Foundation & Endowment Money Management - Nonprofits Turn to Emerging Market Debt

Nonprofits Turn to Emerging Market Debt

Nonprofit investors have become attracted to the solid risk-adjusted returns and diversification benefits of emerging market debt. FEMM Contributing Reporter Joseph D'Allegro recently spoke with John Peta, portfolio manager at Acadian Asset Management; William Ledward, portfolio manager with Franklin Templeton Fixed Income; Adrian Cronje, founding partner and cio of Balentine LLC; Cristina Panait, senior emerging market debt strategist at Payden and Rygel; and Yanni Partners' Chief Strategist David Hammerstein.

FEMM: Why should a nonprofit invest in emerging market bonds?

John Peta Peta: Historically the return has been among the highest of any asset class. We believe these characteristics will continue due to the longer-term structural changes that are occurring in many of these countries. External debt should benefit as the credit quality of the asset class continues to improve and local currency debt should benefit from stronger central bank credibility and stronger exchange rates.

Ledward: Today we see two particular reasons why investors should consider a strategic allocation to EMD. First, a shifting paradigm and positive secular growth trends in emerging economies relative to the G7 will benefit emerging market country fundamentals and correspondingly EM debt profiles and risk premiums. Second, the rapid evolution and expansion of the asset class over the past five years enables investors to approach allocations to the asset class in a more diversified manner.

Adrian Cronje Cronje: The arguments for emerging market bonds include their attractive yield levels for income-oriented portfolios, especially relative to the very low current yields on developed country bonds. From today's starting point, however, a degree of caution is warranted when initiating exposure to this asset class. After their spectacular double-digit annualized performance over the last fifteen years, which has placed them amongst the best performing asset classes, their yield spreads over U.S. Treasury bonds have narrowed to less than 4% today.

Panait: Emerging market bonds offer diversification benefits and the potential for higher returns in a fixed-income portfolio for investors with a long investment time horizon. Traditionally, emerging market bonds have been compared to core debt markets in the U.S., as well as equities. Emerging market sovereign debt has low correlation with other fixed income asset ...

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Nonprofits Turn to Emerging Market Debt

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