Threadneedle launches new Emerging Market Local Fund

14 January 2008 sees the launch of the Threadneedle Emerging Market Local Fund, a UK-domiciled OEIC investing in the local debt and currencies of emerging market countries.

The fund will be managed by Richard House, an experienced manager with an impressive 15-year record in local emerging market debt. The fund is designed to capture the substantial yields available in local emerging markets and the relative undervaluation of the currencies.

“Recent years have seen big improvements in the social, political and economic fundamentals underpinning emerging markets,” explains House. “This trend has increasingly allowed emerging market governments to issue bonds in their own currencies leading to the development of domestic yield curves (often extending past 20 years). At the same time, macroeconomic reform has resulted in the creation of a pension fund industry in many countries. This, together with the ongoing search for yield on the part of international investors, has broadened the demand for local currency debt. We believe that this trend will continue.”

Spreads of dollar-denominated emerging market bonds over US Treasuries have tightened significantly over the past three years, reflecting the improved fundamentals supporting the asset class. Threadneedle believes that a similar trend will develop in local currency bonds, but this trend is in its infancy.

House expands: “The superior yield, and the likelihood of capital gains as the spread narrows, are two of the main reasons why we are seeing such strong demand for local currency bond products.”

In addition, Threadneedle’s analysis suggests that most emerging currencies are significantly undervalued. “Long-term appreciation of emerging market currencies provides an additional source of returns,” confirms House. “So we will be looking to add value through both duration and FX exposure.”

In managing the fund, House will be supported by Threadneedle’s dedicated Emerging Market Debt team, which is one of the largest in the City of London. He will also draw on the expertise of the rest of Threadneedle’s 30-strong fixed income desk as well as the company’s Emerging Market equity managers.

“This is a specialist area that calls for specific skills,” concludes House. “There is significant demand for a product like this but a shortage of capable suppliers. By offering this fund, we aim to give investors across the globe access to the undoubted attractions of the asset class.”