Emerging market debt funds in have managed to post strong annualised mean returns over the period fr...
Emerging market debt funds in have managed to post strong annualised mean returns over the period from August 1997 to July 2000, crises including the Russian debt default of 1998 notwithstanding. Performance has come at the price of high standard deviation.
Average annualised mean return across the sector is 4.87%, with annualised standard deviation of 22.25%.
The top performer in the sector is Ashmore Russian debt portfolio, run by specialised emerging debt investor Ashmore, which has an annualised mean return of 31.76%, and annualised standard deviation of 65.15%. The group takes a conservative investment stance across its portfolios, with a long-only approach and employing little leverage - a fact which is responsible for the Russian debt fund's longevity following the Russian debt default of 1998.
Jerome Booth, director of Ashmore, said: "Of the eight Russian debt funds that existed before the crisis, ours is the only one remaining. The other funds in the sector were all hedge funds and were mostly leveraged going into the crisis whereas we were not. The Russia fund has now completely recovered."
The company also runs a number of multi-country vehicles, the flagship fund being the Ashmore emerging markets liquid investment portfolio, which is diversified geographically across 35 or so countries. This has posted annualised mean return of 12.27% with annualised standard deviation of 25.19%.
The investment process across the funds involves a team of 10 people who have worked together for an average of over 10 years. There is a very strong focus on macro-economic analysis, Booth said. "Developing countries have a different policy set to developed markets. In many ways emerging economies are characterised by the fact that their institutions at all levels are of relatively poor quality, with big gaps from one institution to another. It is only via in-depth knowledge and experience that one can have a sense of how each individual market works."
Booth believes the outlook for emerging market debt as a whole is very bright. "From a technical aspect things look good. $8bn of debt is scheduled to mature by the end of the year, and apart from Argentina all the sovereigns have completed their financing requirements. At the same time there is strong demand from Japan for Samurai bonds. There are also a number of quality cross-over investors coming into the market, who have typically been in other markets and are now supplementing their overall exposure by coming into emerging debt. This is positive for the supply/demand picture.
At the same time, although the market has been oversold, there is little leverage in evidence. Booth said: "This time the rally has been much slower than it was, for example, in 1995 in the wake of the Mexican crisis, because all the froth has gone into Nasdaq. This means that nearly all the money in emerging debt is from dedicated investors, and so the asset class is not likely to fluctuate at every new piece of data from the US."
Additionally the rally has lasted long enough to draw in institutional investors. Paul Dickson, manager of the JP Morgan Emerging Fixed Interest fund, is also positive on the asset class. This vehicle has returned an annualised mean of 6.94% with annualised standard deviation of 22.84%.
The investment strategy focuses on analysing sovereign credit-worthiness. Dickson said: "Around half our work involves looking for opportunities where instruments are mispriced and credit-worthiness is improving, while looking at those sovereigns which are in trouble and so should be avoided.
"The key elements in assessing sovereigns are fiscal performance, monetary management and debt management."
Over the last few years a number of strategic moves have contributed to performance. "We underweighted Russian debt in 1998 in the months preceding the default, It was apparent to us early in 1998 that the fiscal programme there was unsustainable. They were running arrears, and seemed either incapable or unwilling to meet IMF guidelines.
"In addition, we had a close focus on the way the country was financing budget gaps through short-term capital flows, which in effect created a bubble. They were forced to raise interest rates to maintain market confidence and it was clear to most observers that something would happen. Some investors thought the country was too big to fail and so took the 'moral hazard' route. However we believed that the IMF was no longer likely to take the route of bailing out countries that were in trouble and took an underweight position."
By the end of 1999 Dickson was positive about the outlook for Russian debt. "We started to realise the Putin government was serious about reforms, and that the debt restructuring plans would be positive for the market. We also realised the rise in oil prices would be very positive for the country."
Another key move for the fund was recognising in early 1999 that the Brazilian devaluation was not as catastrophic as the market feared and that there would be a rapid readjustment.
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