Yield opportunities
Historically, emerging market local bonds have provided attractive relative yields and access to strong developing market sovereign balance sheets.
Fixed Income
Introducing the Invesco Emerging Markets Local Debt Fund
Target income generation and long-term growth, while gaining exposure to the diversification benefits and relative yield enhancement offered by emerging markets.
At a glance
Balancing risk and return
We harness manager skill, attempting to outperform the market while simultaneously minimising the downside risk associated with this asset class.
What makes this fund different?
No market or region can be viewed in isolation. Issues like trade and international relations must be taken into consideration. That’s why we combine top-down macro analysis with bottom-up country research.
We develop our macroeconomic outlook and incorporate the robust linkages between developed and emerging market economies to better inform our global perspective.
We then allocate risk based on this macroeconomic outlook over a 9-18 month investment horizon across interest rates and foreign currencies.
Senior Portfolio Manager Hemant Baijal describes this approach in detail in the videos below.
The investment concerns the acquisition of units in an actively managed fund and not in a given underlying asset.
We believe that, given the relative volatility of the asset class, an asymmetric approach to risk management and budgeting can provide investors with an overall smoother investment experience over time.
We look to reduce volatility throughout the emerging market cycle. As such, on an ex-ante basis, we do not allocate more risk (volatility) than that of the reference benchmark while deploying the following loss-mitigation strategy:
- Maintaining a low tracking error and high volatility in risk-on periods.
- Maintaining a high tracking error and low volatility in risk-off periods.
As fiduciaries, we fully incorporate ESG factors into the investment process, because we believe it is an important risk management tool in emerging markets.
To better understand ESG factors, we employ a rigorous qualitative and quantitative framework and carry out research trips and engage directly with local experts.
These include policymakers, senior government officials, central bank representatives, state administrators, politicians, non-governmental organisations, and private sector representatives.
Position sizing is adjusted taking ESG factors into consideration, assuming financial metrics and valuations support the stated investment thesis.
ESG risks are also considered and actively managed, and the fund is classified as Article 8 under the Sustainable Finance Disclosure Regulation (SFDR).
Any investment decision should take into account all the characteristics of the fund as described in the legal documents. For sustainability related aspects, please refer to https://www.invescomanagementcompany.lu.
Investment risks
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For complete information on risks, refer to the legal documents. The value of investments and any income will fluctuate. This may partly be the result of exchange rate fluctuations. Investors may not get back the full amount invested. Debt instruments are exposed to credit risk which is the ability of the borrower to repay the interest and capital on the redemption date. Changes in interest rates will result in fluctuations in the value of the fund. The fund uses derivatives (complex instruments) for investment purposes. This may result in the fund being significantly leveraged and could cause large fluctuations in the value of the fund. As a large portion of the fund is invested in less developed countries, you should be prepared to accept significantly large fluctuations in the value of the fund. The fund may invest in certain securities listed in China. This can involve significant regulatory constraints that may affect the liquidity and/or the investment performance of the fund. Investments in debt instruments which are of lower credit quality may result in large fluctuations in the value of the fund. The fund may invest in distressed securities which carry a significant risk of capital loss.
A closer look at our approach
Investment process and philosophy
Portfolio Manager Hemant Baijal introduces the fund’s investment process and philosophy. And all in under three minutes.
Transcript
I am going to talk about our emerging market local debt strategy which is a single sector offering designed to outperform the JPMorgan GBI-EM index.
It is designed to outperform the index with risk commensurate with that of the index. At our core, we are a global macro discretional strategy.
We believe strongly that it is essential to understand global factors to invest successfully in emerging markets.
Our strategy is therefore integrated across developed markets and emerging markets.
To understand and manage beta in emerging markets, it is essential to understand global economic conditions, including what is happening in developed markets.
To generate alpha in our portfolios, we believe it is critical to understand the nuances of each of the emerging market countries that we invest in.
With that view, our economists develop a comprehensive look at each of the major countries we are interested in on a quarterly basis.
This view is then aggregated into a global view to determine the path of growth and the clarity of that view over the next nine to eighteen months and the implication that has for markets.
We believe that non-US growth and its relationship to US growth and the impact that has on US financial conditions are the two primary drivers of beta in emerging markets.
Once the basic economic case is developed with the work of the economists, the two portfolio managers, myself and Wim Vandenhoeck, we are responsible for having a discussion around the risk to the base case and bring valuations into the picture to determine the amount of risk that we are going to allocate in the portfolio at that point in time.
