Emerging Market Bonds
Posted: Sun Sep 28, 2003 1:40 pm
I recall from the thread on asset allocations that at least one person has invested in Emerging Market Debt. This was recommended by Morningstar a little over a year ago and has done well since then, but it is a relatively new asset class.
I wanted to see if we could strike up a discussion on the merits or lack thereof of emerging market debt investment vs EM stocks. Were their specific factors that made the timing favourable and not so a long term investment? Are they the sort of high risk investment that might warrant a 1-2% investment and if so, why? The annualised return pre-costs has been 17% on top funds that invest in this area over the last five years.
I recently looked at a 'high income' bond fund here in the UK, comparing it a lower return bond fund. The first invested in BBB and below only, the latter in Treasury debt and only AAA, AA, A and some cherry picked B's. Whilst the premium was 3% higher on the higher risk debt, I figured that there was next to no risk of default on the latter investment but I might have to factor in a loss of principle when some of the more risky debt defaults on the higher income fund. I figured with the higher dividends eating up yearly tax allowances, I'd have to re-invest inflation and possibly add a guess of 2% extra to cover possible defaults. I also considered that during times of poor equity performance like a recession I would be relying on the fixed income investments for income or sell them outright if I needed the cash, contrastly at a time when I needed the money back the most I thought it likely the lower quality debt defaults might increase dramatically. I wonder how emerging market debt might fit into this scenario albeit though it seems that it delivers perhaps enough return to cover a much higher level of default and still deliver solid positive returns.
Perhaps it should be viewed as part of an overall emerging market equity investment, allocating a portion of that money to the debt side rather than be considered part of a fixed income defensive allocation for when equities are down several years, dividends get cut and you desperately need cash to live but don't want to sell shares on the cheap.
Thoughts?
For reference:
Safer bond PDF
http://www.legalandgeneral.com/factsheets/pdf/FII.pdf
High Income fund PDF
http://www.legalandgeneral.com/factsheets/pdf/HIT.pdf
Morningstar emerging market debt article:
http://www.morningstar.co.uk/news/analy ... 2003-08-27
Thanks
I wanted to see if we could strike up a discussion on the merits or lack thereof of emerging market debt investment vs EM stocks. Were their specific factors that made the timing favourable and not so a long term investment? Are they the sort of high risk investment that might warrant a 1-2% investment and if so, why? The annualised return pre-costs has been 17% on top funds that invest in this area over the last five years.
I recently looked at a 'high income' bond fund here in the UK, comparing it a lower return bond fund. The first invested in BBB and below only, the latter in Treasury debt and only AAA, AA, A and some cherry picked B's. Whilst the premium was 3% higher on the higher risk debt, I figured that there was next to no risk of default on the latter investment but I might have to factor in a loss of principle when some of the more risky debt defaults on the higher income fund. I figured with the higher dividends eating up yearly tax allowances, I'd have to re-invest inflation and possibly add a guess of 2% extra to cover possible defaults. I also considered that during times of poor equity performance like a recession I would be relying on the fixed income investments for income or sell them outright if I needed the cash, contrastly at a time when I needed the money back the most I thought it likely the lower quality debt defaults might increase dramatically. I wonder how emerging market debt might fit into this scenario albeit though it seems that it delivers perhaps enough return to cover a much higher level of default and still deliver solid positive returns.
Perhaps it should be viewed as part of an overall emerging market equity investment, allocating a portion of that money to the debt side rather than be considered part of a fixed income defensive allocation for when equities are down several years, dividends get cut and you desperately need cash to live but don't want to sell shares on the cheap.
Thoughts?
For reference:
Safer bond PDF
http://www.legalandgeneral.com/factsheets/pdf/FII.pdf
High Income fund PDF
http://www.legalandgeneral.com/factsheets/pdf/HIT.pdf
Morningstar emerging market debt article:
http://www.morningstar.co.uk/news/analy ... 2003-08-27
Thanks