As institutional investors further diversify their fixed income portfolios, demand for investment products with exposure to global emerging markets debt is now higher than ever before. Pension funds and other institutional investors are not only investing in dollar-denominated emerging market fixed income but they are also getting more and more comfortable with gaining exposure to local currency debt and other instruments.
The Ashmore Emerging Markets Liquid Investment Portfolio (EMLIP) fund mainly invests in dollar-denominated sovereign bonds but can also have exposure of up to 25 per cent of total assets in local currency denominated debt, and a similar proportion in what the Ashmore’s team referred to as ‘special situations’ investments.
“Special situations for us is a combination of distressed debt and private equity,” says Jerome Booth, head of research at Ashmore Investment Management. He explains that altogether the firm invests some $7bn (€5.2bn) in this type of investments. Mr Booth explains that by including both local currency debt and special situations, the fund’s portfolio is much more diversified than other products investing in emerging market fixed income.
“We have long experience in both special situations and local currency and these two areas supplement our dollar debt capacity,” he says.
Launched back in 1992, EMLIP currently has $4.2bn under management. According to data from Standard & Poor’s, the fund has been top performer over three years in the fixed income global emerging market category.
Mr Booth explains that the fund’s investment philosophy hasn’t changed since inception: “It is very much a top-down process with a huge focus on liquidity,” says Mr Booth. He explains the investment team has weekly meetings to look at different scenarios in the global economy and in emerging markets, focusing on how those can affect the risk profile of the fund. “We have to make sure that whatever happens we are reasonably comfortable. This is not an aggressive fund at all, it has always been very focused on risk management, something which has ended successfully.” Once the team agrees on how they want to change the overall risk profile of the fund, they look at making changes to country allocation. “This decision is dominated by liquidity situations, not just about liquidity today but how this might changes suddenly if something happens.” Mr Booth says that a lot of their research focuses on the behaviour of policy makers, but also at how local financial institutions and investors behave in particular situations.
He explains that the fund’s growth in assets since launch hasn’t had an impact on the way the fund is managed. “It’s a huge market so we don’t have any capacity problems,” he says. “Growth in assets has benefited us in terms of being able to get very good access to information.” Mr Booth explains the large size of the total investments that Ashmore has in these regions means their relationships with their counterparties are particularly strong. “We have a lot of bargaining power because we are everybody’s best client and the investment banks want to give best service.”
He says that when investing in distressed debt they don’t “go and sue people. We take a majority position, we align our interests and we try to be constructive to solve the problem because we have a very long-term view on where our business is going. It is very
obvious to a government that we are a good partner.”
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