Emerging Market Debt Absolute Return
Schroders Emerging Market Debt Absolute Return strategy seeks a positive absolute return from capital growth and income.
An absolute return strategy managed with the aim of delivering high returns with low volatility, while maintaining a low correlation to other products. The broad range of assets offered by such an under-researched EMD asset class presents us with diverse opportunities for consistent returns. A key part of our investment philosophy is that we believe we are able to add value by actively managing exposure to both external and local debt, as well as local currencies.
The Schroders EMD team consists of three fund managers with an average of 26 years investment experience. Supporting them is an EM corporate analyst, a technical and sentiment analyst, a quantitative analyst, four implementation staff and a five strong product team. The head of the group, Abdallah Guezour, has 25 years of investment experience and has been at Schroders since 2000 and the team have worked together for 20 years.
Schroders has developed what we believe is a unique approach to portfolio construction, designed specifically for EMD. Principles of both risk control and return maximization operate concurrently. Our EMD strategy focuses on absolute returns as the primary goal, which seeks to ensure that the risk of loss for every security is analyzed thoroughly, using fundamental, quantitative, sentiment and technical analysis, before any purchase is considered. Our extensive in house research is applied across all EMD countries and debt sectors within those countries.
We believe in:
Schroders believes that EMD is an underdeveloped, inefficient asset class in which the rewards for expert, active management are high.
We believe opportunities for diversification are greater in EMD than in any other sector of the bond markets. Our EMD strategy seeks to exploit all such opportunities, investing in as broad a range of assets as permitted.
Absolute Return Focus
Following in-depth country analysis, the team actively allocates to selected countries within the universe, across a range of different securities, that they believe will offer the best risk adjusted returns.
Our approach is simple, flexible and opportunistic, with a strong focus on capital preservation. The team’s unique, multifaceted research process, consistently applied, gives it a superior ability to identify EM fixed income assets that have high potential returns (i.e. strong fundamentals), but limited downside risk (i.e. weak perception). Global conditions for EMD are discussed quarterly; a broad investment framework covering major themes in the market is then created encompassing the following:
- Global and regional outlooks (Asia, Eastern Europe, Latin America, Middle East/Africa);
- Long-term sovereign and currency risk models (quantitative analysis);
- Long-term chart analysis (technical analysis); and
- Global and regional sentiment (sentiment analysis).
Country analysis is carried out weekly and forms the core of the investment process. Our investment universe comprises more than 50 countries. Major countries are reviewed at least once a year, minor ones less frequently. Four types of analysis are applied to each country. Countries are compared consistently (a) over time and (b) against each other. The EMD team’s comprehensive country analysis employs four separate and independent levels of analysis: fundamental, quantitative, technical and sentiment. Fundamental analysis is the most important element. The quantitative, technical and sentiment analyses are used to support our fundamental views.
Fundamental analysis (biggest contribution to decision making – 70%)
The relevant country analyst prepares a report on a particular country which focuses on political, economic and market developments and outlook. Such a report frequently follows a country research visit. Politics is inevitably the most qualitative element and focuses on risks and opportunities. Economic outlooks, as well as market forecasts for external and local debt and for the exchange rate, are also prepared. These forecasts are made on both a three and 12-month horizon and are the central output of this analysis.
EMD fund managers make frequent visits to the countries within their respective regions. They meet with figures such as policy makers, central banks, consultants, local banks, journalists and company executives. In the course of this research, they also draw on the expertise of Schroders' local equity and credit analysts. Schroders’ presence in 28 countries around the world is a significant support for this activity and ensures, at the very least, that we gain access to key decision makers, particularly during times of crisis.
A country risk model is updated for all countries in our investment universe at the start of each quarter and whenever an individual country is reviewed. The model aims to provide an objective input into our inevitably more subjective fundamental analysis. Countries are scored on a scale from -12 to +12 reflecting the country’s risk based on six key factors: Growth dynamics, sovereign external liquidity, hot money indicator, domestic banking system: external liquidity, credit cycle and competitiveness.
We make extensive use of chart analysis: the volatile and frequently momentum-driven nature of many EMs makes both long- and short-term chart analyses of price patterns a valuable tool. Chart analysis encompasses:
Chart analysis is particularly useful in supporting decisions on timing and aggressiveness of positioning. Chart analysis also often generates investment ideas which are then fully researched through fundamental analysis.
Sentiment analysis attempts to discover how other market participants are positioned and/or how likely they are to change their positions in the future. Accurate readings can support our own assessment of risk/opportunity in markets. A few key measures are systematically considered as contrarian indicators. The sentiment indicators include: consensus forecast model, fund manager risk index, short tern sentiment index STSI, flow analysis, ratings agency.
At the final stage of the analysis, the EMD team agrees 12-month total return forecasts for each investable asset. Given the risks involved, a minimum expected return of 8% (in USD) is required to initiate a position. Assuming such returns are forecast, investments are made subject to the team’s portfolio construction discipline.
In order to aid investment decision making, the team maintain a scorecard for all countries and their respective markets in our universe, thus enabling the team to rank opportunities based on the output from our investment process.
- The fund’s long-term track record and team stability;
- The absolute return focus of our investment style, with its twin aims of participating in the attractive returns available in the asset class while not losing money;
- The simplicity and flexibility of our investment management style enabling us to compare and take advantage of the opportunities available in all emerging markets and sectors;
- A comprehensive and proven investment process that uses four types of analysis: fundamental, quantitative, technical and sentiment, in assessing investment opportunities;
- A highly extensive country visit program, in which the fund managers regularly carry out in-depth visits to all relevant countries in their respective regions, which they have been covering in significant depth for many years;
- A team-based approach with highly experienced fund managers and analysts who have worked together in a variety of market environments over many years (the current investment team has worked together for over 20 years); and
- An investment and risk process specifically designed to optimize risk adjusted returns from the asset class. The simple and proven risk control system used by the team has been more effective than the commonly employed model-based systems (e.g. Value-at-Risk).
- Separate Accounts
- Commingled Vehicle