EMD
investment
Looking for higher yields?
Get the right blend
Nicholas Hardingham reveals how undertaking a
blended approach to emerging market debt can provide
attractive results for investors
A
s more investors look outside
traditional government
bonds in order to generate
a reasonable yield in what is
a historical low-yielding environment,
emerging market debt (EMD) has
been a significant beneficiary of the
reallocation. We believe that taking a
narrowly-focused approach to EMD is
sub-optimal in achieving diversification
from traditional fixed income portfolios.
Our analysis indicates an allocation to
blended EMD categories provides the
most attractive diversification outcome.
Over the past decade, we have seen
the EMD asset class grow significantly
in size as more issuers have come to
market, which in turn has increased the
opportunity set available to investors.
In spite of this, yields for EMD remain
attractive in comparison to their
developed market peers, and in line with
their longer term historical averages
Chart 2
Low correlation to gilts
(see Chart 1 below).
EMD Correlations to UK Gilts: 5 Years to 30 April 2017
Recent inflows have helped
support strong returns delivered by
0.9
many EM sovereigns and corporates,
0.7
but a lot of this capital has been
0.5
0.39
placed into more traditional, often
0.27
0.3
0.15
investment grade, EM issuers. They
0.09
0.1
may appear to offer a lower risk entry
Local Currency EM
Hard Currency EM
EM Corporates
Blended:
-0.1
point to the asset class but this in
Sovereigns
Sovereigns
Franklin Emerging Market
Debt Opportunities
turn concentrates investors’ risks and
-0.3
Strategy
diminishes the potential
-0.5
diversification benefit.
By applying a blended approach to the asset class, pension schemes have the ability to better diversify
Chart 1
EMD yields are relatively attractive
Yield to Maturity of Average Benchmark Indices (%)
10 Years to 30 April 2017
12.0
10.0
an EMD allocation in relation to a broader fixed income portfolio. Active allocation has the potential to
improve the outcome even further, exploiting the diverse nature of EMD. Added to that, an
unconstrained manager has the freedom to avoid large exposures to markets or sectors that dominate
indices, which are often more correlated to core fixed income, whilst still capturing the high yields on
offer. This is the approach adopted within Franklin Emerging Markets Debt Opportunities strategy.
Written by Nicholas
8.0
6.0
4.0
Local Currency EMD Sovereigns
Data source and basis: see below.
Apr-17
Dec-16
Apr-16
Hard Currency EMD Sovereigns
BofA Merrill Lynch UK Gilts
Aug-16
Apr-15
Dec-15
Aug-15
Apr-14
Dec-14
Aug-14
Apr-13
Dec-13
Aug-13
Dec-12
Apr-12
Aug-12
Apr-11
Dec-11
Aug-11
Apr-10
Dec-10
Aug-10
Apr-09
Dec-09
Aug-09
Apr-08
Dec-08
Aug-08
Apr-07
Dec-07
Aug-07
2.0
0.0
in diversifying traditional fixed income
assets vary from good to excellent as can
be seen in Chart 2 below.
By applying a blended approach to
the asset class, pension schemes have
the ability to better diversify an EMD
allocation in relation to a broader fixed
income portfolio. Active allocation has
the potential to improve the outcome
even further, exploiting the diverse
nature of EMD. Added to that, an
unconstrained manager has the freedom
to avoid large exposures to markets or
sectors that dominate indices, which
are often more correlated to core fixed
income, whilst still capturing the high
yields on offer. This is the approach
adopted within Franklin Emerging
Markets Debt Opportunities strategy.
Diversification and an active
Hardingham, portfolio
approach
manager, Franklin Templeton
EMD can be classified into Written by Nicholas Hardingham,
portfolio
manager, Franklin
Templeton Fixed Income Group
Fixed
Income
Group
three broad categories: local In association with (Franklin Templeton logo)
In association with
currency sovereign debt,
hard currency sovereign
debt and hard currency EM
corporate debt. Their qualities
Data source: Franklin Templeton Investments, Barclays POINT as at 30 April 2017. Local Currency EM Sovereigns are represented by the JP Morgan GBI-EM
Broad Diversified Index; Hard Currency Sovereigns are represented by the JP Morgan EMBI Global Diversified Index (Chart 2: GBP-hedged); EM Corporates are
represented by the BofA Merrill Lynch Emerging Market Corporate Plus Index (GBP-hedged); UK Gilts are represented by the Bank of America Merrill Lynch UK
Gilts Index. Due to differences in calculation methodologies between our internal risk database and official benchmark provider, these statistics may not match
the official statistics of the benchmark provider.
