Investing in Global Emerging Markets Bonds could be an interesting option for investors. Emerging markets are defined as the economy of a developing nation that is becoming part of the global economy and markets as it grows. They have some of the characteristics of a developed market, but they are not considered a developed market yet, however as their economy progresses they are more integrated in the economy globally, and the opportunities for investors grow.
We have chatted to the portfolio Managers of the Schroder International Selection Fund Global Credit High Income and the Aberdeen Standard SICAV I – Frontier Markets Bond Fund, to understand a bit better their investment strategies and what are the pros and cons of investing in Global Emerging Market bonds.
Schroder International Selection Fund Global Credit High Income
Julien Houdain, Portfolio Manager and Deputy Head of Credit, Europe, Schroders
Recovery calls for a fresh look at emerging markets. In the Schroder International Selection Fund Global Credit High Income (which has returned more than 40% over the past decade), we seek capital and income growth by investing in fixed income issued by governments and companies around the world. To do this, we look for long-term themes and shifts, and identify which companies can benefit from them. Active stock selection remains paramount and sustainability is increasingly important.
We have had a remarkably stable period in corporate bond markets, underpinned by a combination of political support and strong economic recovery. Valuations of investment grade debt are high, but solidly supported by fundamentals. It is hard to say what could disrupt this scenario. High yield has had a strong run too, but again well supported by fundamentals against a backdrop of a very strong economic recovery. In particular, we are likely to see a continued increase in credit ratings upgrades, potentially rising stars (high yield bonds upgraded to investment grade) and continued decline in default rates. As such, the focus remains on identifying the pockets of value and areas with some further recovery potential postCovid. This recovery has played out to some degree and these opportunities are becoming increasingly scarce. However, there is still scope for high yield spreads to converge more towards investment grade. Credit, high yield and emerging market bonds continue to provide valuable sources of income.
Regarding emerging markets, we would note that the last decade has been difficult to say the least. However, amidst all this uncertainty, we believe there could be some opportunities for emerging economies to emerge stronger from the pandemic. With private savings rising, commodity prices rising and global trade growing strongly, emerging market fundamentals are perhaps in better shape than many feared at the start of the pandemic. For investors, these changes may at least warrant a fresh look at emerging markets, with a reassessment of the challenges and opportunities they offer.
Aberdeen Standard SICAV I – Frontier Markets Bond Fund
Kevin Daly, Portfolio Manager Aberdeen Standard SICAV I – Frontier Markets Bond Fund
Frontier Markets is a niche asset class that requires the expertise and resources in order to conduct due diligence in countries where information risk is high. The ASI Frontier Markets Bond fund was first launched in September 2013 and at that time, the fund was only the second frontier fund of its kind. Today there are only four managers with a dedicated fund.
The Aberdeen Standard SICAV I – Frontier Markets Bond fund is highly diversified, investing in hard and local currency government bonds, along with hard currency corporate bonds. This approach helped us navigate the difficult period during the peak of the pandemic in early 2020, which was a key factor in reducing the drawdown of the fund. We were able to sharply reduce our exposure in local currency bonds in March and rotate into hard currency sovereign bonds that had significantly underperformed in Q1 20.
Our long term track record is strong, with annualised returns of over 8%. In terms or our investment strategy, we apply a bottom up approach where we assess the risk adjusted returns on hard and local currency bonds in 40-50 countries, although not every country has an accessible local market, and most don’t issue hard currency corporate bonds. We have a 10% country cap limit, though average positions tend to be in the 4-5% range.
ESG considerations are factored into our investment analysis, and we work closely with our risk management colleagues to ensure the fund is closely monitored along with the investment managers.
In terms of assets under management, the fund has surpassed its highest level of assets under management at the moment at $600 million. In terms of current portfolio positioning, Ukraine (7.3%), Angola (6.8%), Nigeria (6.5%), Ghana (6.3%) and Pakistan (5.9%) represent the top five countries. The majority credit risk is B with 69.6% of the portfolio and the composition by asset type is distributed as follows: government debt (79.2%), corporate (13.9%), sub-sovereign (4%) and cash (2.9%). In terms of currency, 76.2% of the issues in the portfolio are in US dollars.
If you have enjoyed this article about Global Emerging Market Bonds, you might want to check out our article about the MENA region and Frontier Markets, and if you want to read more articles about fixed income options check out Our Fixed income section.