Emerging market debt fund performance lacks consistency with 20% of funds falling from top quartile to bottom quartile – as well as moving in the other direction – between 2005 and 2011, Fitch Ratings found.
“The lack of consistency in performance reflects fund managers’ difficulties in adapting style and exposure to changing market regimes… “ said Manuel Arrive, senior director in Fitch’s fund and asset manager rating team. He added that emerging market debt funds remain a beta play.
But Fitch added that emerging market debt funds’ performance and flows suggested an “evolution in portfolio management processes and skills”.
In a report (Managing Emerging Market Debt Funds) Fitch said that as emerging market debt funds are now integrated with global markets, this means that investment processes are evolving to incorporate global risk factors – such as the European debt crisis – in addition to local drivers such as inflation and growth.
As a result, portfolio managers have to broaden their macro research horizon to derive investment themes and top-down allocations, while preserving their access to local intelligence.
Arrive said: “Fitch believes that EMD [emerging market debt] processes can gain from a better incorporation of global risk drivers, a genuine management of market exposure and flows as well as an increased separation of economic, credit and currency research inputs.”
Fitch found that only 11% of funds stayed in first or second quartile performance in both the periods 2005-2008 and 2008-2011, while around 20% of funds moved from top quartile to bottom quartile (and vice versa) over the same periods.
Emerging market debt funds attracted US$ 28 billion (€21 billion) in 2011 and US$ 13 billion for the first two months of 2012, said Fitch. This pushed the sector’s assets under management to US$ 279 billion as at the end of February 2012.
Fitch expects to see more emerging market debt multi-strategy funds – either absolute return or blended currency strategies – or specialised corporate funds launched in the next few months.
©2012 funds europe
