An emerging markets local currency debt strategy investing in supranational bonds, which broadly contributes to environmental and social objectives. We seek to improve the risk-return profile compared with traditional approaches of local currency emerging markets debt (EMD) investing.
Our investment believe traditional, index-oriented emerging markets strategies offer suboptimal exposure to the underlying universe, as they typically provide highly concentrated exposure to only a small number of currencies represented in the main benchmark. Unlike traditional approaches, we do not limit ourselves to opportunities available in the benchmark. Instead, we screen all potential emerging markets currencies in the universe and generate target allocations based on proprietary quantitative measures, seeking to reduce concentration risk.
Robust investment philosophy
- Based on core beliefs of active management of currency risk, an unconstrained approach, and access to frontier markets.
An experienced, well-resourced EMD team
- A dedicated EMD team comprising veteran investors with many years of combined experience managing the full spectrum of EMD.
The investment process begins with determining the investible universe through an ESG exclusion screen and ESG integrated fundamental analysis. The team then follows a three-staged investment approach to supranational portfolio construction, which includes currency diversification, macro‑based reallocation, and bond selection. Combined, these can bring systematic advantages.
01 | Currency diversification
Broad diversification is achieved through an equal volatility weighted, risk-based target allocation to all available countries. The total number of countries increases as the investment universe broadens.
02 | Macro-based reallocation
A systematic macro scorecard is applied to consider bottom-up macro factors. The pure equal risk-based allocation is adjusted to reflect the local macro background.
03 | Bond selection
Active bond selection accounts for market technicalities, such as the funding activities of the supranational issuers, available maturities, and supranational and local bond yield curve estimations and the relative value between them. Compared with traditional emerging markets local currency funds, we actively engage with the issuers.
Benchmark: The J.P. Morgan Government Bond Index–Emerging Markets (GBI-EM) Global Diversified tracks local currency government bonds issued by emerging markets, limiting the weights of the index countries by only including a specified portion of those countries’ eligible current face amounts of debt outstanding.
For more information about our Credit capabilities
Risks
The value of the portfolio may fall as well as rise, and you may not receive back the amount invested.
Fixed income securities can lose value, including the possible loss of principal. An issuer of a fixed income security may be unable to make interest payments and/or repay principal in a timely manner. The prices of bonds and other fixed income securities will increase as interest rates fall and decrease as interest rates rise. Fixed income securities with longer maturities or duration generally are more sensitive to interest rate changes.
International investments entail risks including fluctuation in currency values, differences in accounting principles, or economic or political instability. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility, lower trading volume, and higher risk of market closures. In many emerging markets, there is substantially less publicly available information and the available information may be incomplete or misleading. Legal claims are generally more difficult to pursue.
Fluctuations in exchange rates between various foreign currencies may cause the value of the investment to decline. The market for some (or all) currencies may from time to time have low trading volume and become illiquid, which may prevent the Strategy from effecting positions or from promptly liquidating unfavourable positions in such markets, thus subjecting the investment to substantial losses.
Fixed income securities are subject to credit risk, which is the risk of loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower expects to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation. Credit risk is closely tied to the potential return of an investment, the most notable being that the yields on bonds correlate strongly to their perceived credit risk.
Fixed income securities are also subject to interest rate risk, which is the risk that the prices of fixed income securities will increase as interest rates fall and decrease as interest rates rise. Interest rate changes are influenced by a number of factors, such as government policy, monetary policy, inflation expectations, and the supply and demand of securities. Fixed income securities with longer maturities or duration generally are more sensitive to interest rate changes.
Fixed income securities may also be subject to prepayment risk, which is the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.
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