Away from the US corporate and government bond market, this year’s Fixed Income Leaders Summit, emphasised the value of investing in both emerging markets bonds and explained how interest in the social aspects of mortgage-backed securities are attracting investors in the US and beyond.
“I’m going to share some numbers that are going to make some people pretty unhappy if they’re trying to sell EM,” warned Rick Harrell, associate portfolio manager at Aperture Investors.
Considering why EM has struggled to attract flows recently, Harrell explained that, at the moment, US high yield bonds are performing far better than their EM equivalents. Local emerging markets on the BGI EM index are seeing returns of -8%, he continued, along with significant volatility.
However, it was not all bad, Harrell went on to say; he noted that volatility in emerging markets offers a lot of opportunity, and advised that shorter duration EM sovereigns and corporates are the “sweet spot” for investors. The most attractive area lies between corporate and sovereign bonds, he added, providing a promising middle ground. Emerging markets are a spectrum, he continued, recounting how a number of new countries have entered traditional benchmarks over recent years.
The frontier market subsector is seeing particular growth, he added, citing countries in sub-Saharan Africa such as Zambia, Nigeria and Egypt, Pakistan, Sri Lanka and Turkey as notable additions.
It is important to consider the nuances of emerging and frontier markets, he added, with divergence across the category requiring careful monitoring.
On the issue of data, Harrell assured that “the availability of data is not a challenge; it’s how you aggregate and make sense of it”.
Aperture Investors are using alternative and third-party data sources to gather relevant information, he reported, describing a web scraping tool that gathers news reports to get a picture of sentiment and potential risks in emerging markets.
On a later panel, Sam Valverde, principal executive vice president at Ginnie Mae, discussed the increased levels of interest in mortgage backed securities (MBSs) from Asian institutional funding streams. These form the second largest part of the firm’s investor base, he explained, the first being US domestic banks.
“These are the cores, but we’re always looking to new areas,” Valverde added.
He went on to note significant interest in the social and green aspects of Ginnie Mae investments, which the firm has begun to emphasise when marketing its products. That being said, he acknowledged the importance of explaining ESG credentials in a disclosable, verifiable, repeatable and transparent way.
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