in certain parts of the hard currency with reasonable success in protecting against market downside. Collins: A lot more clients are allocated to emerging market debt, but there’s a lot of dry powder because they are generally underweight. In the past couple of years, clients have become more tolerant of the volatility. When the market fell between 2013 and 2015 they grumbled across the table at you saying: “This was a terrible decision, what are we doing here?” They were thinking of leaving the asset class, but now they have grown used to the fact that this will happen and asset prices will hopefully recover. What is happening more and more is that they are phasing in their investments, so when there is a bad quarter they do a second tranche. They are using declines in the market to build up their exposure to a slightly higher target level. So there’s been a change in client mentality and comfort with the asset class and at a general level that should bode well for it over time. Lasocki: You have touched on an important point, which is the way to access this debt. From a large institutional investor’s perspective, it’s a long-term game so it’s critical to be flexible, to switch dynami- cally between the micro and macro side. You have to balance your views between local and hard cur- rency, between high yields and investment grade. I would never invest passively in emerging markets. This is an area where good active, benchmark agnostic managers can add value.
I would not invest in a benchmark-driven fund because I couldn’t hedge my negative currency exposure. It is important to be able to hedge, to go off-benchmark. One example is Ukraine. You wouldn’t bet your fortune on Ukraine but there are off-benchmark instruments, like GDP bank warrants, which are attrac- tively priced and have good potential. So it’s critical to find investment managers who are able to identify unique opportunities, particularly if we are cautiously optimistic, not just outright optimistic.
PI: What elements do you look for when picking an active manager? Lasocki: It is important to find the right balance between having dozens of people in every part of the world and taking sometimes risky and less informed decisions. One of the most efficient ways to invest
June–July 2019 portfolio institutional roundtable: Emerging market debt 13
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