A flexible approach to investing in emerging markets through the M&G (Lux) Emerging Markets Bond Fund

20/02/2019

Against recent performance challenges for emerging bond markets, such as higher US interest rates and international trade tensions, a flexible approach remains key to investing in this hugely diversified asset class. Claudia Calich, firmly believes that choosing the right mix between government and corporate issues in local and ‘hard’ currency, together with careful country and security selection, are critical factors in seeking to maximise returns.

UK-authorised OEIC which launched on 15 October 1999, merged into the M&G (Lux) Emerging Markets Bond Fund, a Luxembourg-authorised SICAV, which launched on 17 September 2018. The SICAV is run by the same fund manager, applying the same investment strategy, as the UK-authorised OEIC.

Against recent performance challenges for emerging bond markets, such as higher US interest rates and international trade tensions, a flexible approach remains key to investing in this hugely diversified asset class. Claudia Calich, who has managed the M&G (Lux) Emerging Markets Bond Fund since launch (and the equivalent UK-domiciled fund for five years), firmly believes that choosing the right mix between government and corporate issues in local and ‘hard’ currency, together with careful country and security selection, are critical factors in seeking to maximise returns. 

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.

Lots of leeway in decision-making

Importantly, the fund’s flexibility allows Calich to allocate the portfolio in an unrestricted way between the three main emerging market bond sub-asset classes. These are local currency-denominated emerging market government bonds, hard currency-denominated emerging market government bonds, and hard currency emerging market corporate bonds.

In doing so, she actively manages three levers that help to drive the fund’s returns: 

  • duration
  • credit risk
  • currency positioning

As the fund is unconstrained by a benchmark, this approach allows Calich to invest only in areas that she likes and avoid those parts of the market where the outlook is less favourable. In turn, this allows her to construct a ‘best-ideas’ portfolio across global emerging bond markets and seek to generate performance in a variety of market environments.

Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There may be difficulties in buying, selling, safekeeping or valuing investments in such countries. In exceptional circumstances where assets cannot be fairly valued, or have to be sold at a large discount to raise cash, we may temporarily suspend the fund in the best interest of all investors.The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.

As of the end of January 2019, the fund had 637.76 million euros in AUM, with the objective of generating current income and capital growth. Performance is there to see: an investor who started out with 100 euros five years ago would now have 146 euros.1 At least 80 percent of the portfolio are invested in bonds, and the allocation is currently 99 percent. Calich hold them either directly or through derivatives, although typically makes little to no use of them.  Her investment decisions are based on a combination of top-down research (i.e., the assessment of economic factors) and bottom-up stock selection through in-depth credit research. 

Performance as at 31.01.191 YTD 2018 2017 2016 2015 2014 Since launch p.a. (19.04.2012)2
M&G (Lux) Emerging Markets Bond Fund USD A Acc
4.55% -6.75% 12.95% 10.25% -1.08% 5.15% 4.73%
Comparative sector3
4.24% -6.02% 10.18% 9.49% -2.90% 2.31% 2.90%

Past performance is not a guide to future performance.

Source: Morningstar Inc., Pan-European database as at: 31 January 2019. M&G (Lux) Emerging Markets Bond Fund (Morningstar Global Emerging Markets Bond Sector Average/Count, USD Share Class A, gross income reinvested, price-to-price basis). 1 Fund performance prior to 17 September 2018 is that of the USD A class shares of the M&G Emerging Markets Bond Fund (a UK-authorised OEIC), which merged into this fund on 7 December 2018. Tax rates and charges may differ. 2 “Since launch” is the launch date of the USD A share class of the OEIC. 3 Morningstar Global Emerging Markets Bond Sector Average/Count.

Global diversity and widening universe

The scope to invest in emerging market corporate bonds provides a far larger opportunity set for the fund, with these assets potentially enhancing its risk/return profile compared to those funds restricted to the much smaller number of emerging market government issuers. Indeed, the emerging market corporate bond sub-asset class has been a particularly fast-growing segment of the fixed income universe over the past decade, and now offers widely diversified investment choices across geographies and industry sectors. 

Amid the recent performance fluctuations in emerging markets, Calich looked to evaluate, as always, if periods of increased volatility offered potential long-term buying opportunities. For example, the fund’s activity included adding some corporate bond positions in Latin America, such as Mexican energy group Pemex, as well as some real estate issuers in China. In both cases, Calich felt valuations were more attractive at lower price levels. In contrast, she sold rand-denominated government bonds in South Africa as the country’s economic prospects weakened.

Looking ahead, Calich will continue to allocate the fund’s assets where she sees the best relative value and avoid areas or countries where she does not like the outlook. Through this strategy, she believes attractive investment opportunities may still be found in the emerging bond markets on a selective basis. In her view, this assessment is supported by factors such as the higher yields availaible, for taking on additional risk, compared to other segments of the global fixed income universe.

The Fund allows for the extensive use of derivatives

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The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.