For Institutional Professional Investors only – not for distribution to retail clients. This material is intended to be of general interest only and should not be
construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not
Data inflows
source: Franklin
Templeton
Investments,
as at 30
2017.
Local
Currency and
EM Sovereigns
are represented by the JP Morgan
GBI-EM
Broad
Diversified
Index;
Sovereigns
areand analyses are rendered as at
constitute legal
or tax advice.
The views
expressed are those
of the Hard
investmentCurrency
manager and the
comments, opinions
Recent
have helped
support
strongBarclays
returnsPOINT
delivered
byApril
many
EM
sovereigns
corporates,
publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding
by the JP Morgan EMBI Global Diversified Index (Chart 2: GBP-hedged); EM Corporates are represented by the BofA Merrill Lynch
Emerging
Market
Corporate
Plus
Index
(GBP-hedged);
Gilts
are Investment Management Limited
any country,
region or market.
All investments
involve risks,
including
possible
loss of principal. Issued UK
by Franklin
Templeton
butrepresented
a lot of this
capital has been placed into more traditional, often investment grade, EM issuers. They
(FTIML),
registered
office:
Cannon
Place,
78
Cannon
Street,
London,
EC4N
6HL.
Tel
+44
(0)20
7073
8500.
Authorised
and regulated
represented by the Bank of America Merrill Lynch UK Gilts Index. Due to differences in calculation methodologies between our internal risk database
and official benchmark provider, these statistics may not match
the in the United Kingdom by
the Financial Conduct Authority. The value of investments and any income received from them can go down as well as up, and investors may not get
mayofficial
appear
to offer
lower riskprovider.
entry point to the asset class but this in turn concentrates investors’
back the full amount invested. Past performance is not an indicator or a guarantee of future performance. Indices are unmanaged, and one cannot invest
statistics
of thea benchmark
risks and diminishes the potential diversification benefit.
For Institutional Professional Investors only – not for distribution to retail clients. This material is intended to be of general interest only and should not be construed as individual investment advice or a
recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments,
opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country,
region or market. All investments involve risks, including possible loss of principal. Issued by Franklin Templeton Investment Management Limited (FTIML), registered office: Cannon Place, 78 Cannon Street, London,
Diversification
and an active approach
EC4N 6HL. Tel +44 (0)20 7073 8500. Authorised and regulated in the United Kingdom by the Financial Conduct Authority. The value of investments and any income received from them can go down as well as up,
and investors may not get back the full amount invested. Past performance is not an indicator or a guarantee of future performance. Indices are unmanaged, and one cannot invest directly in an index. Franklin
EMD
can beInvestments
classified have
intoexercised
three professional
broad categories:
local currency
sovereign
debt, hard
Templeton
care and diligence
in the collection
of information
in thiscurrency
document. However, data from third party sources may have been used in its preparation and Franklin
sovereign
debt
and hard
EM corporate
debt. Their
qualities
in diversifying
traditional
Templeton
Investments
hascurrency
not independently
verified, validated
or audited
such data.
Any research
and analysisfixed
contained in this document has been procured by Franklin Templeton Investments for its own purposes
and isassets
provided
to you
only
incidentally.
Franklin
Templeton
Investments
shallbelow.
not be liable to any user of this document or to any other person or entity for the inaccuracy of information or any errors or omissions in its
income
vary
from
good
to excellent
as can
be seen
in the table
contents, regardless of the cause of such inaccuracy, error or omission. © Copyright 2017. Franklin Templeton Investments. All rights reserved.
Chart 2
Low correlation to gilts
www.pensionsage.com
EMD
Correlations to UK Gilts: 5 Years to 30 April 2017
June 2017
25