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Talking factsheet: Emerging market debt strategy
Alejandro Arevalo and Reza Karim give an overview of Jupiter’s emerging market debt strategy, how the investment process works, and how the team seek to generate alpha.
Emerging market debt (EMD) continues to be one of the fastest-growing fixed income sectors, having expanded into a widely diversified US$23 trillion universe, as governments and companies in some of the world’s most dynamic economies have tapped into global markets.
Jupiter’s EMD investment team firmly believe that EMD deserves a permanent place in investors’ portfolios. The asset class offers diversification through the cycle; a high yield relative to the rest of fixed income, where around 90% of the universe yields less than 3%; and volatility about half that of the S&P 500 Index1. Nevertheless, while the asset class’s opportunities are evident, it’s still significantly underrepresented in global portfolios and indices.
When investing in such a diverse asset class, the team believe that being selective, active and risk-aware is crucial. They understand the unique opportunities and challenges that each part of the investment universe represents, helping investors to navigate this complex landscape.
The investment team’s flexible mandate means they can invest across the global emerging markets fixed income universe in sovereign and corporate bonds, denominated in both hard and local currencies.
Jupiter EMD Platform – Expertise across markets
The team seek to identify investments that attractively compensate for global and EM country-specific risks and corporate credit risk, using a combination of top-down and bottom-up fundamental research techniques and proprietary valuation tools. In other words, they conduct ‘deep dive’ research to answer the question: “Are we getting paid for the risk we take?”
The team’s investment process also incorporates a variety of risk mitigation strategies to manage drawdowns and to construct an ‘all seasons’ portfolio.
1 Source: Bloomberg, to 30.09.2021. Hard currency EMD.
Jupiter Global Emerging Markets Short Duration Bond
The Jupiter Global Emerging Markets Short Duration Bond fund is a ‘go anywhere’ short duration bond strategy, designed for any point in the cycle. It is a great way for investors to gain exposure to the yield premium offered by EMD, while also limiting volatility and drawdowns.
Flexibility: The fund can invest in both sovereign and corporate bonds, giving it the flexibility to look for value across the whole EMD spectrum.
Limited volatility: The team’s risk aware approach and focus on limiting downside has helped to limit what could have been much larger drawdowns, and it has put the fund in a strong position relative to many of its peers.
Limited duration and credit risk: The fund’s average effective duration will not exceed three years, and we never use derivatives to manage duration – the fund’s duration is simply the average duration across all bonds held in the portfolio. In terms of credit risk, while the fund can invest in lower-rated bonds, its average credit rating will not fall below BB2.
Use of CDSs and local currency hedging: The team have the ability to add protection effectively through credit default swaps (CDSs) and hedges against local EM FX.
Jupiter Global Emerging Markets Corporate Bond
Emerging market corporate bonds are an often-underappreciated part of the emerging market debt landscape for investors used to focusing on sovereign debt. In fact:
- Corporates have had better risk-adjusted returns than sovereigns over the last decade
- The corporate market is around twice the size of the sovereign market
- The corporate index has a higher investment grade allocation than sovereign
- EM credits pay a premium over developed market, which in many cases is not justified
- The corporate market is incredibly diversified across sectors and geographies
- EM credits almost always offer a higher spread than their sovereign equivalent for the same rating
The Jupiter Global Emerging Markets Corporate Bond fund provides focused exposure to a highly diversified EM credit market, a key growth area over the next decade.
Focusing on identifying strong bottom-up stories: The team identify companies with strong fundamentals that are trading at attractive valuations.
Adopting an all-weather approach: The team seek to deliver a consistent yield through the market cycle to offer a core, long-term portfolio holding.
Being risk aware: The team use top-down macro insights to help reduce drawdown and ensure they are paid for the risk we take.