Be well aware of risks, says Emerging Market fixed income expert

Wouter Van Overfelt, PhD, Head of Emerging Markets Corporate Bonds and Senior Portfolio Manager at Vontobel AM, believes his interest in economics, history, and politics have led him to his successful career as an EM fixed income investor. Wouter is incredibly passionate about about what he does, reflected in the breadth and depth of knowledge he holds on the subject, and allowing us to deem him a true EM expert.

We had the privilege of interviewing Wouter, where we captured his thoughts on EM investing, the outlook for the asset class, and the useful advice he so graciously provides for all those considering to invest in EM.

Reading the full interview below from start to finish is highly recommended by the editorial team at RankiaPro.

How did your career lead you to launch, and now lead, EM fixed income funds at Vontobel?

I have always been interested in economics, history and politics, which helps to understand what’s happening in the world. After obtaining my PhD in corporate finance, I started working at Dexia Asset Management, currently Candriam, where I met Luc D’hooge, now Head of Emerging Markets Bonds at Vontobel. At that time, Luc was heading the emerging markets team. During that time, I had multiple debates with Luc on how the Global Financial Crisis would impact emerging markets. At Dexia, I also had the chance to work in the credit risk-modelling department where I focused on credit risk in a portfolio management context as well as the modelling of illiquid security prices. The combination of both markets and quantitative analysis fascinated me. In 2013, while working at GDF Suez, Luc contacted me to join him at Vontobel and expand the offering in emerging markets fixed income. I must admit, I never actively pursued a career as an emerging markets investor. I believe that my interest for economics, history, politics and being passionate about what I do, brought me to where I am now. In fact, I'm fortunate to say that my job is my passion and therefore, it is always a pleasure to come to work.

Many investors are turning to EM in their search for yield. Do you think this inflow will lead to structural changes in the asset class?

I believe that the asset class is changing structurally: Especially the emerging markets corporate universe is expanding fast and offers many opportunities due to the diversity across countries and industries in which companies operate. As the asset class grows, the diversification of the index is becoming broader. Furthermore, due to the fact that high quality issuers from Asia issue more debt than issuers in other regions, the credit quality of the index is improving as well.

I would not attribute the growth of the asset class to a hunt for yield. Actually I find the term “hunt for yield” rather negative as it sounds like blindly grabbing for yield without being conscious about the risks involved and I do not believe that emerging markets investors are not aware about the risks of the asset class.

The growth of the asset class is the result of more positive facts like strong economic growth. When economies are growing fast, companies (and countries) tend to have better access to opportunities to finance themselves. I believe that more people are becoming aware of the opportunities that exist within emerging markets, and in a perfect market, it would be natural that capital flows to where the strongest growth opportunities lie. Of course, the low yield environment in the developed world also improves the financing conditions for companies in emerging markets, the goal of an accommodative monetary policy is exactly to stimulate economic growth.

Within what is defined as EM, there are wide differences between countries and their fixed income investment opportunities. How do you manage these differences in your portfolio construction and ongoing management?

Yields in emerging markets are indeed often more attractive than in developed markets. That does not mean that investing emerging markets is a free lunch. We follow closely the so called “institutional framework” within which the companies operate. The history of countries and the way of doing things are endogenously determined and it is important to be aware of differences across countries and industries.

For us, it is important to understand the incentives of the stakeholders in the companies in which we invest. We seek investments where the incentives of the stakeholders are aligned with our interests as bondholders. Since actions speak louder than words, we look at past behavior of the companies and its executives. Finally, we engage with the companies in which we invest and we meet with the management to better understand their goals and challenges. For this reason, we have recently expanded the team with three senior analysts, two of which are based in HK to further enhance our local knowledge. One analyst covers Latin America, where the culture and language also play an important role. Finally, we recognize that unexpected things do happen and that there are a lot of so-called “unknown unknowns” and therefore a solid risk management approach that leads to a well-diversified portfolio offering price upside is key for long-term performance.

One of the hold ups that investors have with EM is the overall lack of data and transparency, when compared to developed markets. How do you overcome this barrier?

I do not consider the lack of data or transparency a limitation at all. I believe the circumstances are the same for every investor and the success or failure lies in how an investor copes with the circumstances. Many factors like lack of transparency, corporate governance standards, and history of the company are known ex-ante and it is our job to factor in the right risk premium for the risk we are taking. The lesser transparency is therefore also a source of opportunity for investors.

What factors do you believe will most determine how EM develop over the next 5-10 years?

As people like to say, making predictions about the future is certainly difficult. However, I think there are currently two important and, in my view related, long-term dynamics. On the one hand, we have a backlash against globalization. On the other hand, we have increasing awareness of the importance of ESG. How the world answers these questions will likely define the framework under which companies will be allowed to operate. It will determine which companies will thrive and which ones will not. I believe these two trends will have implications not only for emerging markets but for the world economy as a whole.

Are there particular sectors in EM that you see a lot of opportunity in from an investment perspective?

We have an active approach to investing in emerging markets and we aim to find securities with price upside. They can be found in any industry and there is no particular industry that I would highlight currently. I do however believe that China, due to the sheer number of companies within China, offers enormous opportunities today. It is also for this reason that we have recently expanded our team with two analysts that are based in Hong Kong.

What advice would you give investors who are looking to move into EM fixed income

The advice I would give to any fixed income investor is to be aware about the risks they take. For example: Am I taking credit risk or duration risk? I feel that many investors believe they are investing in credit when the larger part of their returns really comes from duration. Certainly in today’s low rate environment the fact is that duration risk in many fixed income benchmarks has gone up dramatically.

For investors interested in emerging markets fixed income, I would recommend to select an active manager. The emerging markets corporate bonds universe is an active manager’s paradise and given the inefficiency of the asset class it does not make sense to just buy the index. Besides selecting an active manager, make sure you believe and feel comfortable with the investment process.

Finally, investors need to be aware that crises are part of emerging markets investing but when you have truly understood the investment process that guides the investment decisions, crises should be moments of opportunity for the long-term investor as periods of high volatility offer active managers opportunities to thrive.

About Wouter Van Overfelt

Wouter Van Overfelt joined Vontobel Asset Management in April 2013 as Portfolio Manager in the Emerging Markets Bonds team. Prior to joining Vontobel, from 2012 to 2013, he headed the Business Control of the Central Portfolio Management unit at Gaz de France (GDF) Suez. Before joining GDF, he held various positions at Dexia.  From 2010 to 2012, he was Senior Credit Risk Modeler and member of the Credit Portfolio Modelling and Pricing team at Dexia Group. From 2008 to 2010, he worked as portfolio manager in the Fixed Income Team at Dexia Asset Management, where he managed credit and total return bond funds. He started his career in 2002, modeling credit spreads on high yield bonds. Wouter Van Overfelt holds a PhD as well as a Master’s in Applied Economics from the University of Antwerp.