Consistency in emerging-market debt may be elusive for many managers, but it doesn’t have to be that way, as Barney Goodchild and Aaron Grehan explain.

Emerging market debt (EMD) can offer significant returns but has historically been susceptible to periods of increased volatility and rapid spread widening, as recently witnessed in 2021 and 2022 when global inflation concerns and the Russian invasion of Ukraine saw negative returns across EMD.

We believe there are three main reasons many managers fail to outperform during periods of market weakness:

  • A structural bias towards the higher-yielding parts of the EMD market
  • A poor understanding of EM-specific risk factors and overreliance on traditional risk metrics
  • Deficiencies in portfolio construction that lead to concentrated portfolios and overreliance on credit spread compression

A failure to fully consider these factors is likely to lead to higher drawdowns and increased volatility of excess returns over the long run.

Download An unbiased approach to finding opportunities in emerging market debt to understand:

  • Why many EMD managers underperform during moments of market weakness
  • What that means in terms of drawdowns and volatility of returns
  • How our approach seeks to deliver uncorrelated alpha, enhanced capital preservation and smoother returns

Key risks

Investment risk

The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested.

Credit risk

Bond values are affected by changes in interest rates and the bond issuer's creditworthiness. Bonds that offer the potential for a higher income typically have a greater risk of default.

Currency risk

The strategy is exposed to different currencies. Derivatives are used to minimise, but may not always eliminate, the impact of movements in currency exchange rates.

Emerging markets risk

Investments can be made in emerging markets. These markets may be volatile and carry higher risk than developed markets.

Derivatives risk

Investments can be made in derivatives, which can be complex and highly volatile. Derivatives may not perform as expected, meaning significant losses may be incurred.

Derivatives are instruments that can be complex and highly volatile, have some degree of unpredictability (especially in unusual market conditions), and can create losses significantly greater than the cost of the derivative itself.

Illiquid securities risk

Some investments could be hard to value or to sell at a desired time, or at a price considered to be fair (especially in large quantities), and as a result their prices can be volatile.

For investments in money market instruments such as short-term bank debt, the market prices/value can rise as well as fall on a daily basis. Their values are affected by changes in interest rates, inflation and any decline in creditworthiness of the issuer.

Money market securities risk

Investments are not guaranteed, an investment in a Money Market Fund is different from an investment in deposits and can fluctuate in price meaning you may not get back the original amount you invested. This investment does not rely on external support for guaranteeing liquidity or stabilising the NAV per unit or share. The risk of loss of the principal is to be borne by the investor.

Related views

Important information


Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

Where relevant, information on our approach to the sustainability aspects of the strategy and the Sustainable Finance disclosure regulation (SFDR) including policies and procedures can be found on the following link:

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