Pioneer Funds Absolute Return Bond

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Pioneer Funds – Absolute Return Bond

Aiming to enhance performance through diversified alpha sleeves

For broker/dealer use only and not to be distributed to the public.

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Sometimes when members of the European Investment-Grade Fixed Income team are marketing the Pioneer Funds–Absolute Return Bond, we hear the fund being referred to as a “short duration” or “negative duration” fund. This implies that the

performance of the fund is driven by one or two short duration positions, most notably a short 10-year German Bund position or a short position in 2-year and 5-year U.S. Treasuries.

The reality is very different. In this piece, we look at how diverse alpha sleeves have contributed to the recent recovery in performance. This highlights the potential of accessing multiple highly-diversified and lowly-correlated sources of return, a key feature of Pioneer Investment’s European Investment-Grade Fixed Income team’s investment process.

However, we will start with a quick recap of performance both year-to-date (YTD) and over May so far, which demonstrates the alpha-generating capabilities of Pioneer Funds-Absolute Return Bond (‘Fund’). The Broker/Dealer factsheet of the Fund can be viewed via this link.

How does the Fund’s performance compare to peers1_and_{other Fixed Income categories?}

First, let us look at the performance of Pioneer Funds – Absolute Return Bond versus some selected competitor’s YTD 2015. The chart below shows that our Fund lagged selected competitors for most of the year, but that performance gap has narrowed significantly in the recent sell-off. Indeed, with the exception of one of the selected competitor, the other funds either have all suffered drawdowns or had flat performance.

Source: Morning Star, as at 13 May 2015.

1 Pioneer Investments select peers objectively for illustrative and comparative purposes. These competitors were derived from MorningStar category EAA OE – Alt Long/Short Debt using the following objective criteria’s: Strategy, Active Management, International Player, Large AUM and Sales Feedback.

-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 01/2015 02/2015 03/2015 04/2015 05/2015 Competitor A Competitor B Competitor C Competitor D

Pioneer Funds - Absolute Return Bond Competitor E

Tanguy Le Saout

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Pioneer Funds – Absolute Return Bond I A Real Team Effort I May 2015

Now if we look at performance against other major fixed income sectors YTD, we see a similar story – Pioneer Funds – Absolute Return Bond lagged for the first 4 months of the year but has recovered strongly so far in May. Performance for the fund YTD is now ahead of the Euro Government Bond sector, and very close to the Euro Aggregate Bond and Euro Corporate Bond sectors as of 13 May.

Source: Morning Star as at 13 May 2015.

That recovery in performance becomes evident when we look at performance over May so far. The Fund has outperformed the Euro Government Bond sector by nearly 4% since 13 April 2015. It has also outperformed the Euro Aggregate Bond sector by 3.30%, and the Euro Corporate Bond sector by 2.5% over the same period.

-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 01/2015 02/2015 03/2015 04/2015 05/2015

EAA OE EUR Diversified Bond EAA OE EUR Corporate Bond

Pioneer Funds - Absolute Return Bond EAA OE EUR Government Bond

-3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 13/04/2015 19/04/2015 26/04/2015 03/05/2015 10/05/2015

Pioneer Funds - Absolute Return Bond EAA OE EUR Corporate Bond

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However, even more interesting is the performance of the Fund so far in May, since the sell-off in fixed income markets started. What we can see is clear

out-performance by Pioneer Funds-Absolute Return Bond versus some of the selected competitors that we track. In some instances, the extent of the out-performance is over 2.5% so far in the same month. As with the “taper tantrum” episode in 2013, the pattern of this performance would lead us to suspect that some competitors are relying on duration, credit or emerging market exposure to generate performance.

These are very strong performance numbers for the Pioneer Funds – Absolute Return Bond, and we believe that they highlight something that we in Pioneer Investments have been stressing for some time now – the “Danger of Duration”. Given we expect yields to continue moving higher, we should see a continuation of recent performance patterns.

Performance Analysis 30 December – 24 April 2015

Source: Pioneer Investments as at 24 April 2015.

As can be seen in the attached chart of performance to 27 April 2015, the fund had an up-and-down start to the year. The performance contribution by alpha source can be seen in the table below. Our long position in inflation markets was the main contributor to performance, along with our Commodity Trading Advisor (CTA) trend-following quantitative strategy, which had been long 10-year Bunds for most of 2015. Our Relative Value strategy benefitted from a long Swiss Franc bond position, which rallied strongly when the Swiss National Bank removed the Euro/Swiss Franc currency floor. Finally, our Currency alpha sleeve (which was long the U.S. Dollar) benefitted from the continued appreciation of the U.S Dollar.

-2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0%

Pioneer Funds - Absolute Return Bond Competitor A

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In contrast, our Interest Rates Euro alpha sleeve suffered from two short duration positions as bond yields fell (a short 10-year German Bund position and a short 50-year Euro swap rate position). The decision of the European Central Bank to include 30-year bonds in their Quantitative Easing programme saw a big fall in long-dated volatility where we were priced for a rise in volatility. Our Quant Fixed Income models continued to struggle in the environment where central banks, rather than fundamentals, were driving assets prices and finally our short duration position in the U.S. detracted from performance as U.S. bond yields fell due to softer economic data.

