After an extended period of underperformance, emerging market debt and bond-related exchange traded funds could provide great value for fixed-income investors.
“Given where prices are now, the apocalypse could be priced in, and unless you believe that we are about to live through another period like the late 90s (the Asian crisis, a devaluation in Russia and currency crises in Brazil, Argentina and Turkey), this could be a good time to look at emerging market debt,” Guillermo Osses, a portfolio manager at Man GLG, wrote on the Financial Times.
Fixed-income investors may track U.S. dollar-denominated emerging market debt through ETF options. For instance, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) has a 7.08 year duration and a 5.16% 30-day SEC yield. The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) has a 8.42 year duration and a 5.68% 30-day SEC yield. The Vanguard Emerging Markets Government Bond ETF (NasdaqGM: VWOB) has a 6.2 year duration and a 4.82% 30-day SEC yield. Year-to-date, EMB rose 3.3%, PCY gained 2.9% and VWOB returned 3.2%.
These emerging market funds may help investors gain exposure to a portfolio of diversified developing country sovereign debt.
“More so than in other asset classes, the funds that invest in emerging market debt tend to move in crowds, follow trends and be reactive, rather than proactive, in their portfolio allocations,” Osses said.
Osses, though, notes that emerging market bond investors should analyze concentration risk or look under the hood of their funds to better understand how much of a particular investment they are exposed to.
For instance, Osses sees value in Russia as the developing economy road the gyrations in the foreign exchange market. Despite all the troubles it has struggled through, Russia’s current-account balance is back to where it was when oil prices were above $100 per barrel, and the ruble currency has depreciated so much that the country looks in good financial health, Osses added.
“We are only half joking when we tell investors that Russian foreign currency bond holdings could be a safer bet than US Treasuries,” Osses said.
[related_stories]The USD-denominated emerging market bond ETFs also include a good chunk of Russia exposure. For instance, Russia makes up 5.6% of EMB’s underlying holdings, 3.4% of PCY and 7.3% of VWOB.
Moreover, investors who typically associated the developing economies with greater risk should note that these emerging bond ETFs include heavy allocations toward investment-grade debt securities. For example, EMB holds investment-grade AA 2.1%, A 12.7% and BBB 42.3%, along with speculative-grade BB 19.2%, B 15.6%, CCC 5.1% and D 3.0%. PCY has AA 6%, A 10%, BBB 37%, BB 24%, B 17% and CCC 3%. VWOB includes Aa 5.9%, A 16.0%, Baa 41.9% and speculative-grade Baa or lower 36.2%.