Investors look to emerging market debt
Last week saw emerging market (EM) bond funds globally post its seventh straight week of inflows and only one fund domiciled in Australia has managed to recover losses and make a return so far this year.
According to Bank of America and EPFR data, emerging market debt funds had their seventh week of inflows at US$0.9 billion ($1.26 billion).
Source: EPFR
EPFR said investors who were looking to EM debt were continuing to gravitate towards those with hard currency mandates and favoured EM investment grade corporate bond funds over their sovereign or high yield peers.
“Retail flows for the fund group were negative for the first time since late June, funds with socially responsible (SRI) or environmental, social and governance (ESG) mandates posted a new inflow record and frontier markets bond funds saw redemptions hit a seven-week high as they posted their eighth outflow in the past 10 weeks,” it said.
According to FE Analytics data, within the Australian Core Strategies Universe, there were only five funds focused on EM debt.
Since the start of the year to 31 July, 2020, only one fund has managed to recoup losses brought by the COVID-19 sell off in March. This was Lazard Emerging Markets Total Return Debt at 6.16%.
This was followed by VanEck Emerging income opportunities Active ETF (Managed) at a loss of 3.47%, Mercer Emerging Markets Debt at a loss of 10.07%, Aberdeen Standard Emerging Market Local Currency Debt at a loss of 10.34%, and Colchester Emerging Markets Bond I at a loss of 10.44%.
Performance of emerging market debt funds since the start of 2020 to 31 July 2020
Source: FE Analytics
Lazard’s latest factsheet said July saw a rebound for EM debt as hard and local currency debt climbed 3.71% and 3.02%.
Lazard said its fund had significantly outperformed as a result of defensive positioning heading into the COVID-19 pandemic crisis and shifting to offense as markets bottomed.
“Since April, we have been deploying the fund’s full risk budget, roughly 80% of which is currently allocated to external debt, with an emphasis on high yield sovereigns. Consistent with this positioning, sovereign credit positions were the main driver of positive performance in July,” it said.
“On a bottom-up basis, the fund’s high-conviction positions in high yield issuers, such as PEMEX and the Dominican Republic were key contributors. The only notable detractor within this theme was Ukraine.
“We recently added currency exposure to the fund through a diversified basket of long call options in order to express a negative view on the US dollar over the medium-term.”
Looking ahead, the fund said it continued to favour hard currency debt but saw little value left in the investment grade as they offered little cushion against a potential rise in US Treasury yields.
Region-wise, the fund has its largest allocation towards Middle East and Africa at 32.9%, followed by Latin America at 28.9%, Eastern Europe at 16%, and Asia at 15.4%.
Only the Lazard and Mercer funds had fund history over three and five years. Lazard again came out on top over the five years to 31 July, 2020, at 18.5%, compared to Mercer at 14.02%.
Performance of emerging market debt funds over the five years to 31 July 2020
Source: FE Analytics
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