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If you want to hear a positive story about any asset class, you should talk to a fund manager investing in it. A manager of a fund invested only in gold, for example, will tell you that in spite of the yellow metal’s stupendous rise there is still plenty of “upside”. This makes the story in FTfm this week about an emerging market bond fund all the more alarming.
Geoff Blanning, manager of the Schroder ISF Emerging Markets Debt Absolute Return fund, is reported to have raised his cash position to the maximum permitted, a move instigated by his fears surrounding the short-term prospects for the sector. His reasoning makes good sense.
He said:
People underestimate the influence that flows have in emerging markets. It is not like the UK gilt market, where certain pension funds and other investors are permanently in gilts. Prices for emerging market debt are subject to international asset flows. Money can move in dramatically, as it did during the first half of last year, and equally that can quickly turn around. When it does, contagion means that good credit gets hit as well as bad.
Mr Blanning says he believes yields in many bond markets are too low and until he can take advantage of periods of weakness, the fund's cash balance will remain over 25 per cent.
“Investors haven't done their homework properly and they haven't considered that yields in the western countries might go back to 3 or 5 per cent in a few years, in which case 5 per cent yields on an emerging market bond is not that attractive.”
Timescales are all-important for investors, however, and many might think they might only need to act “in a few years”, when yields in western countries might go back to between 3 and 5 per cent.
But Mr Blanning also reveals that he and his emerging market bond team are expecting to see opportunities towards the end of this year.
Latest data from EPFR, which tracks global fund flows, show that investors are largely sticking to the patterns established late last year, in which equity funds are getting almost four dollars for every one committed to bond funds and developed market equity funds sharing centre stage with their emerging markets counterparts after months in their shadow.
Investors holding emerging market bonds had better do their homework.
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