Emerging-market debt is one of the 2013’s key themes, but one of the most promising components of the asset class – local-currency corporate debt – has yet to appear on the radar screens of many investors.
That is the view from global fund manager PineBridge Investments, two managers who were in Australia in February for an investor roadshow.
PineBridge, formerly part of the AIG stable, was spun off in 2010 when Hong Kong entrepreneur Richard Li took 80 per cent of the company, with the balance taken by PineBridge management.
With around US$70 billion in funds under management, PineBridge has a focus on institutional investors. The firm is another global fund manager eyeing the Australian institutional market, although some of the discussions in Australia were with platform providers, as PineBridge seeks inroads into the self-managed super and retail markets.
Steve Cook, the firm’s Hong Kong-based senior corporate portfolio manager of emerging markets fixed income, told I & T News that he looks at emerging market debt as a number of separate asset classes.
“There are three asset classes and a fourth is coming, and coming fast,” said Cook.
“There is the typical sovereign hard-currency debt, and then in 2002 corporates started issuing hard-currency debt, and then sovereigns started issuing in local currency.
“The fourth asset class is local-currency corporate debt, and we are seeing strong, if not exponential, interest in this.”
This, says Cook, is a “natural progression,” even though the market is in a “nascent phase.”
Going local but avoiding the FX
He says that of all the emerging market asset classes, the best opportunities this year will come from local-currency sovereign debt, and local-currency high-yield corporates. PineBridge, says Cook, is a “bottoms-up investor” that derives “50 per cent of its alpha from the right credit.”
“Country is only 20 per cent of the story,” he says, with the balance of the focus coming from picking the right sector.
“This corporate debt is pretty much all rated, and 70 per cent of it is investment grade,” says Cook.
“You’ve got telcos, you’ve got utilities and all their revenues are in local currencies and they know they don’t want to take FX currency risk.”
Cook says the most attractive funds accessing the asset class are local currency funds with coupons in US dollars, which avoid the need for a local custodian and side-step local withholding tax issues.
Any upside, of course, was dependent on an appreciating local currency story and while investors had been disappointed with this over 2012, the outlook for 2013 was more positive.
“Everybody assumed that FX volatility was a one-way bet in 2012, but that proved not to be true,” said Cook.
“It’s true that if you have local-currency corporates then you have currency risk, and while we are not advocating major exposure, we think that an allocation of up to 5 per cent in a local-currency portfolio is worthwhile this year.”