Fixed income

Invesco Emerging Markets Local Bond Strategy

By harnessing manager skill, we aim to generate above market returns from the attractive yield and income opportunities offered by emerging market local debt. In the same way, we aim to minimise the potential downside that goes hand in hand with the relatively higher risks of this asset class.

At a glance

Our macroeconomic base case evolves gradually. However, the market pricing of this base case changes more rapidly, which provides opportunities to take advantage of changing risk premia. We believe the key to better risk-adjusted returns is allocating risk based on a macroeconomic outlook.

Asymmetric risk budgeting

To reduce volatility throughout the emerging market cycle, we employ asymmetric risk budgeting by generally taking tracking error below that of the benchmark.

Targets attractive risk-adjusted returns

We seek to provide alpha with mitigated downside risk over 3- and 5-year periods.

Integrated team and process

We analyse global markets while incorporating the robust linkages between developed and emerging market economies. We implement positioning across interest rate, credit, and foreign exchange exposures.

Goals

The strategy aims to outperform the J.P. Morgan GBI-EM Global Diversified Index by 200 bps (gross of fees) annually over rolling three-year periods.

Investment process

We manage our portfolios using a top-down global macro analysis to determine the overall portfolio risk budget.

We combine this with bottom-up country analysis to identify favourable, country-specific opportunities:

  • Views are expressed directionally across interest rates, credit, and foreign exchange based on attractiveness of risk/reward profiles
  • It is more efficient to evaluate market risks and to determine a risk budget instead of predicting returns

Risk is continually monitored.

Watch the video to find out more about the team's investment process and philosophy

Why Invesco

At Invesco Fixed Income, we believe a portfolio’s tracking error is an inadequate measure of volatility when it comes to local currency emerging market debt because it gives equal treatment to the positive and negative differences between a portfolio and its benchmark.

Thus, to reduce volatility throughout the emerging market cycle, we employ asymmetric risk budgeting by generally taking tracking error below that of the benchmark’s long-term standard deviation. For example, if tracking error is 6% and the benchmark has a standard deviation of 12%, we typically stay in the 6-12% range for standard deviation not in the 12–18% range.

  • Maintaining a low tracking error and high volatility in risk-on periods.
  • Maintaining a high tracking error and low volatility in risk-off periods.

Locally denominated debt securities in emerging markets expose investors to a variety of risks driven by foreign exchange, credit quality, interest rates, macroeconomic conditions, and regional politics. This unique combination of risks, in our view, warrants special emphasis on limiting potential downside.

We believe this is best achieved through manager skill, which at the same time can wring value from market exposure to attractive yields and income.

Investment team

The Global Debt Team offers international expertise within a broad, global lens. The team manages USD 10bn across its platform, including USD 6bn in Developed Markets and USD 4bn in Emerging Markets.

  • Long, successful history of investing in International fixed income, dating back to the mid-1990s, enables the team to interpret market events through a multi-decade context
  • Team of 16 investment professionals with diverse international backgrounds, including fluency in over 20 languages, which helps inform an interconnected global perspective
  • Integrated and collaborative macro and country analyses, which allows for the cross pollination of ideas

Related insights

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. As a large portion of the strategy is invested in less developed countries, you should be prepared to accept significantly large fluctuations in value. Debt instruments are exposed to credit risk which is the ability of the borrower to repay the interest and capital on the redemption date. Investments in debt instruments which are of lower credit quality may result in large fluctuations in value. Changes in interest rates will result in fluctuations in value. The strategy may invest in distressed securities which carry a significant risk of capital loss. The strategy may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of a portfolio. The Manager, however, will ensure that the use of derivatives does not materially alter the overall risk profile of the strategy.

Important Information

  • Data as at October 2019, unless otherwise stated. By accepting this document, you consent to communicate with us in English, unless you inform us otherwise. Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.

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