The Emerging Markets Debt team philosophy is based on the belief that markets are not always efficient and are often slow to price developments, both positive and negative.
We are an active manager and through our team-based approach seek to take advantage of these inefficiencies through superior research and systematic, forward-looking analysis. We aim to identify instances where consensus has become too bullish or too bearish and position accordingly.
The team follows a disciplined, structured and repeatable investment process, designed to deliver risk-controlled outperformance. Idea generation begins with thorough research on both the top-down macroeconomic environment and bottom-up country fundamentals and valuations.
Fundamental, research-based expectations are integrated into our investment model (the beta matrix), which translates inputs into a country ranking to assist portfolio managers in comparing and selecting credits at the portfolio construction stage.
Risk management is central to our philosophy, and an assessment of risk is integrated into each stage of our investment process.
"Risk management is central to our philosophy, and an assessment of risk is integrated into each stage of our investment process."
Our approach to investing is driven by a commitment to providing the best possible outcomes over the long term for our clients.
Our analysis of countries focuses on six factors, which, in our experience, have the ability to explain changes in country spreads. These are: politics, structural reform, fiscal policy, monetary policy, the external sector and technicals. Three of these factors are intimately related to RI and stewardship: fiscal policy, politics, and structural reform.
Assessment and monitoring
ESG issues are identified and considered in the course of the team's investment analysis. At the core of the process is the Key Factor Model, which comprises six factors, from which we approach the analysis of the issues in our investment universe.
In order to support our monitoring and assessment efforts we have compiled a database with a number of relevant indices for ESG. The database gives us an overview of how countries compare with each other and how they track over time. This information helps us monitor the countries we invest in, in a systematic fashion and also contributes in our assessment of ESG considerations.
Namely, for each country that we invest in, we monitor six variables: human development, corruption, business environment, institutional strength, government effectiveness and energy dependence. We utilise indices provided by reputable sources including the World Bank, the United Nations Development Program, Transparency International, the Fund for Peace and the World Energy Council.
For these indices, we analyse levels, rankings and trends over time, providing us with objective measures to support our research.
Our approach to ESG is defined by integration. ESG considerations are embedded in the Key Factor Model, alongside macroeconomic data, political developments, policy-making assessment (fiscal and monetary) and market technical aspects. As such, they are sources of risk and drivers of return that we take into account when conducting our research efforts.
As part of our country research efforts, we meet key decision-makers when they are in London (on roadshows or presentation) and we take field trips to get first-hand impressions of events on the ground. It is on these occasions that we have the opportunity to engage and to raise those issues, including ESG-related, that we deem relevant from our viewpoint. In the overwhelming majority of cases, authorities have been very receptive and constructive engagements have taken place.
We recognise the evolving nature of RI and stewardship for fixed income investments and, in particular, for sovereign issuers. In order to develop our own understanding, as well as to contribute to improvements in industry practice, we have been involved in the United Nations Environmental Program Finance Initiatives E-RISC project phase 2, which is developing methods for investors to incorporate environmental factors into the risk assessment of sovereign issuers.
Furthermore, as of January 2017 Manuel has joined the United Nations Principles for Responsible Investment Fixed Income Advisory Committee.
"ESG issues are identified and considered in the course of the team's investment analysis. At the core of the process is the Key Factor Model."
"For each country that we invest in, we monitor six variables: human development, corruption, business environment, institutional strength, government effectiveness and energy dependence."
"In order to develop our own understanding, as well as to contribute to improvements in industry practice, we have been involved in the United Nations Environmental Program Finance Initiatives E-RISC project phase 2"
|Portfolios outperforming their relevant benchmark over three years (Weighted by size of fund)||77%|
|Weighted average of outperformance (three years annualised. Weighted by size of fund)||1.3%|
|1 Year Performance vs Benchmark
First State Asian Quality Bond Fund
|3 Year Performance vs Benchmark
First State Emerging Markets Bond Fund (VCC)
Absolute return over three years (to 31/12/2016)
Performance and investment characteristics are as at 31/12/2016
Performance is quoted pre-fees and in $A terms.
Source: First State Investments
Please follow this link for information on how our RI and Stewardship Measures are calculated.
Source: Calculated by BRS Aladdin using data from Moody’s, S&P and CFSGAM
Emerging Market countries are particularly vulnerable to the impact of extreme weather events, such as floods and droughts. The occurrence of these events has increased sharply in the recent past, due to the larger share of their economy devoted to agriculture, lower agricultural productivity and fragile food self-sufficiency.
Emerging Market economies are also often reliant on multilateral financial institutions to fund their infrastructure and power generation projects, as an alternative to tapping scarce domestic savings or issuing expensive debt in global markets. Due to the effects of climate change, the World Bank has stopped funding new coal projects except in 'rare circumstances', which imposes a higher funding cost for these economies.
We are also aware that economic transformations related to climate change can become an opportunity for some emerging economies: Morocco has significant potential in solar energy, for example, and has been able to operate the world's largest solar power plant, reducing its dependency on fossil fuel imports. In the medium term, it is expected that solar electric energy exports to European markets from Morocco could become economically viable.