Why Unconstrained Approach to EM Bond Investing?
ERIC FINE: In one word, the value of an unconstrained approach to emerging markets bond investing is flexibility. The market changed a lot in the past 20 years. At first, it was only hard currency sovereign bonds. Then came hard currency corporates followed by local currency sovereigns. Nowadays, local currency corporates are becoming more prominent. Having an unconstrained mandate is key to optimizing the portfolio using all four sub asset classes. In the future, I think you are going to see local currency corporates become increasingly important.
FINE: One of the most important advantages is flexibility. Some of the specific examples of how this flexibility helps you on a day-to-day basis are: number one, you can optimize your country view. If I like Brazil, I shouldn't be forced into investing in a hard currency bond. I should have the opportunity to invest in a local currency bond, maybe inflation linked. I should also have the flexibility to express my view through a corporate bond, whether it's in local currency or hard currency. The question is if I like the country, what's the best way to express it?
FINE: Number two, I can optimize the portfolio. These days, hard currency high-rated bonds have tended to rally during risk-off environments. Local currency bonds have tended to sell-off during risk-off environments. If you're proactive, you can position the portfolio for different and broader market environments.
FINE: Third, and maybe most importantly, all the mandates are changing. You'll see blended funds, which is an attempt to move towards unconstrained. Even here, there are minimums and maximums. You've got to have a minimum allocation in local currency, a minimum in corporate bonds, you can't have this much, you can’t have more than a certain amount, etc. That is an intermediate step, but I think funds are moving towards the direction of fully unconstrained. Blended is an attempt towards this, but it's not the full step towards what I think is the right approach, unconstrained.
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