The recent boost to emerging market debt capabilities by asset management groups has triggered a flurry of moves within the sector. S&P Capital IQ's Kate Hollis explains the implications for fund analysis and gradings.
Emerging market debt (EMD) is now a mainstream asset class and there are many institutional investors who need to increase their allocations. As well as this, some emerging countries have been upgraded to investment grade.
Hard currency bonds issued by good quality corporates domiciled in those countries are also entering the mainstream OECD corporate indices. Russian energy giant Gazprom, for example, is a component of some dollar and euro corporate bond indices.
Several asset managers have decided in recent years they need to set up or upgrade their emerging market debt capability in order to take advantage of the growth of this asset class. Groups usually prefer to develop in-house teams and expertise over time, but it is much easier to hire a whole team if there is an urgent need.
Thus BlackRock has lifted a team from BNP Paribas Investment Partners and Neuberger Berman from ING Investment Management within the last 12 months.
Experienced and effective emerging market debt managers are not common so this has triggered a merry-go-round of moves, particularly in London, as groups hire specialists to plug the gaps in their line-up, and promote more junior people internally.
There has also been strong demand for emerging market credit analysts to support increased emerging market corporate allocations within EMD funds and OECD high yield and aggregate funds.
So what are the implications for our fund analysis and gradings when a group hires a new team? In some cases the style and process of a newly hired team is very different from the old team and, as our gradings process takes investment approach and team stability into account when evaluating a fund, significant changes to either will affect our long-term view and by extension the grading.
There is also a strong possibility the fund’s mandate, and possibly prospectus, could change as a result.
Managers often welcome the chance to customise a fund’s mandate to their own requirements; it means they can drop features of the process that have not worked well in the past or can add new features, such as credit default swaps, that they may not have been able to use in their previous incarnation.
However, changing a prospectus is not something to be undertaken lightly, as involving lawyers and regulators is usually expensive and can often take longer to negotiate than one would believe possible.
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