Emerging Markets Debt
At a Glance
- Primary Benchmark: JP Morgan GBI-EM Global Diversified Index or other emerging markets bond benchmark, as specified by client direction
- Returns are driven by the pursuit of value through high real-yielding bonds and active currency management. Inflation, monetary trends, political risk, the business cycle, demographics, and liquidity measures are also considered
- Duration management is determined on a country-by-country basis, establishing positions along the yield curve where we have determined the best risk/reward profile exists
- Investments will typically be concentrated in the 10 to 15 countries that we believe offer the best total return potential
We strive to capture income and generate principal growth through capital appreciation when market conditions permit. Our goal is to outperform the benchmark by 2% annually over rolling five-year periods.
Sovereign debt and currencies of countries in the JP Morgan GBI-EM Global Diversified Index as well as allowable non-index countries subject to client guidelines. We also may invest in corporate debt issued in these countries.
The portfolio is managed by our Global Fixed Income team, which consists of four portfolio managers, five analysts, and four traders, who have been investing in the debt of emerging markets countries and their currencies for almost 10 years.
We believe in mean reversion with respect to the valuation of bonds and currencies. At extremes, interest rates and exchange rates affect economic activity, thus creating a feedback cycle that supports mean reversion back toward fair value. This tendency has existed for decades and we believe that it will continue to work going forward due to the importance of the business cycle on asset prices and economic trends.
Investment Process Summary
Our approach is to seek undervalued assets globally by utilizing a top-down macroeconomic framework and a value-driven process. Real yield is our primary measure of value in the global bond market. We also actively manage our currency exposures and focus on owning undervalued currencies with the potential for appreciation. We hedge currencies that we believe are overvalued or pose downside risk. We structure our portfolios along macroeconomic themes involving business cycle analysis, inflation trends, monetary policies, and political risk. We typically concentrate investments in the 10 to 15 countries that we find most attractive.
We believe that concentrating investments in countries or markets with the highest total return potential maximizes return while reducing overall risk. Macroeconomic analysis is combined with quantitative screening to identify value and opportunity. Fundamental factors drive the country weighting process, and once an investment becomes fully valued, we look to take profits and reallocate into a more undervalued segment of the universe.
Currency exposures are actively managed. We seek to invest in bonds denominated in undervalued currencies that possess supportive fundamentals and, hence, are likely to appreciate. We hedge overvalued currencies or those with weak fundamentals.
We concentrate duration risk where real yields are the most attractive. Larger interest rate exposure is assumed in countries with greater value, and positions are established along the yield curve where we find the best risk vs. reward profile. Portfolio duration generally ranges from 1 to 10 years.
Within a specific bond market security selection is based on yield curve analysis, desired duration, and liquidity considerations.