11/17/13

Zenith Portfolio Strategies- Global Bond Insight

We discussed in a prior blog Emerging Market Debt and focused in these areas.

  • Asset class risk and reward characteristics
  • ETF comparison(passive)
  • Attributes we look for in a fund

This piece will compare a fund within the Global Bond space to a fund in Emerging Markets.

The opportunity set that spans both areas include:

            Emerging Market Sovereign Debt-The debt issued by the Governments of EM countries such as Indonesia and Turkey.  These bonds can be denominated in dollars or the countries local currency.

            Emerging Market Corporate Debt- These are the bonds of corporations within these countries and also can be denominated in dollars or the local currency. This is an expanding bond market.

            Developed Sovereign or Corporate Debt-These bonds are in familiar countries that are fully developed such as Sweden, Germany and Japan.

            Currencies-As mentioned, these bonds can be dollar or non-dollar denominated and this is a major opportunity set as the currency market may be the least managed segment of the capital markets and may be able to provide added value in a global bond portfolio.

Emerging Market manager

  • They hold a flexible mandate to invest in dollar or non-dollar debt.
  • Their holdings include developed Asia-ex Japan, Africa, Asia Emerging and Latin America-It is difficult to be a pure Emerging Market bond manager without the inclusion of developed ex-US and Europe.
  • They hold a blend of sovereign bond, Quasi-Sovereign and Corporate debt.
  • Top countries-Brazil 14%, Indonesia 13%, Nigeria 13%, Russia 10%
  • Currency positions range from US $ to the Brazilian Real.
  • Currency decision is made at the bond selection level and not made as an outright hedge.
  • Manages duration.

 

Global Bond Manager

  • They hold a flexible mandate to invest in dollar or non-dollar debt.
  • Their holdings include developed Asia-ex Japan, Africa, Asia Emerging Latin America and periphery Europe -It is difficult to be a pure Emerging Market bond manager without the inclusion of developed ex-US and Europe.
  • They hold a blend of sovereign bond, Quasi-Sovereign and Corporate debt.
  • Top countries-South Korea 16%, US 14%, Ireland 14%, Hungary 6%
  • Currencies range from US $ to Malaysian Ringit and the Polish Zloty.
  • Currency decision is made at the bond selection level but they are able to hedge out into another currency.
  • Manages duration.

Our observations;

  • They possess a similar mandate and profile.
  • This leads us to believe that the opportunity set globally is seen similarly by both managers.
  • Performance and risk adjusted returns may converge.
  • They differentiate by country, credit and duration management.
  • The differentiating factors that might lead to a placement in one over the other include;

 

a)      risk control at the country and security selection level

b)      risk control at the duration and credit level

c)      risk control at the position liquidity level-Nigeria’s debt market is not the US Treasury’s

 

            The choice becomes very qualitative in the global bond space for the advisor. At Zenith we need to be comfortable with the managers ability in an area of the capital markets that requires a reasonable amount of abstract thinking as monetary policy is a fluid and many times an elusive animal.

            We suggest you ask a lot of questions and here are just a few.

  • Where does your team see value prospectively in the global bond market?
  • How liquid are the markets you invest and how liquid are the instruments you utilize?
  • What is the likely range of interest rate exposure in their portfolio?
  • What is the likely range of overall credit quality in their portfolio?
  • How much can one country or specific debt issue take up in the portfolio?
  • How do they balance opportunistic ideas with prudent risk control.

            Once your investment committee has a handle on the complexities of the global debt market and is comfortable with a manager and their process, we suggest that a piece of your client’s portfolio can be allocated to this asset class.

Sincerely,

Tom Koehler, CIO

 

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