Why focus now on short duration in emerging markets?

Author: Elisabeth Colleran, CFA, Portfolio Manager, Emerging Markets Debt at Loomis Sayles (Natixis IM)

We have been managing this short duration corporate strategy in emerging markets for 10 years. There has been a great change in the set of opportunities and when we look back we can see that 10 years ago we had certain issuers that were the top 10. Currently, of those 10, only two are still in that group.

10 years ago half of these main issuers were in Latin America, now there is only one in that region. We have seen that Asia and the Middle East have grown quite a bit in the set of opportunities. Latin America has decreased and, of course, we have also seen that emerging Europe has decreased with the exit of Russia.

So there has really been a change in the set of opportunities. We have seen the consumer sector grow positively, which is where we are always looking for opportunities because we believe it is at the core of what is being captured in emerging markets, with income levels increasingly higher.

Other areas that have changed quite a bit are the market players. When we look at the investors who were in the market a decade ago, looking at the investment universe, there were probably a lot of crossover investors who really came in and out based on their beta view, what they were looking for and how they were trying to add risk to their portfolio. There were probably still a good number of investors, even in the emerging markets space, who were only looking for some kind of margin to capture in relation to sovereign debt. Now we see much less of that, in fact what we see are investors specifically looking for these companies for their opportunities and for the role they can play in a portfolio.

We also observe that the end investor has evolved and we are now finding insurance companies, pension funds, large industrials, looking at this asset class as a place that can potentially offer them high quality.

Why short duration? Why now short duration in companies? Does it make sense?

We believe that short duration in corporate products still makes sense despite the evident downward trend in interest rates and inflation. In reality, the strategy is to capture the premium offered in the corporate space of emerging markets and aim for a lower volatility approach. And the shorter duration is not really reducing the set of opportunities because many emerging market companies actually issue in the 5-year or less segment.

So we have this great opportunity: the shorter duration is a tool to reduce volatility. And we see that while we are in a certain downward trend of interest rates, there could be volatility.

So for investors who are really looking to capture this premium and achieve potentially positive returns, we see this as something that, without giving up anything, you still have exposure and diversification.