Institutional investors are still turning to emerging markets debt for higher yields, despite downgrades on Russian sovereign and corporate bonds that forced some indexes to remove certain bonds.
At the end of February, Barclays PLC removed 11 Russian sovereign and more than 35 corporate bonds from its indexes after rating agencies downgraded the bonds to junk status.
Even so, the appetite for emerging markets debt is still evident.
The current low-interest-rate environment is “creating a demand for yield, which emerging markets debt should benefit from,” said Gorky Urquieta, co-head of emerging markets debt and a portfolio manager at Neuberger Berman Group LLC.
Mr. Uriqueta said the pipeline of emerging market debt searches seems “pretty healthy,” noting its blended strategy of sovereign, quasi-sovereign and corporate bonds in local and hard currencies is the most popular of the five it offers. Neuberger managed $4.1 billion in emerging markets debt assets as of Jan. 31.
Among those currently searching for emerging market debt managers are the $29.4 billion Connecticut Retirement Plans & Trust Funds, Hartford; $1.9 billion Chicago Transit Authority Employees Retirement Plan; and $1.1 billion Cambridge (Mass.) Retirement System.
Over the course of 2014, eVestment's emerging markets debt universe experienced $16.3 billion in total net outflows. Results varied among the various investor types. For example, pension funds poured a net $4.8 billion into emerging markets debt strategies while sovereign wealth funds withdrew a net $11 billion, according to eVestment LLC, Marietta, Ga.
Separately, The Institute of International Finance, Washington, reported February inflows of about $6 billion into emerging market debt, down from $14 billion in January but up from a $7.8 billion net outlflows in December.
Lucinda Downing, senior asset allocation analyst at Aon Hewitt in London, said emerging markets bond yields are attractive. The firm's consultant are encouraging clients with small allocations to increase them by investing in a blend of local and hard currency bonds.
The $14.4 billion New Mexico Public Employees Retirement System, Santa Fe, in October began a search for its first emerging markets debt managers as part of a new 5% allocation to fixed-income plus, which includes emerging markets debt.
The managers will be permitted to make a range of investments, including corporates, sovereigns, quasi-sovereigns and derivatives. “To the extent there are dislocations and corrections prior to the launch of a manger, is favorable for us. It could potentially make investments cheaper,” said Jonathan Grabel, chief investment officer.
The £2.8 billion ($4.3 billion) Leicestershire County Council Pension Fund, Leicester, England, has roughly £45 million invested with Ashmore Investment Management Ltd. in a pooled emerging markets debt fund. With the intended exposure at roughly £70 million, there is still significant capital to deploy, Colin Pratt, investment manager, said in an e-mail. Mr. Pratt said he sees the “recent market falls as an excellent entry opportunity.”
While concerns have been raised over weak emerging currency performance, Ms. Downing recommends clients “see through the recent weakness and take more of a medium- or longer-term view of starting to build exposure” to the asset class.
Ms. Downing said search activity picked up in the last year or two from a “low base.” In the last year, Aon Hewitt assisted with about 10 searches.