Our EMD team explains why an unconstrained approach makes sense for investing in the asset class. Targeting downside protection explicitly, while capturing most of the upside, can smoothen the volatility of investments over the long term.
In emerging markets (EM), the universe is so diverse that geopolitical events and significant policy decisions are part and parcel of the investment landscape, often driving the volatility and dispersion that can be harnessed to generate returns.
However, the volatility that can crop up in emerging markets debt (EMD) has led investors to closely scrutinise the timing of capital deployment, as well as the characteristics of the underlying beta of the sub-asset classes. Much of the interest in recent years has focused on strategies that are capable of delivering returns, whilst navigating volatility through asset allocation.
Key takeaways:
- Unconstrained strategies can unlock the full spectrum of EMD opportunity: we believe such a strategy is uniquely positioned to exploit the breadth, technical complexity and inherent inefficiency of the EMD asset class.
- The four pillars to consider when constructing an EMD unconstrained portfolio: full flexibility, benchmark agnostic implementation of high conviction ideas, use of hedging to manage downside, and inclusion of EM assets with return profiles that are uncorrelated to broader downside in the market.
- The importance of a high conviction total return approach: we believe it is only a high conviction total return approach that has the ability to combine all four elements into one well-balanced strategy, making it a better choice for investors.
