An exposure to emerging market debt is not only less risky than most investors assume, it actually decreases the overall risk profile of a global bond portfolio, according to investment manager Standish.
"In the portfolio context, emerging markets local bonds should not be viewed simply as a higher-risk enhancer of total returns," Standish deputy portfolio manager and senior sovereign analyst Javier Murcio said.
"Based on the available index data since January 2003, an exposure to emerging markets local bonds can actually mildly dampen the total portfolio risk," he said at a presentation of BNY Mellon Asset Management, which distributes Standish funds in Australia.
He said the asset class was the last domino to fall as the global financial crisis intensified towards the end of 2008.
This was due to the improved creditworthiness of most emerging markets' sovereign issuers and the higher growth in these economies compared to the United States, the Euro countries and Japan.
The returns of emerging market debt came predominantly from the appreciation of local currencies and from bond duration, which provided a premium over the local cash rate.
"Assuming a modest appreciation of emerging markets currencies, Standish believes emerging market local currency bonds have the potential to generate double-digit returns on an annual basis," Murcio said.
Emerging market bonds have increasingly attracted the attention of global investors over the past year, and Standish has profited from this trend.
The Boston-based investment manager has seen assets under management of its emerging market bond funds rise from more than US$2 billion at the beginning of this year to US$9 billion currently.
