Potentially lucrative benefits of investing in emerging markets debt
New research from retail stockbroker The Share Centre reveals investors could be missing out on potentially lucrative benefits offered by emerging markets debt funds, because of a lack of understanding of these types of investments.
The survey of 449 private investors showed that while 58% have some exposure to emerging market economies via either equities (23%), funds (23%) or both, only 5% currently invest in emerging markets debt.
Commenting on the results, Sheridan Admans, investment adviser at The Share Centre, said: "I am not surprised a substantial number of those polled invest in emerging markets, given their strong fundamentals, positive reform, advantageous demographics, wealth in resources and sound banking systems.
"However, it appears that the investment potential of emerging markets debt is being overlooked because of a lack of understanding. In fact, 53% of investors said they do not know enough to invest in the sector or that they had no idea what emerging markets debt is.
"Investing in emerging markets debt is not for everyone as it may not meet the investor's long-term objectives, but it does have benefits. It allows for diversification in an income portfolio, and due to the lack of correlation with other asset classes it provides differentiation in a balanced portfolio of investments historically delivering good risk adjusted returns.
"Traditionally, investors may have gained exposure to emerging markets by investing in equity-backed funds, with many focusing on the key regions of Brazil, Russia, India and China", added Admans.
"In terms of risk, in a collective investment scheme investing in emerging markets debt is at the higher end of risk in a lower risk asset class as the debt is issued by institutions in their own currency. This means the investor is exposed to currency risk as well as other risks associated with emerging markets.
"Understandably, the idea of investing in debt, let alone emerging market debt, may concern some investors. However, it is worth remembering that in a company's financial structure, debt holders rank higher than those holding equity," Admans concluded.
SUGGESTED FUNDS FOR EMERGING MARKETS DEBT
M&G Emerging Markets Bond fund
The fund aims to maximise total return through a combination of income and capital growth. It will not hold loans or corporate issues, which can be higher risk and offer lower long-term returns. It also avoids emerging market currency debt, as this can be more at risk from default and high inflation. The fund has returned 38% over the last three years. Investing in emerging markets is far riskier than investing in the developed world. As such, this fund sits higher up the risk scale for lower risk investors.
Investec Emerging Market Debt fund
The fund aims to achieve long-term total returns primarily through investment in public sector, sovereign and corporate bonds issued by emerging market borrowers. It has been managed by Peter Eerdmans since its inception in 2006 and offers investors an easier route into emerging markets debt. The fund is currently offering an attractive yield of 7.24%. Year-to-date the fund has returned 12.62%. With regards to risk, this fund sits between those of global bonds and emerging market equities.