John Carlson, manager of the Fidelity Funds Emerging Market Debt Fund, says over the last decade emerging market debt has been the best performing asset class in the world.
“It outperformed everything else. The only asset class next to it was emerging market equity but emerging debt had 40 per cent of the volatility of emerging equity,” he says.
Data from Financial Express suggests that there are a number of funds investing in emerging markets debt, however filtering the data down further to show those available to UK investors reveals there is a limited amount of choice, particularly for retail investors.
The data suggests there are 14 UK Mutual funds available to UK investors, all of which are also FSA offshore recognised funds. However, not all are suitable for retail investors, with only two fitting into the IMA UT and OEIC definition. These are the Investec Emerging Markets Debt fund and the Schroder - SISF Emerging Markets Debt Absolute Return fund. The Fidelity Funds Emerging Market Debt Fund is also available to retail investors with a minimum investment of $2,500.
Relative risk, reward
| Fund | Ann. volatility to last week end 1yr | Cum perf to last year end 1yr |
| Amundi Emerging Markets Debt TR in US | 8.47 | 50.43 |
| Ashmore SICAV Emerging Markets Debt TR in US | 5.66 | 25.31 |
| Barclays MultiManager Emerging Markets Debt TR in US | 6.02 | 33.71 |
| Fidelity Emerging Markets Debt TR in US | 12.37 | 45.52 |
| Franklin Templeton Emerging Markets Debt Opportunities TR in US | 19.88 | 46.97 |
| GS Global Emerging Markets Debt Local P TR in US | 8.65 | 24.44 |
| GS Global Emerging Markets Debt Portfolio TR in US | 7.48 | 38.36 |
| HSBC GIF Global Emerging Markets Local Debt TR in US | 10.25 | 24.45 |
| Investec Emerging Markets Debt TR in GB | 10.73 | 15.20 |
| JPM Emerging Markets Debt TR in EU | 7.80 | 31.99 |
| JPM Emerging Markets Local Currency Debt TR in EU | 8.18 | 22.20 |
| Morg Stnly Emerging Markets Debt TR in US | 7.01 | 29.91 |
| Schroder SISF Emerging Markets Debt Absolute Return TR in US | 7.10 | 17.39 |
| SGMF Emerging Markets Debt TR in GB | 11.19 | 29.86 |
Carlson believes the primary reason for the returns currently seen in the emerging market debt asset class is two fold, firstly pointing to a massive credit improvement.
“The index is now 60 per cent investment grade, 15 years ago it was 10 per cent investment grade,” he says.
“The other thing, which is key in this market environment, is you get a coupon so get paid to wait. If you go back over the last 16 years from the end of 2009; you will see that you got 850 basis points so 8.5 per cent from the coupon and you got 170 basis points from price return.”
Aberdeen Asset Management agrees that emerging market debt is an attractive asset class to mainstream investors due to its improved credit quality and higher issuance.
The company points to countries such as Mexico, Indonesia, Hungary and Poland as ones with the best investment opportunities.
According to Brett Diment, head of emerging markets at Aberdeen Asset Management, Poland was the only country in Europe to post positive growth in 2009.
“The improving growth outlook will prompt rate hikes. While the Polish Zloty remains attractive; currently trading well below its five-year real effective exchange rate,” he says.
Carlson is also a fan of Indonesia, saying he has his biggest overweight to the country and therefore sees the biggest opportunities there this year.
“I really like the story in Indonesia. The presidential election is behind them, it has a robust diversified corporate bond market,” he says.
“There is opportunity on the local currency side as well as the dollar gap. One of the themes I have is the quality of growth and they have quality of growth, low debt to GDP ration and fiscally very sustainable.”
Looking forward Carlson remains optimistic for the emerging market debt asset class.
“In spite of the great rally we have had I still think there are opportunities in the emerging markets across the asset class. Over the last 15 years there has been an evolution in the asset class with emerging market debt maturing.
He says coupon flow is very important in this environment and states there will be a real premium this year in picking winners and losers.
“2008 was dramatic, it went down a lot and it came back in 2009, you really had to be in the market between April and September.
“This year its going to be a theme of picking winners and losers and the winners will be characterised, whether it’s corporate or government, by growth and good management.”