Over the last few years yields on traditional fixed income assets have been at very low levels, and because of that, investors have had to look to other more risky areas for yield. One beneficiary of the ultra-low interest rate environment had been emerging market debt funds, both hard and local currency, with these enjoying a purple patch over the last few years as the asset class enjoyed a surge in popularity.
However Hambidge, who manages the five crown-rated Premier Multi Asset Distribution fund of funds, says that with the end of the Fed’s quantitative easing looming and sentiment towards emerging markets still negative, investors need to re-think their allocation.
"If emerging market equities struggle against developed markets and bond yields continue to rise, then we will not hold emerging market debt funds in our portfolio," he said.
"Emerging market debt has had a phenomenal run, but because of that investors should have been buying them five or 10 years ago instead of more recently. If fixed income does continue to struggle and emerging markets continue to disappoint, it won’t be a good area to invest in if money keeps coming out of those funds," he added.
As well as offering a decent yield, investors have seen significant capital gains from emerging market debt over recent years. According to FE Analytics, between January 2008 and January 2013 the Citi Global Emerging Market Sovereign Index returned 99.67 per cent.
Performance of index between Jan 2008 and Jan 2013
Source: FE Analytics
However, investors in emerging market debt funds have had a tricky year to say the least.
Given the fact that the asset class has been one of the main beneficiaries of QE, when Ben Bernanke hinted to the market in May that the Fed was about to decrease the stimulus, investors clamoured to exit their holdings in emerging market debt.
Jupiter Merlin’s FE Alpha Manager Algy Smith-Maxwell told FE Trustnet this morning that his range of funds of funds was hit badly by the sell-off.
Multi-billion pound portfolios such as Investec Emerging Markets Local Currency Debt, Pictet Emerging Market Local Currency Debt and BNY Mellon Emerging Market Debt Local Currency have all lost money so far in 2013.
Performance of funds year to date
Source: FE Analytics
A combination of capital losses and outflows has meant some of these funds have significantly shrunk in size. For instance, the £1.5bn Investec Emerging Market Local Currency Debt fund had been close to £2.4bn on 22 May 2013.
Hambidge says this is a real concern, because if the backdrop remains negative for the asset class, then investors’ capital could be stuck in the funds.
"The problem is that most of the money came into emerging market debt funds over a very short period of time, which is very dangerous," said Hambidge.
"I think emerging market debt funds will remain under pressure, and that doesn't look good from a technical standpoint with many investors who turned up late to the party now sitting on losses."
"There are liquidity issues as well and in our view much better opportunities in less crowded trades like real estate debt," he added.
Hambidge’s thoughts echo those of FE Alpha Manager Bill McQuaker, who recently told FE Trustnet that emerging market debt funds are facing a similar debacle to commercial property funds during the crash year of 2008.
"There just isn’t enough liquidity for a high proportion [of investors] to exit, plus it could cause further issues for the economies themselves," McQuaker explained.
During the financial crash, the value of commercial property began to fall significantly, causing notable fund groups such as Aviva and New Star to impose restrictions on investors trying to pull their money out as there was not enough underlying liquidity to meet the redemptions.
The manager warns that a similar event could happen to investors in emerging market debt funds.
Hambidge has managed his five crown-rated Premier Multi Asset Distribution fund since October 1995.
Our data shows that the £216m fund has been one of the best performers in the IMA Mixed Investment 20%-60% Shares sector since then, having beaten the average fund over one, three, five and 10 years.
One of the fund’s best relative performances has been over three years, where Hambidge’s portfolio has returned 30.08 per cent, making it a top quartile performer as it has beaten the sector by close to 15 percentage points.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Hambidge says the main objective of the portfolio is to provide unit holders with a good and growing income.
Because of that, he has a high weighting to dividend-paying equities. The UK is his largest regional exposure, with the likes of Standard Life UK Equity High Income, Franklin UK Equity Income, Rathbone Income and Psigma Income featuring in his top-10.
The manager says that fixed income is becoming an increasingly difficult asset class to navigate through; therefore he is looking to other areas for yield.
He has a 9 per cent weighting to commercial property and real estate. He uses the Schroder Real Estate Investment Trust, Henderson UK Property fund and the Picton Property Income fund in his portfolio for exposure to this asset class.
Premier Multi Asset Distribution has a yield of 3.79 per cent and our data shows that Hambidge has been able to increase his net distribution over recent years.
The fund has an ongoing charges figure (OCF) of 2.04 per cent and requires a minimum investment of £1,000.
