A top-flight fixed-income trading desk is a key component of the investment process and can have a significant impact on realised returns. This is especially true in emerging markets, where the trading infrastructure varies greatly from country to country, and managers must cope with differing clearance and settlement procedures, custodial arrangements and regulatory constraints.
In this Q&A, Mike O'Brien, Director of Global Trading, offers his insights into how the trading desk seeks to add alpha to the investment process.
Mike, how can the trading desk enhance the global fixed-income team's investment process?
Broadly speaking, there are three areas: "operational" alpha, liquidity sources and market evolution. These areas certainly overlap, but they represent different facets of how the trading team seeks to enhance the performance of our strategies.
Let's start with operational alpha - can you describe what you mean by that?
The global fixed-income team believes that the optimal way to generate alpha¹ in emerging markets is to go beyond the countries in the common benchmarks. For example, the top 10 countries in the J.P. Morgan Government Bond Index - Emerging Markets comprise 80% of that benchmark, according to J.P. Morgan.² By contrast, our dedicated fundamental portfolio analysts and managers analyse approximately 110 emerging and frontier markets in search of the best value in the sector. The ability of our investment professionals to generate alpha from such an extended universe depends on robust coverage in those countries. Thus, we have devoted substantial resources to our trading and operations teams and the development of a global infrastructure, which provides us with local access to more than 90 countries. Our trading professionals are in three locations — Boston, London and Singapore - and operate 24 hours a day. We need to be able to get local information on what's happening in real time and be ready to trade.
How does operational alpha differentiate your team from other managers in the EM sector?
Largely, because we embrace complexities unique to each emerging market. Consider the operational hurdles involved in investing in many of the smaller off-benchmark countries. Lengthy lead times are usually required to establish local clearance and settlement arrangements. Complex compliance issues need to be addressed, with varying registration and licensing procedures as well as other up-front documentation and administrative burdens.
This requires a tremendous amount of commitment and preparation. It's fair to say that unless an asset manager has emerging-markets debt as a core capability, it's unlikely to be able to devote the time and resources necessary to match what we have built at Eaton Vance over several decades.
¹Alpha is generally considered the active return on an investment, measured as the excess return of that investment relative to the passive return of a benchmark.
²The J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified is an unmanaged index of local-currency bonds with maturities of more than one year issued by emerging market governments.
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