(June 4, 2012) — “If ever there were an asset class in need of active management, this is it,” a whitepaper by GMO states.
The buzzed about “it” that GMO is referring to is emerging debt.
The paper, by Tina Vandersteel of GMO’s Fixed-Income Division, says that from a portfolio fit perspective, emerging market debt has a lower correlation than local currency debt with other common portfolio holdings, such as equities, credit, and global bonds.
Additionally, emerging debt is one of the asset classes in which active managers have most consistently generated alpha over the past two decades, the paper asserts.
According to GMO, emerging debt is a mixed bag of US dollar, local currency, and corporate debt. While the dollar debt has a broad group of countries, the local debt has a narrow group of many of the same countries. “Any or all should be owned in risk-seeking portfolios when they’re cheap to their fundamentals in proportion either to their relative value or portfolio fit,” the paper states.
Read the full whitepaper by GMO here.
The paper by GMO’s Vandersteel follows a whitepaper from Prudential Fixed Income published in April that noted investors who are increasing their allocation to emerging markets should take a deeper look into debt issued in local currency. According to the paper’s author Cathy Hepworth, emerging market local market debt volume is expected to grow by at least 10% annually over the next decade as emerging market governments and corporations are increasingly switching to local currency financing. “The economic growth experienced by EM is no longer a cyclical phenomenon—it is more of a structural long-term trend,” she writes, adding that she expects more money to be allocated on a dedicated basis as the asset class becomes more mainstream over time.
Policy developments, structural reforms, and improved sovereign fundamentals have made investing in local market debt within emerging markets more attractive. “Since 2000, most emerging market countries have followed inflation-targeting regimes and managed floating currencies, which has improved transparency and provided the ability to anchor inflation expectations,” the paper by Prudential concluded.