Now is not the time for local currency bond funds

Local currency bond fund launches have been “super-fashionable” this year, with fund houses eulogising about the appreciation potential of emerging market currencies. But First State’s head of EM debt Helene Williamson is not such a fan.

Now is not the time for local currency bond funds


She said the current risk-off environment was not conducive to launching a local currency bond fund, which was demonstrated by the mass sell off in the sector since August.

On the other hand, dollar-denominated EM debt funds have done well as investors have fled into the greenback’s safe haven appeal.

For this reason Williamson said First State was unlikely to launch a local currency bond fund until the macro environment and underlying technicals had improved.

"Local currency has been super-fashionable this year," she said, "But actually average returns to date are 0%, while dollar funds are around 6% to 7%. We may eventually launch a local currency fund, but I do not think the timing is right just now."

Williamson can hold local currency within her Emerging Markets Bond Fund, but currently it accounts for only 1% of the fund’s total AUM.

If the fund got up towards 10% in local currency she said the team might look again at launching a local currency bond fund.

For now though, the risk-reward ratio is "much better" in dollar-denominated bonds, she concluded.


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