Investors interested in emerging market debt (EMD) should employ specialist managers in order to succeed, according to a report from Willis Towers-Watson.
The report – Mastering Emerging Market Debt – suggests that investors have typically seen EMD as a single asset class when it is actually comprised of multiple asset classes: local currency sovereign debt, hard currency sovereign debt, and hard currency corporate debt.
Because of this, many investors use a single benchmark-focused manager across multiple EMD asset classes – what WTW calls ‘the simple fix’.
Benchmark focused managers usually aren’t able to access the entire opportunity set and don’t justify their high fees.
“EMD is not a single opportunity so it cannot be captured by a single, broad mandate,” said Chris Redmond, Global Head of Manager Research for Willis Towers Watson.
WTW suggests having a manager in every asset class – for example, ‘a Latin American corporate specialist with a strong credit analysis skill set or a local currency specialist focused on rates and FX’ – rather than a single manager who might be based in another country.
This was associated with improved downside protection, a higher Sharpe ratio, and stronger overall concerns.
The report also highlighted the importance of ‘on the ground’ resources, diverse teams, and language knowledge for investing in EMD.
EM debt currently makes up 8 per cent of the global bond market cap, having risen from 2 per cent over the last 20 years.
“The emerging world is a large and growing part of the global economy, just take China’s increasing importance, through global trade and economic growth in the last few years,” said Mr Redmond.
“EMD is consequently an ever more important asset class with even larger allocations from asset owners and continuing attractive return potential and diversification benefits.”
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