated investment grade generally are considered to be of higher credit quality and subject to lower default risk. Although securities rated below investment grade may offer the potential for higher yields, they generally are subject to a higher potential risk of loss.
The Fund attempts to limit interest rate risk by maintaining an aggregate portfolio duration of between and years under normal market conditions. Aggregate portfolio duration is important to investors as an indication of the Fund’s sensitivity to changes in interest rates. Funds with higher durations generally are subject to greater interest rate risk. An aggregate portfolio duration of between and years generally would be considered to be “intermediate.” The Fund’s actual portfolio duration may be longer or shorter depending upon market conditions.
The Fund may invest in derivatives, such as swaps, designed to provide protection from changes in inflation rates. A total return swap is an agreement between two parties to exchange payments at a future date based on the return of a reference asset, such as a bond or equity index. An inflation-linked swap is an agreement between two parties to exchange payments at a future date based on the difference between a fixed payment and a payment linked to an inflation rate or value at a future date. An interest rate swap is a transaction in which two parties typically exchange payments based on the difference between a floating interest rate payment and a fixed interest rate payment. The Fund may buy and sell forward currency contracts and may engage in currency swap transactions. A forward currency contract is an agreement to buy or sell a specific currency at a future date at a price set at the time of the contract. A cross-currency swap is an agreement between two parties to exchange one currency for another at a future rate.
While inflation-linked securities offer protection against inflation, they are sensitive to changes in “real interest rates.” Real interest rates are interest rates that have been adjusted to remove the cost of inflation. Protracted increases in real interest rates would likely have a negative impact on the value of inflation-linked securities and the value of the Fund. The Fund may purchase futures contracts on U.S. Treasury securities or other U.S. government or non-U.S. government obligations to help minimize this risk. A U.S. Treasury futures contract is a financial instrument in which a party agrees to pay a fixed price for U.S. Treasury securities at a specified future date.
The Fund may invest a portion of its assets in fixed-income securities that are not linked to inflation, such as U.S. government obligations. The Fund also may invest in money market instruments (including repurchase agreements) with remaining maturities of one year or less, as well as cash and cash equivalents. A repurchase agreement is a transaction where a party purchases securities and simultaneously commits to resell them at an agreed-upon date at a price reflecting a market rate of interest unrelated to the coupon rate or maturity of the securities.
Under normal circumstances, the Fund will invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in fixed income investments that are economically tied to emerging markets. For purposes of this 80% investment policy, fixed income investments include investments in derivatives such as forward currency contracts and swaps. The decision to secure exposure through direct investment in bonds or indirectly through derivative transactions will be a function of, among other things, market accessibility, credit exposure, tax ramifications and regulatory requirements applicable to U.S. investment companies. If, subsequent to an investment, the 80% requirement is no longer met, the Fund’s future investments will be made in a manner that will bring the Fund into compliance with this policy. The Trust will provide shareholders with sixty (60) days’ prior written notice of any change to this policy for the Fund. In addition, under normal circumstances, the Fund will invest at least 70% of its assets in “Fixed income Securities.” Fixed Income Securities include debt instruments, such as bonds, notes and other obligations, denominated in emerging market currencies or U.S. dollars; Fixed income Securities do not include derivatives.
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