Aberdeen Standard Investments is set to launch a new emerging market local currency debt fund to give Australian investors exposure to a meaningful risk premium.
Aberdeen Standard has been investing in emerging market debt for over 20 years and the new fund will offer investors a new source of investment income in the low-return environment.
ASI’s head of global emerging market debt Brett Diment said emerging market debt (EMD) provided higher yields than Australian and global developed market bonds while its currencies were the cheapest, they’d been since 2008.
“We are now seeing rates fall to similar lows here in Australia and many investors are now looking for alternative ways to generate investment income,” he said.
Mr Diment told Investor Daily that the Australian dollar had fallen and it would net investors quite attractive returns if they purchased emerging market currencies.
“The Australian dollar kind of correlates with emerging market currencies so if investors here buy emerging market currencies unhedged then you get an additional year pickpicup and quite attractive returns,” he said.
Australians were also protected from some of the volatility as opposed to American counterparts said Mr Diment.
“From a US dollar perspective, investing in local markets is reasonably volatile but it’s certainly less volatile if you’re investing in them from an Australian dollar perspective,” he said.
And in the current market this volatility was no worse than buying developed market bonds or European bonds.
“Investors have been fearful of emerging markets due to supposed high volatility and that’s not necessarily the case but you do get quite a big yield difference,” said Mr Diment.
Mr Diment said EMD was not on the radar for many investors but the attractive yields had seen more local investors seeking to understand the asset class and that’s what this fund was for.
“The vast majority of the portfolio is invested in government bonds helping to mitigate credit risk. Secondly this is a local currency fund and the traditional correlation between the AUD and EM currencies helps further mitigate risk for Australian investors,” Mr Diment said.
Mr Diment said that for the past 15 years there had only been three years of negative returns by investing in emerging local currency bonds from an Australian dollar perspective.
“People think emerging markets are scary, risky place but if you’re buying emerging market currencies from an Aussie dollar perspective actually it takes a lot of the risk out of them,” he said.
Investors should look at emerging markets as another diversification and actually one that would provide returns.
“The thing about emerging markets is you want to have a diversified portfolio of assets and that’s why we would actually recommend investing across emerging markets is probably quite a good thing to do,” said Mr Diment.
Eliot Hastie is a journalist at Momentum Media, writing primarily for its wealth and financial services platforms.
Eliot joined the team in 2018 having previously written on Real Estate Business with Momentum Media as well.
Eliot graduated from the University of Westminster, UK with a Bachelor of Arts (Journalism).
You can email him on: [email protected]