Mr Peta explains: “The fund’s investment objective is to achieve asset growth through investment in a well-diversified portfolio of primarily local currency debt securities issued in emerging markets (EM). The fund is benchmarked against the JPMorgan GBI-EM Global Diversified index, which gives a true representation of the liquid local currency EM market and is widely used by our peers.”
The vehicle’s remit allows the managers to invest outside the index in instruments such as hard currency bonds, inflation-linked local currency debt and derivatives based on EM bonds.
Mr Peta confirms the investment objective and process remain unchanged, although they have added new countries to the portfolio and have updated some of the models they use as part of their process.
The manager says they capture opportunities in EM debt by first identifying the “key drivers”. He notes: “We develop both a mental and a quantitative model to forecast market direction and magnitude. We believe in expanding the opportunity set, because breadth of opportunity is needed in order to add the most alpha. We take a holistic approach, identifying the most attractive opportunities across the three risk factors of sovereign default, local rates and currency.”
He continues: “Through our analysis we review the key drivers of return and systemise them as much as appropriate. We also make forecasts and judgments of the relevant factors, including policy rates, inflation, and political risks.”
Analysis of local interest rates takes into account four factors: central bank policy, inflation, G3 interest rates and credit risk. Currency exposure is managed separately from interest rates, with the managers believing relative growth performance between countries is a key driver of currency returns. Mr Peta says:“When EM growth is positive and growth surprise is positive, EM currency returns are strong. When growth and growth surprise is negative, currency returns are negative. We monitor the data that is released in a variety of EM countries and take positions accordingly.”
EXPERT VIEW - Ben Willis, head of research and investment manager, Whitechurch Securities |
| This fund has had a difficult time recently, though much of this can be attributable to the fact that it invests purely in local currency debt. The fortunes of the asset class in recent years have been correlated to US dollar strength and weakness and, therefore, US monetary policy. In relative terms, the portfolio has been on par with other local currency EM debt funds, but investors need to appreciate the nuance between this offering and a hard currency EM debt vehicle. |
Ongoing charges of 1.1 per cent apply to the clean I-accumulation share class, while the fund sits at the riskier end of the risk-reward scale at level five out of seven, the key investor information document shows.
The fund has lagged the benchmark and peer group over three and five years but more recently it has delivered better returns. Data from FE Analytics reveals in the five years to May 11 the fund has generated a negative 7.4 per cent, the benchmark is down only 0.4 per cent and the sector average was 9.1 per cent. But in the past year to May 11 the fund is back in positive territory, delivering 2.3 per cent, only just behind the sector and the benchmark, both of which increased by 3.7 per cent.
Mr Peta points out: “For much of last year and into February 2016 we were concerned about US dollar strength and EM currency weakness, so we hedged a significant portion of the portfolio. This was based on three factors: growth differentials between EM and developed markets, with EM growth expectations declining more than developed markets; lower commodity prices; and the devaluation of the Chinese renminbi.”
The pair turned more positive on EM currencies in February and March, shifting from reducing currency risk to adding additional risk through short US dollar forwards in the portfolio.
Mr Peta observes: “We have added currency positions in frontier markets such as Ghana, Uganda and Argentina in the belief that those exotic markets are quite undervalued.
“With regard to interest rates, we were neutral to underweight in 2015 as we waited for the US Federal Reserve to finally raise policy rates. After local rates sold off we started to increase our duration in a variety of countries including Brazil, Russia, Hungary, Indonesia and Serbia.”
