Sheridan Admans, investment adviser at The Share Centre, explains how investors looking for exposure to emerging markets could benefit from investing in emerging markets debt over the longer term with the M&G Emerging Markets Bond fund.
 
Emerging markets have become increasingly popular with investors over recent years, given their strong fundamentals, positive reform, advantageous demographics, wealth in resources and sound banking systems.
 
More recently, the global financial crisis has helped to boost the attraction of emerging markets debt. As pressure grows on the UK and US to reduce their debt level, which is almost 80% and 90% of GDP respectively, many emerging markets such as Brazil, Poland and Indonesia are demonstrating fiscal surpluses.
 
This is important because if you are going to ‘loan’ these economies’ money by investing in their debt, you want some degree of certainty that they have the ability to pay you back, and with interest.
 
The M&G Emerging Markets Bond aims to maximise total return through a combination of income and capital growth. It primarily invests in debt instruments which may be gained through the use of derivatives.
 
The fund only holds bonds issued by emerging market borrowers that are denominated in G8 currencies. It will not hold loans or corporate issues, which can be higher risk and offer lower long-term returns. It also avoids emerging market currency debt, as this can be more at risk from default and high inflation.
 
The fund’s manager Jim Leaviss focuses on proprietary research. He looks extremely closely at the structure of a country’s debts and underlying assets, rather than relying on broader, less precise debt measures. In terms of performance, the fund has returned 38% over the last three years.
 
As with any investment, exposure to emerging markets carries some risk. Currency fluctuations, political upheaval, inflation and risk of default are just some of the issues investors need to consider before investing in emerging market debt.
 
Investing in emerging markets is far riskier than investing in the developed world. As such, this fund sits higher up the risk scale for lower risk investors. For those who believe emerging markets have a significant role to play within the developing global economy, funds like the M&G Emerging Markets Bond could be just the ticket.