While emerging market debt (EMD) is often referred to as a single asset class, it is home to a wide range of sectors and countries. These all have different economic cycles, credit fundamentals and levels of capital market development, which means a diverse set of opportunities for investors. Within this broad universe, there are three subcategories: sovereign hard currency bonds; sovereign local currency bonds; and corporate credit.
The conventional UK investor has typically opted to allocate their exposure to EMD into blended strategies, which invest in a combination of the three subcategories. By investing with an active EMD manager within the blended space, investors try to benefit from the expertise of investment managers who tactically move portfolio exposures across the different subcategories as market conditions evolve, optimising the risk and return characteristics of the portfolios.
Nevertheless, EMD funds have not historically been favoured by the conventional UK investor, who prefers to dedicate their fixed- income allocation to more traditional and core strategies, such as government bonds and investment grade corporate bonds. The combination of political risk, default risk, liquidity risk and in some cases also currency risk, makes EMD a volatile asset class, and therefore outside the consideration of the defensive characteristics typically required for fixed income allocations.
See also: BNP Paribas names head of emerging market debt
The asset class remains therefore a specialist sector, home to more sophisticated clients such as institutional investors and family offices. The demand for emerging markets has slowed during the past two years, with significant outflows in the retail market.
The asset managers have also reduced the number of launches of new funds in the sector for the UK retail market over the same period, with the number of EMD funds across the Investment Association sectors increasing by only two funds. It stands at a total of 121, as of the end of March 2024.
Read Eduardo Sánchez’s funds to watch by assets under management, three-year performance and newcomers in May’s Portfolio Adviser magazine
