It's a very straightforward question, but brings a complicated answer. Emerging debt markets have broken down over the last decade from a very homogenous group into a very fragmented group of assets. The market used to be nearly all dollar-denominated bonds, and you had high U.S. interest rates and high spreads, and there was an opportunity to take part in a re-rating of an asset class. But today, a lot of these stories have played out as those countries have matured and seen significant credit improvement, like Poland, Brazil and Mexico. Now, other types of debt are also attracting the interest of international investors, like local debt and EM corporate debt.
Over the last five years or so, there has been a lot of support in the dollar-denominated space from U.S. Treasuries, and in 2014, EM dollar-bonds did very well because of U.S. Treasuries. By contrast, the last few years have been very challenging for local debt, with losses coming from local currency weakness and a strengthening dollar. So the “emerging market” aspect of emerging market debt (EMD) has not done very well.
With respect to the standard EMD benchmarks, and the mix of countries in those benchmarks, we believe that the opportunities in the index are modest. Our team expects returns of about 4% for the broad asset class, taking a blend of these different EMD categories. Not as good as some of the best years but certainly not as bad as some of the worst. But unconstrained investors can pick from a very heterogeneous group of countries, which gives a lot of space for active managers to potentially deliver superior portfolios, compared to what the benchmarks have to offer.