Those funds taking the second route – or buying ‘hard-currency’ debt – have prospered in a time when the US dollar has strengthened and several emerging currencies have run into trouble.
Of the 13 funds in Table 1 that disclose their currency positioning, 12 have all or most of their exposure in the dollar or other developed currencies. The only one without an obvious hard-currency preference, Gam Multibond Emerging Markets Opportunities Bond, still has 48 per cent of its exposure in dollar debt.
Of the top five names by five-year performance, the first four have a substantial majority of exposure in hard currency. The fifth name, M&G Emerging Markets Bond, is the most exposed to local currencies out of these names, but still has around two-thirds of assets in hard-currency debt.
The winners
Currency preferences are not the only crossroad for EMD investors: they must also decide whether to focus on buying government bonds, corporate debt, or both. While there are plenty of different approaches on show in Table 1, it is a corporate bond fund that has come out top over five years.
BNY Mellon’s Emerging Markets Corporate Debt offering, managed by Colm McDonagh and Rodica Glavan, has returned £1,675 from a £1,000 lump sum. The vehicle appears well diversified, with exposure spread across 71 holdings and at least 20 different countries. However, this makes it difficult to judge which factors have driven outperformance over recent years.
On a shorter-term basis, the fund’s managers have cited Thailand, the United Arab Emirates, Indonesia and Columbia as regions that performed well. Performance has also benefited from a rally in high-yield debt, though an underweight position in Asian debt has hindered returns. The fund’s biggest sector positions are a 30.6 per cent weighting to financials and 17.8 per cent in oil and gas.
Unlike the top performers in some of our other investment analyses, the best fund over five years fails to dominate its sector over the other available timeframes. The BNY fund comes in fourth place over one year, and ninth on a three-year basis. Fidelity Emerging Market Debt comes out top over one year, with Pimco GIS Emerging Markets Corporate Bond delivering the biggest return over three years. The BNY fund launched in 2012, meaning it lacks a 10-year track record.
Discrete annual returns are a reminder of the volatility inherent in emerging market investing. Each of the portfolios in Table 1 returned a minimum of around 20 per cent in the year to April 30 2017, a period when emerging markets returned to form. But every fund in the top 20 made a loss in the following 12 months.
Other paths
The vehicle in second place over five years, Amundi Emerging Markets Bond, is similar to BNY Mellon’s offering in that it focuses mainly on corporate bonds. But even within the top five, it’s clear that this is not the only source of good returns.