Alpha Sleeve

Portfolio Performance

Inflation 0.29%

ITREND 0.26%

Relative Value 0.21%

Currency 0.15%

Credit Long/Short 0.11%

Event Driven Volatility 0.08%

Special Opportunities 0.08%

Interest Rates UK 0.08%

Credit Relative Value 0.00%

Credit Spreads Duration Macro -0.02%

Sovereign Spreads -0.03%

Interest Rates Scandi -0.03%

Interest Rates $ Bloc -0.04%

Interest Rates Asia -0.04%

Event Driven China -0.13%

Interest Rates Japan -0.15%

Interest Rates US -0.25%

Quant Fixed Income -0.26%

Volatility -0.35%

Interest Rates EUR -0.48%

Source: Pioneer Investments as at 13 May 2015.

Performance Analysis 27 April – 13 May 2015

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The strong recovery in performance is evident from 27 April to the present date. We have written elsewhere as to the reasons for the recent bond market sell-off and so won’t repeat them here again, but suffice to say that we do not think that yields could stabilise or hold at these levels.

What is interesting is to look at the drivers of this recovery in performance since 28 April 2015.

Alpha Sleeve

Portfolio Performance

Relative Value 0.49%

Interest Rates Japan 0.31%

ITREND 0.22%

Interest Rates UK 0.15%

Interest Rates US 0.12%

Interest Rates $ Bloc 0.09%

Volatility 0.06%

Event Driven Volatility 0.06%

Special Opportunities 0.06%

Credit Long/Short 0.05%

Interest Rates Asia 0.04%

Credit Spread Macro Duration 0.01%

Sovereign Spreads 0.01%

Interest Rates EUR 0.00%

Interest Rates Scandi -0.01%

Event Driven China -0.02%

Quant Fixed Income -0.06%

Inflation -0.073%

Currency -0.10%

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To illustrate the fact that no single alpha sleeve has been dominating risk levels, we can look at the contribution of each alpha sleeve to overall tracking error.

Tracking error as of 13 May 2015

Finally, a chart of the duration exposure of the fund (below) shows that we have been quite dynamic in managing the duration profile of the Fund in 2015.

Therefore, we can refute any suggestion that the Fund is a “short/negative duration” fund whose performance is mainly attributable to short positions in the German Bund or U.S. Treasury market.

In conclusion, we can see from the numbers and charts above that the strong recovery in performance has not been due to one or two dominant positions. Rather many different alpha sleeves have contributed to performance, once again proving the potential benefit of being able to access multiple sources of highly diversified but lowly correlated returns.

-20 0 20 40 60 80 100

Standalone Risk Tracking Error Contribution

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Important Information

Unless otherwise stated all information contained in this document is from Pioneer Investments and is as at 24 April 2015.

Pioneer Funds – Absolute Return Bond is a sub-fund (the “Sub-Fund”) of Pioneer Funds (the “Fund”), a fonds commun de placement with several separate sub-funds established under the laws of the Grand Duchy of Luxembourg.

Past performance does not guarantee and is not indicative of future results. Unless otherwise stated, all views expressed are those of Pioneer Investments. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks . Investment return and principal value may go down as well as up and could result in the loss of all capital invested. More recent returns may be different than those shown. Please contact your local Pioneer Investments representative for more current performance results. This material is not a prospectus and does not constitute an offer to buy or a solicitation to sell any units of any Pioneer Investments fund or any services, by or to anyone in any jurisdiction in which such offer or solicitation would be unlawful or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. For additional information on the Fund, a free prospectus should be requested from Pioneer Global Investments Limited (“PGIL”), 1 George’s Quay Plaza, George’s Quay, Dublin 2, Ireland. Call +353 1 480 2000 Fax +353 1 449 5000 or your local Pioneer Investments sales office.

This information is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities or services in the United States or in any of its territories or possessions subject to its jurisdiction to or for the benefit of any Restricted U.S. Investor (as defined in the prospectus of the Funds). The Funds have not been registered in the United States under the Investment Company Act of 1940 and units of the Funds are not registered in the United States under the Securities Act of 1933.

This document is not intended for and no reliance can be placed on this document by retail clients, to whom the document should not be provided.

This content of this document is approved by Pioneer Global Investments Limited. In the UK, it is directed at professional clients and not at retail clients and it is approved for distribution by Pioneer Global Investments Limited (London Branch), Portland House, 8th Floor, Bressenden Place, London SW1E 5BH. Pioneer Global Investments Limited is authorised and regulated by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority (“FCA”) are available from us on request. The Funds are an unregulated collective investment scheme under the UK Financial Services and Markets Act 2000 and therefore do not carry the protection provided by the UK regulatory system.

For Broker/Dealer Use Only and Not to be Distributed to the Public.