Emerging market currencies have generally been strong on the back of these positive flows. Many emerging market central banks are concerned that this appreciation will negatively affect trade balances. This concern has led many countries to implement or consider methods to limit the appreciation. Some central banks are reluctant to consider raising rates to contain inflation, fearing that this would further appreciate respective currencies. Market volatility will likely be elevated until policy-makers can find a coordinated solution to this issue.

In terms of strategy, Russia remains an overweight, but we have reduced the size of the position as spreads have tightened. We have also been constructive on the fundamentals and relative valuations in Brazil and Colombia. Despite negative fundamentals, we also have slight overweights relative to our benchmark in Argentina and Venezuela due to very cheap valuations and the belief that there is an underlying ability and willingness to remain current on the debt. We have a significant underweight in the Philippines due to fiscal concerns and poor valuations. In terms of local markets, we continue to maintain positions in Brazil and Indonesia due to strong fundamentals and a positive outlook on the rates and currency.

We continue to be constructive on emerging market corporates with a focus on strategic companies that are critical to their respective countries' economies. We have reduced cash levels or swapped out of existing holdings as opportunities have arisen in the new issue market. This has generally improved the quality of the corporate holdings in the portfolio. Recent additions include Suzano, a Brazilian paper company, and Banco Del Estado, the state-owned Chilean bank.

Continuing with our cautious view of the current state of the world, we are avoiding less liquid and smaller sovereigns like Ukraine in the near term. We also remain selective on local currency exposure due to the uncertain global environment.