Passive exposure to emerging market government bonds is the strategy for a new fund from Legal & General.
The Legal & General Emerging Markets Government Bond Index fund will compete with Standard Life, Schroders and First State’s recently launched active vehicles in the emerging market bond sector. It is headed by Lee Collins and the L&G index funds team.
Investment in emerging market government bonds will be made via the JP Morgan Emerging Markets Bond Index Plus (EMBI+), which covers loans, Eurobonds and US dollar-denominated Brady bonds, created in the late 1980s and mostly issued by Latin American countries.
L&G seeks to combine growing interest in cheaper passive investment with the attractive yield appeal of emerging market bonds. Global economic instability has seen demand for bonds rise in recent years, which in turn has caused developed-market government bond interest to waiver as coupons reach all-time lows.
This is highlighted by L&G’s managing director, Simon Ellis, who said the fund offers great opportunities to diversify a portfolio beyond the lower yields of conventional gilts.
The annual management charge of L&G’s 17th UK-based passive fund range has been set at 0.30 per cent, a lower fee than the 0.45 TER of its main rival competitor in the passive market, the iShares Emerging Bond.
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MM View:
Emerging market debt bonds have been the trend for quite some time and it is therefore no surprise to see its first passive vehicle arrive on UK shores. While previously labelled high-risk, particularly after Argentina defaulted on its bonds in 2001, these days some have gone so far as to label them safe havens.
Such judgement may well be exaggerated, yet in terms of compensation they certainly hold the upper hand over developed nations.
Fixed-income investments have enjoyed a surge in investor interest since the global recession threw the equity market into disarray. Amid fears of continued volatility, the stability offered by developed-nation government bonds generated high levels of investment. However, high demand has steadily weakened yields and pushed even cautious investors to more thirst-quenching fixed-income opportunities.
L&G’s new fund is attractive because of its relatively low fee and hard currency resistance. While local currency exposure caters more to the courageous investor, the fact L&G’s fund is denominated in US Dollars allays fears of exchange rates and fluctuating local interest rates eating up gains.
During the past 15 years the EMBI+ outperformed the JP Morgan Global Bond Index, though analysts predict a rockier future. That said, this now-mainstream asset class still appears a better option than the sovereign debt levels and low yields in the G7.
