Trustnet Magazine 54 September 2019 | Page 42

In focus “Emerging market debt asset classes, particularly local currencies, came out of the gate strong in the second quarter, driven by central bank stimuli and favourable monetary policy expectations” weights ranging from 3 to 6 per cent depending on the portfolio. Assets in the IA Emerging Markets “We like the asset class as it brings Bond sector stand at £8.4bn today, with good diversification to our other some 50 funds to choose from. This fixed interest exposure and brings compares with £2.4bn and 25 funds at an attractive yield pick-up, although launch in December 2013. events in Argentina remind us all that this is not without risk.” Cautiously optimistic Adrian Lowcock, head of personal So what do the fund buyers think? Ryan investing at Willis Owen, says that Hughes, head of active portfolios at AJ while his exposure to emerging market Bell Investments, says his allocation to debt had been rising over the last 12 emerging market debt has been broadly months, he recently moved it back to a stable over the last 12 months, with more neutral position. The long-termer: Invesco Emerging Markets Bond Invesco Emerging Markets Bond is the best performer in its sector over the past 10 years, its gains of 161.04 per cent more than double the 73.31 per cent made by the average fund. Managers Michael Hyman and Robert Turner can invest in both local and hard currency debt, across the spectrum from investment grade to high yield bonds. In a recent FE TRUSTNET [ SECTOR PROFILE ] 42 / 43 note to investors, they said that while funding conditions in emerging markets are not currently a concern, a renewed move higher in the US dollar or US rates “would require close monitoring”. “We are also mindful of increased tariff volatility, especially with China and the negative impact that would have on broader emerging markets given current supply chain logistics,” they added. The fund is yielding 5.57 per cent. The all-rounder: M&G Emerging Markets Bond Hughes and Hasler picked out M&G Emerging Markets Bond, due to its flexible mandate. “We use M&G Emerging Markets Bond which gives us a blend of hard and local currency exposure and is managed by the hugely experienced Claudia Calich who is able to tap into the wide expertise that exists in the M&G team,” says Hughes. Hasler adds: PERFORMANCE OF FUNDS VS SECTOR AND INDEX Name 1yr (%) 3yr (%) 5yr (%) 10yr (%) Invesco Emerging Markets Bond 19.62 19.94 68.59 161.04 M&G Emerging Markets Bond 20.29 26.41 69.34 135.63 Ashmore Emerging Markets Short Duration -2.54 9.09 N/A N/A IA Global Emerging Markets Bond 15.46 14.63 31.58 73.31 JPM GBI-EM Global Composite 20.06 20.2 30.07 73.03 Source: FE Analytics “Emerging market debt asset classes, particularly local currencies, came out of the gate strong in the second quarter, driven by central bank stimuli and favourable monetary policy expectations,” he explains. “This provided investors with solid returns across emerging market debt, with local currency leading the way.” “Calich is supported by specialist emerging market credit analyst, Charles de Quinsonas, and they take asset allocation decisions across the emerging bond markets. This approach makes sense for many investors, allowing them to access the full opportunity set of this market without having to constantly move their positions around.” The fund is yielding 5.76 per cent. It has made 135.63 per cent over the past decade. While Lowcock remains positive on emerging market debt, he has become more cautious given further US interest rate cuts now look priced in. “Emerging markets tend to do well in periods of falling rates, but risks exist,” he says. “These include the US-China trade war and Iranian tensions, along with currency volatility.” The income option: Ashmore Emerging Markets Short Duration For investors who are specifically looking for income, Hasler says an interesting option is the Ashmore Emerging Markets Short Duration fund. Sitting in the offshore Fixed Interest Emerging Markets sector, Hasler describes the $6.3bn Luxembourg SICAV as a relatively straightforward fund which looks to buy short-dated emerging market bonds and hold them to maturity. “The bonds will be issued in hard currencies (largely US dollars) and pay attractive coupons, resulting in a relatively high income stream,” she says. “It is likely to carry considerable credit risk given that a large percentage of its holdings are usually in sub-investment grade corporate bonds.” The fund is yielding 7.23 per cent and has made 31.98 per cent since launch in September 2014. trustnet.com