Local currency strategies began a “once-in-a-lifetime” phase as they became “discovered” in the U.S. about 18 months ago, said Alexander Kozhemiakin, managing director and head of emerging markets debt at Standish Mellon, Boston.
“It's spreading like wildfire right now,” he said. “We're invited to finals once every other week now. ... We're going through a who's who of corporate plans in the U.S.” He declined to identify the plans.
Experts say Pictet has been a perennial contender for new business in emerging markets local currency bonds in the U.S. But globally, its emerging markets local currency assets fell to $8.8 billion in 2011 from $9.1 billion, a 3.3% drop.
Simon Lue-Fong, director and head of emerging markets fixed income at Pictet, said “rotations of our client base” did cause a loss in local currency assets. Wholesale clients, after having gotten into the asset class early, took profits in 2011. Mr. Lue-Fong said that trend would be reversed by inflows from pension funds. He described the U.S. market as a “big, sleepy giant” that is being roused by emerging markets local currency debt.
MassPRIM reduced its global equity allocation by six percentage points to 43% in August; some of that was used to fund a 2% allocation to emerging markets local currency debt. That complements a $700 million allocation to hard currency in place since 2004.
“We think we can get a better risk-adjusted return and lower overall portfolio risk” by moving from equities to local currency emerging markets bonds, said Stanley P. Mavromates, MassPRIM's chief investment officer.
MassPRIM is expected to hire Pictet to run $400 million and Investec and Stone Harbor to run $250 million each at a Feb. 7 meeting.
Not all of the moves are being funded by equities. Indeed, a major driver comes from the breakdown of the core-plus approach to structuring a bond portfolio. Whereas higher-risk, higher-returning asset classes such as high yield and emerging markets debt were once part of core-plus, they're now getting their own time in the spotlight (Pensions & Investments, Oct. 3).
“Five years ago when I talked to U.S. investors about emerging markets local currency bonds, very few people were willing to listen,” Standish Mellon's Mr. Kozhemiakin said. “Up until recently, U.S. investors have been wedded to the idea of core-plus as an investment paradigm” and had home and equity biases.
Why not just invest in emerging markets equity? “The answer is that, at the very least, you get better risk-adjusted returns, if not better risk-adjusted returns,” by investing in local currency debt instead of emerging markets equities, Mr. Kozhemiakin said.
But not all investors go for local currency mandates. “We like the diversification between local currency and external (or hard-currency) debt,” said Moustapha Abounadi, director, investment research in fixed income at Rogerscasey Inc., Darien, Conn. In 2011, it was easily to see how the two “can diverge quite substantially ... (like) in the third quarter, when the sell-off in emerging markets currencies was quite massive.”
Brian Collett, CIO of the Missouri Local pension fund, said during the manager search process, Stone Harbor executives convinced him they could add value through allocating among hard currency sovereign, local currency sovereign and local currency corporate debt.