Emerging market debt has become a new area of interest by investors given the continuing search for elusive yield. But it is very different from emerging market equities as well as other fixed income strategies. The asset sub-class’s evolution over the past 15-20 years is worth noting.
One of the managers with a long track record in emerging market debt (EMD), although it is better known for its bottom-up global equities strategies, is Capital Group. The firm has about US$20 billion in EMD and has been managing money in that way since the early 1990s. This is a sub-set of Capital’s US$320 billion across diversified fixed income strategies. The big privately held Californian-based manager had US$1.86 trillion across all asset classes as of March this year.
In a conference call with Australia last week, James Blair, Capital’s Singapore-based head of fixed income investment services for Asia Pacific, said that the selection of whether to invest in US-dollar EMD instruments or denominated in other “hard” currencies such as the Euro, had changed, back and forth, over the past 15-20 years, when big institutional investors started to study and invest in EMD as a genuine less-correlated and surprisingly low-risk strategy for their portfolios.
Paul Hennessy, the senior vice president for Capital in Australia and New Zealand, said there was genuine interest in EMD being shown by investors in this region. “The head of the strategy, Rob Neithart [chairman of the fixed income management committee]is still running it so we have a deep capability and experience,” he said.
According to Blair, big institutional investors have tended to favour local currency and countering the US-dollar exposure in other ways if they wish. For a lot of its clients, Capital will manage a 50:50 – local versus US$-backed – portfolios, or ‘blended’ portfolios with the manager able to take tactical tilts. Countries and their currencies tend to perform differently in different cycles.
Going further out the risk curve, Blair says, Capital has been a strong proponent of frontier markets for many years. “Institutional investors ‘get it’,” he says. But they’d never put a huge part of their portfolios into frontier markets. Talking to [wholesale]advisors, it’s a different story. They can get scared because of the big shifts which might occur.”
Blair thinks that the global financial crisis, followed by the quantitative easing by various governments, turned a spotlight on EMD. “It’s one of the more liquid parts of the higher-yielding universe,” he says. “And unlike emerging markets equities, it is more geographically diverse. It’s not as dominated by Asia, for instance.”
Blair says it is one market in the search for yield that remains “cheap, particularly in local currencies”, but investors need to actively manage it. “There are plenty of opportunities there,” he says.
A further consideration for investors is the recent emergence of major geopolitical risks following, in part at least, by the Trump presidency in the US. Blair says: “We have a large macro-economic and political research group. With fixed income, it can’t be solely bottom up. We are now seeing larger geopolitical risks in the developed markets than we have seen for a long time. But I don’t think the emerging markets have seen the same big increase in those geopolitical risks.”
Can someone please tell Donald Trump?