Emerging Market Debt Relative
The Emerging Market Debt Relative strategy uses a benchmark index consisting of one-third of each of the following JP Morgan Indices: EMBI Global Diversified dollar bond index, one-third GBI-EM Global Diversified local currency index, and one-third CEMBI Broad Diversified corporate index. The strategy seeks to outperform this hybrid index by 200 to 300 basis points over a typical market cycle (gross of fees, per annum).
A relative return multi-sector strategy that integrates sovereign hard currency debt, local currency rates, local currencies, and emerging market corporate debt within an actively managed, strategic asset allocation framework. Using this approach we capture the full opportunity set in emerging market fixed income while managing these four alpha sources in an integrated manner with the goal of achieving the highest risk-adjusted returns available within the asset class.
The EMD Relative Return team, co-headed by James Barrineau and Rajeev De Mello, consists of deep and highly experienced management teams in multiple time zones, drawing on the expertise of more than 30 credit analysts across five continents, with in-market presence in six major emerging countries.
James Barrineau joined Schroders in April 2012 as Co-Head of EMD Relative Return. Prior to joining Schroders, Jim worked as a Senior Portfolio Manager - Sovereign from 2010 to 2012 at ICE Canyon, an alternative investment firm specializing in emerging market debt.
Fernando Grisales joined Schroders in April 2012 as a Portfolio Manager in the EMD Relative Return team. He had previously worked at ICE Canyon as a Senior Portfolio Manager for two years. From 2001-2010, he worked at AllianceBernstein in a variety of roles.
We believe that value exists across the EMD opportunity set in every market cycle and episode of structural change and can be identified through fundamental research and time-tested investment tools. We advocate an integrated, dynamic asset allocation approach utilizing the entire EMD opportunity set as the best way to balance risk and return and optimize exposure to this asset class. Our relative value approach seeks to best harness the four main sources of potential excess return in EMD: hard currency sovereign, hard currency corporate, and local rates and currencies – in a dynamic, integrated format that minimizes unintended risks.
Our multi-sector approach to emerging market debt follows a disciplined investment process:
We begin by setting broad themes and an overall thesis for emerging markets for the next three to six months. We pay close attention to the overall liquidity environment in EMD as that has been a major driver of historical returns. We also continually monitor sovereign and corporate sector valuations to understand what value may be present at any given time. We further analyze local yield and historical F/X valuations, again, in order to gain a sense of where value may reside in the market.
We distill this information into a consensus recommendation about the weighting of various sectors within EMD. We divide the EMD universe into Strategic Risk Sectors (“SRS”), which are meant to serve as longer-term anchors to the portfolio. Our regular analysis of the EMD opportunity set leads us to identify market themes within these SRS that are particularly compelling. We then move on to our analysis which develops the USD sovereign, F/X and local duration ratings. We begin with an assessment of the sovereign issues of the underlying benchmark countries using a proprietary valuation model. Our Sovereign Credit Model utilizes 10 factors which are specifically based upon external, growth and public debt dynamics and not market data. Sovereign Credit Model output is also stress tested at the country level to help determine our intrinsic country credit ratings.
Once all of that information is aggregated and analyzed, we develop our own Intrinsic Rating for each country, which is its fundamental rating after the credit trajectory, market technicals and potential catalysts are factored in. Local duration and F/X ratings are separately developed using much of the same input, but reflecting the fact that these assets do have different valuation drivers. We use qualitative factors (such as the steepness of the yield curve and changes in CPI) and market drivers (such as the policy framework and current local bond valuations). Our rating range for F/X and Local Duration is Overweight, Market Weight and Underweight.
- The strategy uses an integrated approach to the main sectors of EM fixed income, insuring that portfolio risks are assessed in the most comprehensive manner
- The strategy is less benchmark-constrained than typical hard currency sovereign-based strategies, which provides the flexibility to pursue the most attractive investment opportunities available
- Portfolio construction uses a proven investment approach: an intrinsic rating process; corporate relative value recommendations; global scenario analysis supported by a proprietary EM liquidity index; and a transparent portfolio construction framework where the underlying assumptions of expected returns are made explicit
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