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Irish Pensions Magazine Autumn 2016
6
Advertorial
Expert Opinion
P
ension investors are well aware that the pool of
fixed income assets yielding decent income levels
has been greatly diminished and they have been
casting around for alternative options. And yet,
for one reason or another, many investors seem
unconvinced of the merits of an asset class that has
developed rapidly in recent years: Emerging Markets
Debt (EMD). Investor attitude towards EMD still
appears focused on perceptions and assumptions
that are too often rooted in the past.
However, a quick scan of developments serves to
highlight the advances made in EMD:
• EMD has become a large, diverse and relatively
liquid universe.
• The market is now about US$4 trillion
1
, with a
mix of local and hard currency issues and a well-
developed corporate market.
• The increasing breadth and depth of the market
has enhanced liquidity.
At the same time, one can understand the reticence
to fully embrace EMD. Inefficiencies and volatility
remain high and, while those are market factors that
active investors traditionally look to exploit, they
may actually be too high for active managers to
consistently deliver excess returns. We believe that
intelligent indexed approaches to EMD that aim to
capture this complex market exposure in a consistent
and cost effective manner deserve consideration. In
fact, such strategies have been gaining market share.
Understanding Why Active Managers Have
Struggled
Sowhy isn’t the activemanagement approachworking
in EMD? After all, the perceived inefficiencies and the
diverse nature of the market, together with the belief
that detailed fundamental knowledge provides an
advantage should enable active managers to identify
and extract value. But looking at the Morningstar
database, we can see that the 30 largest active funds
tracking two flagship indices (JPM GBI-EM Global
Diversified Index for local currency and JPM EMBI
Global Diversified for hard currency) have significantly
underperformed their respective benchmarks (Figure
1).
Figure 1: Historical Performance of Active
Managers
Percent of Underperforming Active Managers
1 Year
(%)
3 Years
(%)
5 Years
(%)
Hard Currency Universe
87 97
97
Local Currency Universe
90 93
93
Source: Morningstar as at 30 June 2016. The universe of active
managers is generated by selecting the largest 30 live funds with
the primary prospectus benchmark of JPM EMBI Global Diversified
Index for the hard currency analysis and JPM GBI-EM Global
Diversified Index for the local currency analysis.
Past performance is not a guarantee of future results.
Emerging Market Debt: Passive Management on the Rise
by Niall O’Leary