Emerging markets debt, pummeled during last year's “taper tantrum,” is now tempting institutional investors back into the fold.
Compelling valuations are the driving factor, but the move is also a long-term strategic bet that certain emerging economies likely will outperform developed markets, consultants said.
“Emerging markets debt is one of the most popular asset classes right now,” said Phil Edwards, principal and European director of strategic research at Mercer in Bristol, England. “Investors want access to the growth dynamics of (emerging) countries, the long-term appreciation of their currencies and the lower levels of debt relative to developed economies.”
But institutions remain wary of emerging markets volatility. On July 17, after the downing of Malaysia Airlines Flight MH17 over Ukraine combined with the U.S. expansion of sanctions on Russia roiled markets, Russian 10-year sovereign bond yields jumped by 33 basis points to close at 9.01%. (Bond prices fall when yields rise.)
Among those increasing active emerging markets debt exposure are the world's two largest pension funds.
Japan's ¥126.6 trillion ($1.25 trillion) Government Pension Investment Fund, Tokyo, is searching for EMD managers to run an undisclosed sum of assets.
Norway's 5.1 trillion Norwegian kroner ($823 billion) Government Pension Fund Global, Oslo, recently hired Templeton Asset Management and Pacific Investment Management Co. to run its first dedicated EMD strategy. Both portfolios amounted to less than 0.1% of total assets, and officials likely will add to that position, according to the fund's 2014-2016 investment strategy report published in June.
Others that have increased allocations to active emerging markets debt this year include: Ohio Public Employees' Retirement System, Columbus, which oversees about $75 billion in defined benefit assets; the $16.6 billion Illinois State Universities Retirement System, Champaign; the £2.8 billion ($4.8 billion) Leicestershire County Council Pension Fund, Leicestershire, England; and the $2.7 billion Louisiana Sheriffs' Pension & Relief Fund and $1.8 billion Louisiana Municipal Police Employees' Retirement System, both in Baton Rouge.