An Efficient Beta Approach to Emerging Market Debt Local Currency
Emerging market local currency debt is a sizable and mature asset class that offers an opportunity to collect an attractive yield and diversify investors’ exposure to higher-yielding bonds.
Nobel laureate Harry Markowitz is famous for coining the phrase “diversification is the only free lunch in finance.” This concept went on to inform much of modern portfolio theory. It also helps to explain why more sophisticated investors have been adding local currency debt to their global investment portfolios. Over a reasonable time horizon, emerging market local currency debt offers an attractive and less correlated source of returns. This can help most global portfolios achieve a higher Sharpe ratio out on the efficient frontier. What has prompted this increased interest in the asset class? What is the best approach for harvesting returns?
In our view, local currency debt deserves a closer look as the growth in market size, attractive yields and diversification benefits make a strong case for a strategic allocation. In this paper, we look at some of the fundamentals of the overall emerging market (EM) debt space as well as its challenges, and outline our innovative and systematic efficient beta solution.