The £118.4m M&G Emerging Markets Bond was launched in 1999, with the objectives changed slightly in 2012 to make it more flexible.
The fund aims to maximise total returns through investments primarily in bonds issued by governments and companies in emerging markets, but it can also invest in emerging market currencies.
Manager Claudia Calich has run the fund since December 2013, with Matthew Russell as deputy manager, and she notes it is “what we believe are the best ideas within emerging markets”.
Ms Calich explains the investment process starts with a top-down view in terms of macro factors across both emerging and developed markets, including global growth, monetary policy and the outlook for areas – such as commodity prices – that can have a strong impact on certain emerging countries. She says: “The top-down macro will dictate how much risk we should be running in the fund, whether to take higher risk or be more defensively positioned. Then we drill down into country specifics, which is where country overweights and underweights are determined.”
At this point the team looks for bottom-up components that offer opportunities within countries or themes and then make decisions on security selections, including the currency, the part of the capital structure and the duration of potential holdings. The holding periods depend on the investments, with the manager noting that smaller- and mid-sized markets tend to have a longer time frame, while other positions that she added when she joined in 2013 are still in the fund.
This portfolio has a risk-reward level of four out of seven for the X-accumulation share class, with ongoing charges of 1.45 per cent, its key investor information document shows.
In spite of the headwind of the falling price of oil at the end of last year, the fund has delivered reasonable short- and longer-term performances, returning 10.45 per cent in 2014 compared with the IA Global Emerging Market Bond sector average of 3.96 per cent. Meanwhile, the vehicle’s five-year performance to May 14 2015 of 18.19 per cent is roughly three times the sector average of 5.87 per cent, data from FE Analytics shows.
Ms Calich notes that within the past 12-18 months, changes to the portfolio have been concentrated mainly on hard currency securities – mostly dollar denominated but with a small proportion of euro-denominated debt.
But she adds: “One of the recent [performance] drivers last year was the [falling] oil price. We had relatively less than the benchmark exposure to some of the oil names, which worked well. The flip side was that we didn’t get the overweight positions when [there was] a rally this year.
“We also avoided quite a lot of the Brazilian corporates that were involved directly or indirectly with the bribery scandal, and we had no exposure there. But the beauty of this fund is that it is not only flexible within emerging markets, we can also add some top picks from developed markets. So there are the occasional selective opportunities that we can also invest in.”
In addition, while there is a 20 per cent limit on non-emerging market exposure, there are no restrictions on whether holdings are classed as emerging or frontier markets. For instance, the fund holds a few African sovereign positions. The manager notes: “It is all semantics – these acronyms that people come up with, [such as] Bric or Mint. You have to look at the fundamentals and whether you’re getting paid for the risks of that particular country or company.”
For example, some of the detractors to performance were not holding exposure to Ecuador and not being overweight Venezuela as the oil price rallied. But Ms Calich highlights the extreme differentiation between credits in emerging markets such as Venezuela – which has recovered from depressed levels – with the sovereign situation in Ukraine.
“These extremes are what makes the difference in performance; it is about avoiding the blow-ups and the tail risks,” she explains. “We have different challenges impacting emerging markets, and its always tricky when dealing with politics. In the past when there was more liquidity going into emerging markets, some areas were rallying for the right reasons and some on the back of the liquidity. Now there is less liquidity, bottom-up research is becoming more important.”
EXPERT VIEW
Ben Willis, investment manager and head of research, Whitechurch Securities
Although this is a long-running fund, Claudia Calich has only been at the helm for 18 months. She has produced strong performance in that time, outpacing the sector average but without significantly more risk. Although it’s early days for Ms Calich at M&G, the group is known for its fixed interest capabilities, and any addition to the team provides a strong vote of confidence. For those seeking exposure to emerging market debt, then this fund warrants attention.
