June 2021 / INVESTMENT INSIGHTS
Seeking alpha in EM local currency debt
A closer look at our investment approach
- Two asset classes in one. When thinking about how best to allocate the client’s risk budget, we believe managers should approach bond and currency selection as separate decisions, with different primary objectives.
- Two different decision processes. In bond selection we tend to take larger positions, and more directional exposures. In currency selection, we tend to take more diversified positions, with emphasis on both absolute and relative value positioning.
- Getting currency risk right. Historically, coupon has been the highest-return, lowest-volatility component of the index return, while currency has accounted for the bulk of the volatility. We believe long-term outperformance in this asset class is not possible without getting risk right in currency.
- Focus on idiosyncratic alpha. We build portfolios on bottom-up bond and currency selection. Active exposures beyond mainstream emerging markets (EMs) include selected frontier opportunities and non-benchmark assets. We seek to manage systemic exposure to external risks, such as commodity price fluctuations or market shocks.
- Improving outcomes with relative value pairs. Especially in currency management, we utilize relative value pairings to exploit correlations between assets and reduce portfolio volatility; to earn carry from high- versus low-yielding currencies; and generally to express fundamental views in a way that makes efficient use of the client’s risk budget.
- Consistent track record. Over time, our approach has translated into consistent alpha generation, notably in the currency portion of our portfolio. Our attractive long-term information ratio and our up/down capture in different.
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