Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
The investment objective – what we are aiming to deliver for investors – is a superior combination of income and capital growth (that is, total return) compared to a composite benchmark of global emerging market bond assets over a three year period.
Our investment approach blends active management based on fundamental analysis of EM assets with a medium to long-term horizon, a high level of diversification and emphasis on risk management.
This approach is underpinned by a strong investment philosophy which is built on being ‘bottom up' in terms of fundamental country analysis. It's a very important part of our process and where we spend most of our time. Diversification and risk management are also fundamental to our approach given the idiosyncratic risks that exist within EM.
The first step of our investment process is to define an overall risk level ie assessing the global macroeconomic environment (like inflation, rates) and its impact on EM debt. The second step is a thorough bottom-up assessment of individual countries. Qualitative factors are very important when analysing EM sovereign issuers, as we need to assess not only the ability but also the willingness to repay debt. We also conduct in-depth analysis on corporate issuers with a focus on their respective sovereign outlook.
I'm the lead portfolio manager, as well as the head of emerging market debt at M&G. Charles De Quinsonas is co-fund manager. We are supported by a dedicated team of EM debt specialists (covering both sovereign and corporate bonds).
How are you currently positioning your portfolio?
Our fund positioning is tilted towards having a high yield bias, given that we view this portion of the market as being particularly attractive and offering fairly compelling valuations. This is, however, not necessarily the case in the investment grade portion of the market given how tight spreads are. However, yields are still attractive - particularly within Latin America.
Our preference for local currency reflects a positive view on select EM currencies which, while facing pressure from a strong US dollar, still provides a very decent carry particularly in countries that have not yet really begun to cut rates, such as Mexico. We are also overweight countries within Sub-Saharan Africa which are far more idiosyncratic in nature. Our underweights position reflects our view that certain portions of the market are looking very expensive, with yields also being relatively low. This valuation view includes the Asia region (China is our largest underweight at a country level) as well as emerging market debt corporates.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
We favour a very holistic approach to idea generation and portfolio construction, meaning the portfolio is very diversified. With our portfolio being as diversified as it is, we do not necessarily have a key investment opportunity, but we do have a couple of positions that are slightly more opportunistic and idiosyncratic in nature which reflects our active, and unconstrained, approach to investing within emerging market debt.
Recent examples would include adding exposure to the Egyptian pound (EGP), and Mexican peso (MEX) off the back of notable market events. For EGP, we added exposure following a devaluation of the currency permitted by the central bank by removing currency controls whilst also implementing a significant interest rate hike to help stem inflation. With EGP initially falling by 26.5% we took the opportunity to add a modest position. For MEX, we added exposure - moving our position from neutral to overweight off the back of a 10% devaluation in MEX that followed Claudia Scheinbaum's election victory (the market sold-off due to concerns over the extent of her victory). We added MEX based on our view that the market reaction was somewhat overdone.
Claudia Calich, Head of EM Debt at M&G Investments.
