The Absolute Insight Emerging Market Debt Fund has grown to over USD1 billion as at 31 March, with new flows driven by significant client interest in an absolute return approach to emerging market debt investment.
The manager of the fund and Insight’s head of emerging market fixed income, Colm McDonagh, believes current market conditions will increase the focus of clients on absolute return approaches to emerging market debt investing.
“Investing in emerging market debt (EMD) has long been a source of opportunity,” he says. “However, episodic market volatility, especially in recent times, has meant it has not always been a comfortable asset class to own. The most significant drivers of market return have been the timing of an allocation and the behaviour of emerging market currencies. A failure to manage these risks in 2013 would have resulted in significant underperformance.
“At Insight, our absolute return approach means that we are freed from the constraint of index following. In EMD, risk is not tracking error relative to the benchmark, it is losses stemming from unwanted exposure. An absolute return approach allows a manager to invest only in high conviction best ideas – both long and short – and to invest across the full universe of opportunities. This includes managing exposure to sovereign, credit and currency risk.”
McDonagh believes that asset price distortions caused by global central banks expanding their balance sheets may persist for some time. However, fund managers will increasingly need to evaluate fundamental differences in the creditworthiness of sovereigns and choices of policymakers within the EMD universe.
“The provision of central bank liquidity globally is no longer a dominant driver of returns from emerging debt assets classes, and arguably financial conditions in many emerging countries are tightening. That will make discriminating between the winners and losers in emerging markets important and this fits well with an absolute return approach,” he says.
Launched in February 2007, the fund has achieved a five year absolute return of 10.5 per cent with annualised volatility of just 5.3 per cent. The fund uses derivatives to allow hedging and/or outright short positions, and can invest a substantial proportion of the portfolio in cash when appropriate.
