Emerging Market Debt Absolute Return
Schroders Emerging Market Debt Absolute Return strategy seeks a positive absolute return from capital growth and income.
An absolute return strategy managed with the aim of delivering high returns with low volatility, while maintaining a low correlation to other products. The broad range of assets offered by such an under-researched EMD asset class presents us with diverse opportunities for consistent returns. A key part of our investment philosophy is that we believe we are able to add value by actively managing exposure to both external and local debt, as well as local currencies.
The EMD Absolute Return team, reporting to Geoff Blanning, is made up of highly experienced, dedicated EMD specialists, based in London. It includes a team of three portfolio managers who have worked together managing absolute return EMD portfolios at Schroders for the last 14 years.
Schroders has developed what we believe is a unique approach to portfolio construction, designed specifically for EMD. Principles of both risk control and return maximization operate concurrently. Our EMD strategy focuses on absolute returns as the primary goal, which seeks to ensure that the risk of loss for every security is analyzed thoroughly, using fundamental, quantitative, sentiment and technical analysis, before any purchase is considered. Our extensive in house research is applied across all EMD countries and debt sectors within those countries.
We believe in:
Schroders believes that EMD is an underdeveloped, inefficient asset class in which the rewards for expert, active management are high.
We believe opportunities for diversification are greater in EMD than in any other sector of the bond markets. Our EMD strategy seeks to exploit all such opportunities, investing in as broad a range of assets as permitted.
Absolute Return Focus
Following in-depth country analysis, the team actively allocates to selected countries within the universe, across a range of different securities, that they believe will offer the best risk adjusted returns.
Global conditions for EMD are discussed quarterly; a broad investment framework covering major themes in the market is then created encompassing the following:
- Global and regional outlooks (Asia, Eastern Europe, Latin America, Middle East / Africa)
- Long term sovereign, currency and corporate risk models (quantitative analysis)
- Long term chart analysis (technical analysis)
Country analysis is carried out weekly and forms the core of the investment process.
Our investment universe is comprised of over 50 countries. Major countries are reviewed at least once a year, minor ones less frequently.
Four types of analysis are applied to each country. Countries are compared consistently (a) over time; and (b) against each other.
The EMD team undertakes very comprehensive country analysis, employing four separate and independent levels of analysis: Fundamental, Quantitative, Technical and Sentiment. The Fundamental analysis is the most important. The Quantitative, Technical and Sentiment analyses are used to support our fundamental views.
1. Fundamental Analysis (Main decision factor – 70% of fund managers’/analysts’ time)
Each week the relevant country analyst prepares a report on a particular country which focuses on political, economic and market developments and outlook. Such a report frequently follows a country research visit. Politics is inevitably the most qualitative and focuses on risks and opportunities. Economic and market forecasts are prepared for external and local debt and for the exchange rate. These are forecast on both a 3- and 12-month horizon, and are the central output of this analysis.
2. Quantitative Analysis
A country risk model is updated for all countries in our investment universe at the start of each quarter and whenever an individual country is reviewed. The model aims to provide an objective input into our inevitably more subjective fundamental analysis. Countries are scored on a scale from -12 to +12 reflecting the country risk based on six key factors:
- Growth Dynamics
- Sovereign External Liquidity
- Hot money Indicator
- Banking System External Liquidity
- Credit Cycle
3. Technical Analysis
We make extensive use of chart analysis: we think the volatile and frequently momentum driven nature of many Emerging Markets makes both long and short term chart analysis of price patterns a valuable tool.
4. Sentiment Analysis
Sentiment Analysis attempts to discover how other market participants are positioned and / or are likely to change their positions in the future. Accurate readings can support our own assessment of risk / opportunity in markets.
At the final stage of the analysis, the EMD team agrees on 3- and 12-month total return forecasts for each investable asset. Given the risks involved, a minimum expected return of 10% (in US$) is required to initiate a position. Assuming such returns are forecast, investments are made subject to the team’s portfolio construction discipline.
Disciplined portfolio construction techniques, consistently applied, play a significant role in Schroders’ strategy. Schroders has developed a unique approach to portfolio construction adapted specifically to EMD. Principles of both risk control and return maximization operate concurrently.
- The EMD strategy focuses on absolute returns as the primary goal
- Principles of both risk control and return maximization operate concurrently
- Portfolio construction emphasizes fundamental, quantitative, technical and sentiment analysis
- Extensive in-house research is applied across all EMD countries and debt sectors within those countries
- Tactically managed with the ability to hold up to 40% in cash