Hargreaves Lansdown: Local currency debt is the king of EM bonds


Emerging market debt is making a comeback, with a number of strategies offering positive returns despite the post-crisis slowdown, especially in local currency debt, Hargreaves Lansdown finds.

The firm’s head of passives Adam Laird argues there is again “some value” in emerging market debt, a trend which has recently reversed.

Laird says: “The sector had a great run in the aftermath of the financial crisis, some emerging countries were lauded for being less indebted than Europe or the USA.

“But as money flowed in, yields were pushed down. In late 2012 the JPM EMBI Global Diversified index yielded under 5 per cent, which was unappealing given the risk in this market. But this has reversed somewhat with some strategies now returning over 6.5 per cent.”

While investors preferred investing in hard currency debt historically, Laird says fund managers are now opting for local currency debt, which is becoming the predominant in emerging market debt.

He says: “Not all emerging market bonds are the same. Historically most UK investors would have accessed hard currency debt.

“The dollar here can be a blessing or a curse. Investors might see some protection from fluctuations in volatile emerging currencies.”

However, Laird warns that as US interest rates are vulnerable investors could see dips if rates continue to rise.

Local currency debt, on the other hand, is becoming more common and globally is the largest class of emerging debt with over £2.5trn in issuance, he says.

To access the market, Laird says options for active investors are “limited” and early this week Hargreaves Lansdown dropped the $25m Templeton Global Bond fund from its Wealth 150 list.

Laird says: “The fund, run by Michael Hasenstab and team, is not a strict emerging market debt fund, but has a strong bias for emerging issuers.

“They have a heavy weighting to Mexico and South Korea. However, the fund has lagged its peer group in the last few years and has relatively high fees.”

Hargreaves said with an ongoing charge of 1 per cent, the fund “has come to look expensive and we do not believe the overall proposition should command such a high fee”.

Passives expert Laird suggests ETFs are one of the main ways to access emerging market bonds.

Among his suggestions is the $4bn iShares JP Morgan Emerging Markets Bond Ucits ETF, which is a “giant in the hard currency debt space” as well as the £1bn iShares Emerging Markets Local Government Bond Ucits ETF.

Laird says: “This ETF covers over 200 local currency bond ETFs and currently yields 6.6 per cent. It has a lower duration, so should be less sensitive to interest rates than the iShares JP Morgan ETF.”

Laird’s comments come as a number of fund management houses have been boosting their emerging market debt offering throughout 2015 and since the start of 2016.

Standard Life Investments launched a fourth emerging market debt fund to be managed by Richard House and Kieran Curtis to sit alongside the asset manager’s existing emerging market hard currency and local currency debt funds.

In December last year, Old Mutual Wealth announced head of emerging market debt John Peta would take over as a fund manager on the $168m emerging market debt fund, while in January this year, Man GLG hired a new head of emerging market debt, Guillermo Ossés, coming from HSBC Asset Management.