20
Welcome to the bandwagon. Assets in emerging-
markets, or
EM
, bond strategies have more than
quadrupled from the start of
2010
, ballooning to $
95
billion in assets from nearly $
20
billion as of February
2013
. That has spurred fund companies to launch a
wide variety of new strategies as the number of funds
has risen to
75
from
28
in three years.
Most of the older funds focus mainly on hard-currency
sovereign or quasi-sovereign bonds, those issued
in dollars rather than the currency of their country
of origin. Historically, dollar-denominated issuance
made up the preponderance of
EM
debt markets,
as this was the only viable way for countries with
dicey fundamentals to gain access to capital. That
dynamic has shifted over the past several years, after
many maturing emerging markets have cleaned up
their finances and have continued to exercise prudent
fiscal and monetary policy. That has led to the devel-
opment of robust domestic bond markets in many
countries. In fact, local currency markets’ share of the
entire
EM
fixed-income universe now tops
80%
.
Meanwhile, in the dollar-denominated market,
EM
corporate bonds have taken up an ever-greater
share of new issuance, between
60%
and
80%
in
each year since the global financial crisis.
Many of the new fund launches in the category in
recent years have sought to capitalize on one of these
trends. Nearly half of the funds launched in the past
three years have either a specific
EM
local-currency
or corporate focus, leaving the
EM
bond category
divided between hard-currency, local-currency, and
corporate offerings (the same is true for the
14
EM
bond exchange-traded funds available). That compli-
cates the choice for investors who want to have
EM
bonds in their overall asset allocation but don’t
have a strong view on which part of the market
to play. Also, the relatively short life of most local-
currency and corporate
EM
bond funds doesn’t give
investors much history by which to judge managers’
skill. That may partly explain why the category’s
oldest local-currency bond fund,
PIMCO Emerging
Local Bond
PELBX
, is also its largest at $
15
billion
in assets.
The category’s older hard-currency-focused funds have
also attracted plenty of new money in recent years—
some of the category’s largest funds, such as
Fidelity
New Markets Income
FNMIX
and
MFS Emerging
Markets Debt
MEDAX
, have received some of the
highest levels of inflows over the trailing
12
months—
but the shifting investment landscape has posed
challenges for them as well. Such funds have added
small stakes in corporates and local-currency debt in
recent years, but they don’t have the flexibility to
make sizable shifts between these sectors as valua-
tions may warrant. Some of these teams also haven’t
invested in the research resources that a higher allo-
cation to corporate and local-currency bonds demands
to the same extent as certain competitors.
Less-constrained total-return approaches that allow
investment managers greater flexibility to invest
across
EM
sectors may offer the best solution for fund
investors who don’t want to micromanage their
sector allocation decisions. So far, such strategies are
in short supply, but that could be changing.
PIMCO
is attempting to fill that void with its recent launch of
PIMCO Emerging Markets Full Spectrum Bond
PFSIX
(retail shares
PFSYX
). Storied
EM
boutique
Ashmore also launched a total-return fund alongside
hard-currency, local-currency, and corporate-focused
offerings when it entered the United States retail
fund market close to two years ago.
One total return strategy that’s gotten a lot of atten-
tion lately is
TCW Emerging Markets Income
TGEIX
, which has rapidly become the category’s third-
largest fund at $
7
.
6
billion. Our estimation of the
fund has improved, as the team has added research
and trading resources and expressed its intention
to close the fund before it hits $
10
billion in an effort
to keep the fund’s size manageable. But its red-
hot returns in recent years are a testament to its risks,
and investors should tread carefully.
œ
Contact Miriam Sjoblom at
More Choices Than Ever in
Emerging Markets
Income Strategist
|
Miriam Sjoblom
