17 May: Q&A’s from the Vontobel AM Emerging Markets Blend Fund team
What is the dominant (market) trend in global emerging markets? How does this trend possibly affect performance/ portfolio characteristics? What is Vontobel AM’s added value? Find below the answers from the Vontobel AM Emerging Markets Debt team.
What are the dominant (market) trend in global emerging markets?
Investors are becoming more familiar with emerging markets (EM) generally. What used to be a side dish is becoming a main dish. The market is expanding. Hard currency corporate debt was rare 10 years ago, local currency was just beginning. These are now multi-trillion market cap markets which no investor can ignore nowadays. In a world of low yields, given current spreads and the historic risk return of hard currency EM debt, it is a “go to” asset class.
How does this trend possibly affect performance / portfolio characteristics?
As the market deepens, broadens and develops, this leads increasingly to a wider investment opportunity set for investors. On the one hand, either investors have a good handle on the asset class and are willing and able to do the allocation between hard and local currency, rates and FX, sovereigns and corporates These investors will invest in pure and clearly defined funds to construct their desired allocation. On the other hand, many investors are unable or unwilling to do this and thus seek an allocation solution from an experienced EM team who will do this allocation as a turnkey solution for them. This is where Blend strategies step in. Blend strategies were necessarily hamstrung a few years back given the lack of depth in the local currency and corporate bond markets.
What is Vontobel AM’s added value?
We have a very high conviction about the inefficiencies we can observe in the market. We build our Blend strategy around these inefficiencies. On the one hand, between asset classes we see significantly higher risk-to-reward in hard currency compared to local currency. Our portfolio is thus geared on a strategic basis towards hard currency. However, tactically, local currency can make sense. We therefore have exposure to local currency bonds which varies quite significantly according to our outlook. Within the hard currency asset class, we have also observed for nigh on twenty years recurring sub-optimal investor behaviour (bad market timing, bad instruments) which helps up to exploit predominantly bottom-up mispricing opportunities. We call this “Spread Optimization” technique whereby we generate higher spread for similar ratings. This is a tried and tested approach and is very different from many EM managers.
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