Primer on Emerging Market Debt Targeted at Fund Directors

A white paper from Broadridge reviews the landscape for emerging market debt, noting that this sector is increasingly relied upon by advisors and investors to add diversification. The paper, providing research and data up to 2016, analyzes emerging market funds and shows how strategies—and peer groups—are becoming increasingly specialized. It also discusses risk, popular benchmarks, and performance and expenses. To help directors in their oversight of such funds, the paper concludes with several takeaways (some listed below).

• While the choice of which index peers benchmark themselves to is unlikely to matter for expense comparison purposes, it most certainly will impact how managers construct internal performance peers. Given the nearly complete dominance of the JP Morgan suite of indexes, managers that choose another provider may employ strategies not followed by many others.

• Country and corporate credit ratings for bonds denominated in hard currencies are often rated lower than that of their local currency issues, as currency mismatches present an additional source of risk. Directors may consider that currency fluctuations could change country and corporate credit ratings, which can impact expenses and performance of peer funds that are denominated in the same currency, have the same objective, yet hold different types of emerging market debt.
• The specialization of peer groups almost certainly comes at a cost in terms of the number of good peers. With other mitigating factors such as asset comparability and distribution channel playing equally important roles in peer group selection, directors need to be mindful of trading sampling size for strategy specificity.