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Emerging Market Bonds: An Income Solution in a World of Negative Yields

The Current State of Global Markets: Investors Say ‘No’ to Record-Low Yields

Developed markets, for example the U.S., Canada and the UK, currently offer little to no yield for income-seeking investors. In fact, over US$10 trillion in government debt actually sport negative interest rates.¹ As a result, investors have been turning en masse to the emerging markets in search of greater yields, and the data is there to prove it.

The Institute for International Finance (IIF), one of the most authoritative trackers of capital flows to and from the developing world, forecasts US$550 billion of foreign investments should flow into emerging markets this year alone, with bonds accounting for the majority of funds.² Furthermore, in a post-Brexit world, we expect to see a continued shift into the emerging markets sector as the UK and Europe is shrouded in uncertainty.

Along with positive fund flows, the performance has also been there to match, with U.S. dollar-denominated, emerging market bonds returning more than 12 percent so far this year – see the chart below.³

Source: Bloomberg data.

It is clear that emerging market bonds represent a sweet spot within the fixed-income universe, providing a significant yield pickup of around 6 percent or greater.

“The main advantage of emerging market debt is that it is a yield enhancement strategy,” says Sergei Strigo, Head of Emerging Market Debt & Currency at Amundi Asset Management. Mr. Strigo is also sub-adviser lead of the Excel High Income Fund. “If you look at the levels of global interest rates, major central banks are cutting interest rates to a negative zone, and in the U.S. the Federal Reserve is not hiking rates to the same extent that investors thought they would, so fixed-income investors are left with very little yield that they can get on their traditional asset classes, hence they are forced to go into more alternative asset classes such as emerging market debt.”

Amundi is one of Europe’s largest asset managers with over US$1 trillion in AUM, including US$550 billion in fixed-income assets.⁴


Excel High Income Fund: A 5-star Strategy, Sub-advised by a Top Decile Manager

The Excel High Income Fund has a 5-star rating from Morningstar and is unique in that it invests in 3 asset classes: hard currency bonds, local currency bonds, as well as active currency overlay.⁵ The fund is average-rated investment-grade, and in addition to greater yields, the fund also provides stronger returns compared to its peers.

Source: Morningstar data, total annualized return, in CAD terms, as at June 30, 2016. Peer Average includes AGF Emerging Markets Bond Fund, BMO Emerging Markets Bond, HSBC Emerging Markets Debt Fund, Invesco Emerging Markets Debt Fund, Manulife Emerging Markets Debt Fund, RBC Emerging Markets Bond Fund, all series F.

When allocating funds between hard currency and local currency bonds, Mr. Strigo, the lead portfolio manager of the fund, currently favors U.S. dollar-denominated bonds, as it protects investors from fluctuations in local currencies, helping to lower the fund’s overall volatility.

He also invests in currencies as a separate asset class for their yield, or as a tactical hedge on local currency bonds. “[Currently,] we do have some reasonably priced currencies in the emerging markets where the carry is high and we generally favour these,” Mr. Strigo noted in a recent interview.⁶ “These are the [Russian] ruble, [Brazilian] real, [Indonesian] rupiah, and the Indian rupee… these are the ones we like at the moment. We like to be overweight on high-yielding assets, including currencies.”

Mr. Strigo and his team generate alpha through an active top-down, bottom-up approach, driven by rigorous proprietary models, although the manager’s judgement and intuition are also key.⁶ 


Looking for Greater Yields? Emerging Market Debt Offers a Viable Solution

Given the strong track record of emerging market bonds over the past 4-5 years, we believe the asset class is a viable option for yield-seeking investors, who can reallocate funds from global bonds which currently offer minimal yields.

The Excel High Income Fund is a highly diversified portfolio with exposure to between 50-60 countries, and is invested in more than 100 positions at any given time. With a low-to-medium risk rating, the fund provides similar yields to high-yield bond funds and preferred shares, but with a much lower correlation to equities. The Excel High Income Fund is also top decile among its peer group here in Canada.⁶ With global interest rates set to remain at record-low levels for the foreseeable future, the Excel High Income Fund is a low volatility investment solution that Canadian investors can turn to for income and yield enhancement.

¹ Wall Street Journal, Negative-Yielding Debt Tops $10 Trillion, June 2, 2016.
² Institute for International Finance (IIF) data, accessed on July 28, 2016.
³ Bloomberg Business, Amundi Drawn to Emerging-Market Debt Yields With Record Inflows, July 25, 2016.
⁴ Amundi Asset Management, information as at March 31, 2016.
⁵ Morningstar data, accessed on July 28, 2016.
⁶ Business News, Big money from emerging markets, July 16, 2016.

Morningstar Overall Five-star Rating for Excel High Income Fund Series “A” and “F”, as at June 30, 2016. Morningstar Five Star Rating Disclaimer for The Excel High Income Fund (Series “A” and “F”) - Overall Rating © 2016 Morningstar Research Inc. All rights reserved. The information contained herein: (i) is proprietary to Morningstar and/or its content providers; (ii) may not be copied or distributed; and (iii) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing.
All statements in this document, other than statements of historical fact, and including statements regarding the future economic effects of events, are “forward-looking statements”. These forward-looking statements reflect the current beliefs of Excel Investment Counsel Inc. and Amundi Asset Management and are based on information available as of the date of this document. Actual results may differ materially as they are subject to a number of significant risks and uncertainties. Excel Investment Counsel Inc. and Amundi Asset Management have no obligation to update or revise the forward-looking statements in this document.


Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.