How to Invest in the Analysts' ISA Favourite

Last month we asked Morningstar analysts and portfolio managers where they would be investing their ISA cash - and emerging market debt was the top choice

Emma Wall 21 April, 2016 | 8:15AM
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Emma Wall: Hello and welcome to the Morningstar Series "Ask The Expert". I'm Emma Wall and I'm joined today by Morningstar Fund Analyst, Ashis Dash.

Hi Ashis.

Ashis Dash: Hi Emma.

Wall: So a couple of months ago we did a vox pop video with all the fund analysts at Morningstar and we asked them where they were putting their ISA cash for 2015-16, and they all said, well a lot of them said emerging market debt. Why is this asset class so attractive?

Dash: So indeed, emerging market debt has been quite a topic recently. There are a couple of reasons behind it. One being the yields that you are offered on developed market bonds which are the government bonds are yielding either very low or in negative territory. And we compare to the some of the emerging market countries, you'll have Brazil which is yielding about 13%. It's obviously much more attractive and it also comes along with a different risk profile.

The second is the recent performance of the emerging market segment as such which has been one of the weakest in 2015. So if you take emerging market local currency bond funds on an average they return about negative 15.5% last year.

And this year as of the end of March they have already returned a positive 9.5%. So there's been quite a rally back. But there is a little bit of dispersion within the funds. If you compare local currency against the corporate bond funds. They have delivered only – they have only lost 2% last year and are up only 4% this year although that’s substantial but still less than the local currency.

Wall: You've alluded to, there are actually quite a few different ways investors can get access to this asset class aren’t there.

Dash: Yes. So broadly we can split emerging market asset class into four broad categories. So the first one being hard currency debt. These generally tend to be issued by the governments or quasi sovereigns in U.S. dollar. You can also find issuances in euro or Japanese yen. But they tend to be quite limited. With these bonds the risk that you are taking is the interest rate risk as well as the country's credit risk. Then the second category would be the local currency bonds. These would be issued in the local currency of the country.

So over the years with improving sovereign fundamentals this market has become the larger part of the EMs universe and tends to be the more liquid segment as well. So in terms of the risk that comes along with local currency bonds you have interest rate risk and country's credit risk as with hard currency, plus you are also taking the currency risk for the country.

Wall: And that’s just all government issued or quasi government issued bonds. And there is also corporate bond sectors in that emerging market debt.

Dash: Yes. So the corporate bond sectors. What tends to happen is that you add corporate issuer risk on top of let's say the hard currency or the local currency risk. Then in this case, it is one of the smallest sectors within the EM segment.

And also tends to be a little less liquid because of that reason. Then you go onto the final segment which is the blended segment which can be a mix of all three of these put together and it gives the manager the flexibility to move around within them.

Wall: It's quite a tall order than for a fund manager. I'm glad we're leaving to the professionals to get the currency risk right, the interest rate risk right, will the country default. With all that in mind though it is of course very attractive asset class you said there Argentina, did you say with 13% yield when we have got negative…

Dash: Brazil.

Wall: Brazil, sorry. When we got negative yields in Europe. So perhaps you could highlight some fund managers who are getting it right, getting that blend right for us.

Dash: Yes. So what we tend to see is a lot of the fund houses have offerings within this space and they tend to cater to all four categories. So you'll have houses like Ashmore, BlueBay, DCW or JPMorgan which will have a suite of funds which are available for investors. In terms of some of the positively rated funds in the hard currency space.

We have Newberger Berman offering which is rated Silver and we have the Pictet-Global Emerging Market debt which is rated Bronze by us. In the local currency space we have offerings from Investec and Pictet as well both are rated Bronze. And in the blended space we've got offerings from DCW and we've got offerings from T. Rowe Price, DCW being rated Silver and T. Rowe Price is rated Bronze.

Wall: Ashis thank you very much.

Dash: Thank you Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Neuberger Berman EM DbtHrdCcy EUR A Acc10.99 EUR-0.01Rating
Pictet-Emerging Local Ccy Dbt PUSD158.21 USD0.08Rating
Pictet-Global Emerging Debt P USD388.38 USD0.46Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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