Emerging Markets Bonds
According to Citywire, Wouter van Overfelt is now the number one out of over 4,000 managers in Europe for risk-adjusted returns. Wouter now explains his investment approach and how he sees current events affecting emerging market corporate bonds.
Thank you. I’d say there are three factors that have led to this.
First, this award validates our investment philosophy and approach. In my experience, the asset class is perceived to be riskier than it is in reality (see chart 1). Since people set prices, it means that investors are compensated for the perceived risk, not for actual risks. It’s this mismatch between perception and reality that makes the asset class an active investor’s paradise. Let me give you some concrete numbers: This is a very diversified asset class with over 50 counties and more than 600 issuers from different industries – from huge quasi sovereigns to smaller startups. The average rating is investment grade and, in addition, that rating doesn’t always fully reflect the credit quality of the underlying corporation as the credit rating is capped by the country in which the company is based. We observe this clearly when companies get downgraded/upgraded following the rating move on a sovereign. On top of this solid foundation, emerging markets are continuing to grow at a faster pace than developed markets.
Second, for the past few years the asset class has done well. This gives us a fertile hunting ground. As for the top-ranking, risk-adjusted returns we are delivering to our investors, I believe, those are down to our approach. We are contrarian investors taking advantage of market overreactions by buying into event-driven stories on the cheap. We also take advantage of value-driven inefficiencies caused by, for example, regulatory, rating or behavioral constraints. Our active and bottom-up approach enables us to unlock value, thus delivering a significant boost to portfolio yields.
Looking towards the future, I don’t see the environment changing. Sure, we will see choppy markets, but we welcome that, as it’s one of our return drivers. However, whatever the global growth environment is, emerging markets will continue, in the long run, to grow faster than developed markets meaning there will be plenty of opportunities for active emerging market fixed income managers like us.
Third, I haven’t done it alone. I work closely with my deputy portfolio manager Sergey Goncharov and we’re part of a first rate Emerging Market Bonds team, supported by the whole Fixed Income boutique at Vontobel Asset Management.
Viewing emerging market corporates with these factors in mind makes for a compelling investment case. Our performance backs this up, therefore, in my view, this is simply an asset class that investors should not ignore.
Quantitative easing (QE) in developed markets has had a benign knock-on effect on emerging market corporate bonds. As QE has pushed yields down, yield-starved investors are naturally looking outside of their traditional hunting grounds. It’s a win-win situation for emerging markets fixed income; issuers are finding new investors as money is flowing from low growth, excess savings regions to high growth, low savings markets.
As investors look at new markets, they are beginning to see that there are solid credit quality issuers in emerging markets, which increases their confidence in further allocating to the asset class. For example, there are corporate bonds available in emerging markets that would have a strong investment-grade rating if the company were domiciled in a developed market country, but because the rating of their sovereign is lower, the corporate’s rating is capped. In other words, we are finding high-quality bonds with junk bond ratings and corresponding yields.
I disagree, this is not a clearly dangerous time, it’s clearly an opportune time. News flow noise is a constant in today’s market and as long as the current US administration remains in office, trade-war rhetoric will be present. It’s more a question of how high or low the volume of that rhetoric is. For investors, this means bouts of volatility. As active investors, we find opportunities in volatility. Therefore, I’m not too worried. We have a genuinely diversified asset class with over 50 countries from across the world and a decent yield buffer. So, from my perspective, “tariff tweeting” is a poor excuse to be out of the market.
Best is to contact one of my colleagues, your local Vontobel representative. They will be able to explain our approach and track record. My experience is that once investors learn about our approach, they will see the benefits in allocating to emerging market corporate bonds.