We normally do not ever allocate a risk that is higher than the long-term volatility of the underlying benchmark.
Investment strategy
Want to know more? In this second short clip, Hemant describes the fund’s investment strategy.
Transcript
Our top-down discretionary macro process is based off the work our economists do on a quarterly basis.
On a quarterly basis they take an in-depth look at each of the major countries that we are interested in. That includes both developed markets and emerging market countries.
We strongly believe that it is essential to understand what is happening in developed markets to understand how to allocate risk within emerging markets.
But it is essential to understand the nuances of each emerging market to determine how we are going to be positioned in those countries.
The economists look at each of the countries and aggregate that view into a global view.
That global view is used to determine the path of non-US growth relative to US growth and the impact on global financial conditions, particularly US financial conditions, over the next 9-18 months.
If we believe we have clarity on growth and the outlook, we would allocate the most amount of risk we would in the portfolio at any point in time.
That risk that we allocate generally should not exceed the long-term risk of the underlying benchmark.
If we believe that there is no clarity and that growth prospects are very uncertain, particularly non-US growth prospects, then we would allocate the least amount of risk in the portfolio at that point in time.
Having determined the top-level risk allocation, the portfolio managers’ job is to bring in valuations into the picture to then determine how that risk will be allocated across interest rates and foreign exchange.
The interest rate risk is then further allocated by country, as is the foreign exchange risk.
Having determined the country-level allocation, we then spend an enormous effort to find the best expression of that view in the marketplace.
This involves curve positioning as well as instrument selection in interest rates and the use of derivatives in foreign exchange.
This is fairly important for our portfolio, again, as we generally do not take more risk than the underlying benchmark we do try to find all ways of adding alpha into the portfolio.
Portfolio construction therefore becomes a fairly key element of how we approach our portfolio.
Meet the managers
Hemant Baijal and Wim Vandenhoeck are responsible for managing the fund. They are members of our Global Debt Team, based in New York.
The team’s eleven investment professionals come from a diverse range of international and investment backgrounds, with fluency in over 20 languages.
Fund facts
The Global Debt Team has been managing portfolios since the mid-1990s. Today, the team manages USD 6 billion across its global platform, including USD 2.5 billion in emerging market local currency funds.
Asymmetric risk budgeting and management
80+ countries covered in depth
Through ESG integration, with over 300 meetings each year
How can we help?
Let us know using this form and one of our specialist team will quickly get back to you.
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FAQs
Broad fixed income markets have declined in 2022. In particular, emerging market (EM) debt has suffered one of its largest selloffs since the 1990s, even though bottom-up fundamentals are relatively sound. At this point, we believe the value created in EM has been significant, potentially generating an attractive entry point for investors with a long-term perspective.
Emerging market debt is fixed income debt that is issued by countries with developing economies as well as by corporations within those nations. It includes local and hard currency.
Local currency bonds are debt securities issued by sovereigns or corporates in their local currency. The return drivers come from local yields, capital appreciation (changes in yield curve or credit standing) and FX. Since countries can be at different stages in the economic cycle, interest rates and returns can be uncorrelated to those in developed markets. Given continued growth, local currency bonds tend to be more liquid than hard currency bonds and the list of markets with investible/liquid local bond markets that are accessible to foreign investors, continues to increase.
Hard currency bonds are debt securities issued by sovereigns or corporates in other currencies – usually in a developed market currency, such as the USD or euro. Many low income, weaker developing countries, “frontier markets” are incented to issue in hard currency to attract foreign investment (perceived as less risky if issued as a USD or euro asset) versus issuing in their local currency.
You can invest in emerging market debt by either investing in actively managed mutual funds or exchange traded funds (ETFs). Invesco offers a broad range of actively managed funds and ETFs.
Important Information
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Data as at 29/02/2024, unless otherwise stated. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change. For information on our funds and the relevant risks, refer to the Key Information Documents/Key Investor Information Documents (local languages) and Prospectus (English, French, German, Spanish, Italian), and the financial reports, available from www.invesco.eu. A summary of investor rights is available in English from www.invescomanagementcompany.lu. The management company may terminate marketing arrangements. Not all share classes of this fund may be available for public sale in all jurisdictions and not all share classes are the same nor do they necessarily suit every investor.
EMEA3320940/2024
