EM short duration: Accessing attractive yields with limited volatility
EM short duration: Accessing attractive yields with limited volatility
Alejandro Arevalo, Fund Manager, Emerging Market Debt, and Reza Karim, Assistant Fund Manager, discuss the benefits of taking a short duration approach to investing in emerging market debt. Alejandro and Reza also look back at the challenges and opportunities that have arisen over the past three years since the launch of the Jupiter Global Emerging Markets Short Duration Bond fund, and explain how they’ve managed to participate in market rallies, while effectively managing drawdowns.
Investors cannot ignore the wealth of investment opportunities offered by the emerging market debt (EMD) asset class. In a world of ultra-low or negative rates, investors have to look outside of developed markets in the ‘hunt for yield’. There is still around $16tn worth of negative yielding debt globally, and just 9% of global fixed income markets offer investors yields of over 3%1 – with unprecedented levels of coordinated monetary stimulus on a global scale, this is unlikely to change dramatically any time soon.
The EMD asset class not only offers huge diversification, encompassing around 100 countries at varying stages of their economic cycles, but it also provides access to high economic growth, with around 70% of global growth coming from emerging markets. With a growing investor base, EMD has been one of the fastest-growing fixed income sectors over the past decade, expanding into a widely diversified $23tn market, which is the same size as around 50% of all developed market government and corporate debt combined.
While the opportunities offered by EMD are evident, risk appetite towards emerging markets does still tend to swing dramatically, from periods of indiscriminate buying when sentiment is strong, irrespective of credit fundamentals, to selling ‘at any price’ when conditions are looking tough. But a more challenging macro backdrop doesn’t mean that investors should shy away from the asset class. Instead, an EM short duration bond approach can provide more cautious investors with exposure to the yield premium offered by EMD, while also limiting the impact of macro volatility.
The EMD asset class not only offers huge diversification, encompassing around 100 countries at varying stages of their economic cycles, but it also provides access to high economic growth, with around 70% of global growth coming from emerging markets. With a growing investor base, EMD has been one of the fastest-growing fixed income sectors over the past decade, expanding into a widely diversified $23tn market, which is the same size as around 50% of all developed market government and corporate debt combined.
While the opportunities offered by EMD are evident, risk appetite towards emerging markets does still tend to swing dramatically, from periods of indiscriminate buying when sentiment is strong, irrespective of credit fundamentals, to selling ‘at any price’ when conditions are looking tough. But a more challenging macro backdrop doesn’t mean that investors should shy away from the asset class. Instead, an EM short duration bond approach can provide more cautious investors with exposure to the yield premium offered by EMD, while also limiting the impact of macro volatility.
The benefits of short duration
Carefully selected short duration emerging market bonds offer the benefit of attractive yields compared to developed market counterparts, but with lower volatility than broad duration bonds. This is because short duration bonds benefit from the ‘pull-to-par’ effect: as a bond gets closer to its maturity date, its