basis points. That is an unavoidable hurdle. It is something that active managers, who may be always critiqued against ordinary benchmarks, are burying silently. The other point is that FX is hard to trade in many emerging market countries in terms of having settle- ments and counterparties. You could argue that that’s not necessarily a drag upfront because if you have to take two days to settle you could win or lose as the FX moves, but it certainly pushes out tracking errors. On the passive side you are almost definitely going to be behind the benchmark and going to have a larger tracking error than you would expect in fixed income. So those are significant headwinds. Emerging market debt is an alpha-rich territory. It has idiosyncratic fees, but the alpha story probably hasn’t been as good. This comes back a little to the slightly biased long positioning against managers in general. They tend to give away alpha when the markets go down and we know that emerging market debt goes up and it goes down so they need to be a little bit more two-way in their thinking. The active story is still valid. Our value-add numbers support that, but the quantum of value-add is less than one would like. It is maybe zoning in around 50 basis points rather than 100 to 150, so it is coming in lower than managers’ stated targets. If they become more two-way in nature they can have a better chance of hitting the higher target.


Passive is eating some of the cake and managers are lowering their fees as there has been a lot of pressure. You cannot have too much of this because it is a resource-heavy business, so you could have a race to the bottom which means not-fit-for-purpose products. There has to be a certain amount of competitiveness between managers but if you go too far they can’t do their job. Willsher: This is an asset class where I would put some of my money to work with an active manager. There aren’t many other areas where you could save fees but it is important that you have regional exposure. You don’t get the same stories that you do if you are just sitting in your office in New York or London as opposed to being on the ground. I am not expecting someone behind a desk in 80 countries, but a regional presence is incredibly important. I would pay more for that manager, knowing that they have the resources. Lasocki: It’s my fiduciary duty to negoti- ate the best deal with a manager on fees, but it’s also important to have a manager who’s incentivised to protect the invest- ment.


It is not always that what’s more expen- sive is better, but this is one area where you should be prepared to pay a bit more for an active, prudent manager. You don’t eat lower fees, you eat higher returns.


PI: How do you manage currency risk in an active portfolio? Lasocki: It’s an important consideration. We all know that currency drives pretty much everything in emerging market debt.It is a difficult topic. On the one hand you want to have some emerging market exposure, but it’s not prudent to leave your currency positions totally un-hedged. Having said that, there are many ways you can hedge your currency exposure and, given the sometimes elevated cost of


straight hedging, alternative ways should be considered.


16 June–July 2019 portfolio institutional roundtable: Emerging market debt


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32