In light of the interest rate hike in the US and due to the sensitivity of hard currency emerging market debt to US Treasury yields, an increasing number of asset management firms have been focusing on short duration bond strategies. These strategies seek to maintain an attractive level of yield, but limit volatility and sensitivity to movements in US treasury yields. Historically, this approach has been mostly applied to US High Yield corporate credit; however, a new trend seen over the past couple of years is the launch of short duration strategies that focus on emerging market debt.
These funds invest predominantly in the hard currency space – sovereign and corporates – and focus on shorter maturity issues, with the objective of maintaining an attractive level of income, capturing improving emerging market fundamentals through spread compression, maintaining volatility and sensitivity to US treasury yields low.
The existing line-up of investment strategies and approaches provides investors with plenty of building blocks for gaining exposure to a still interesting and evolving asset class. In the following section, we highlight some of the funds that invest using the strategies.
Largest Emerging Market Bond Funds
Templeton Emerging Markets Bond
The Templeton Emerging Markets Bond fund is managed by experienced managers Michael Hasenstab and Laura Burakreis, who implement a very high-conviction approach. The managers are known for sometimes building quite large stakes in unloved sovereign credits and being highly active in managing duration and currency exposure. They are backed by a well-resourced team of economists and country analysts. The fund holds a Morningstar Analyst Rating of Bronze.
The strategy is managed by Simon Lue-Fong, who has over 20 years of experience in emerging markets debt and has been Head of GEM Bonds at Pictet since 2005. The fund is managed with an emphasis on limiting downside risk by establishing profit-loss thresholds for each active position taken. The fund invests mainly in hard currency debt, but may hold up to 30% in local currency bonds. The fund holds a Morningstar Analyst Rating of Bronze.
MFS Meridian Emerging Markets Debt
Managers Matthew Ryan and Ward Brown are former International Monetary Fund economists with a wealth of experience in the asset class. They are backed by a team of sovereign analysts and dedicated traders. This is a primarily hard currency sovereign bond strategy, but the managers have discretion to step into corporate debt and local currency sovereign debt if opportunities arise. The fund is holds a Morningstar Analyst rating of Bronze.
Best Performing Emerging Market Bond Funds
HSBC GIF GEM Debt Total Return
The highly flexible, unconstrained strategy run by experienced manager Guillermo Osses has generated a solid performance over the past three years while keeping volatility contained. The manager employs a top-down driven approach that can tap the full extent of the emerging markets opportunity set. In addition, due to the highly flexible nature of the strategy, the manager can increase liquidity in the portfolio to limit downside risk.
AXA WF Emerging Market Short Duration Bonds
The fund is managed by Iva Alexandrova and invests in hard currency debt of sovereign and corporate issuers in emerging markets, with discretion to invest up to 15% in short duration local currency debt. The approach, based on in-depth fundamental single issuer and macroeconomic analysis, and low average duration has helped the fund generate a solid return over the last three years, while maintaining volatility considerably lower than peers.
First State Emerging Markets Bond
The emerging markets debt team at First State is led by experienced Helene Williams, who joined the firm in 2011 after 16 years as Head of Emerging Market Debt with F&C Asset Management. The fund invests mainly in hard currency sovereign bonds, but may have exposure to corporate issuers in emerging markets. The risk-controlled approach has seen the fund generate strong returns over the past three years.
This article was written by Carlos Gonzalez-Lucar, CFA, CAIA, Manager Research Analyst for Morningstar for International Adviser Magazine
