the flexibility not to stick rigidly to the benchmark. Muaddi: The benchmark in emerging markets, in all asset classes, is a horrid starting point. Fixed income benchmarks reward highly lever- aged countries and companies that have more debt. So, if Apple has a higher market cap it gets higher index weight. If Argentina has more debt it gets a higher index weight. It is perverse. The best thing I have done in my career is to ignore the benchmark. I have about an 85% active share. There are around 80 countries I can own and typically invest in 25 to 27 of them. The country has to earn your clients’ capital, it is not the other way around.


A developed nation goes through a crisis in a different way than an emerging market nation. When something goes wrong in the United States or Europe government bond yields fall. When something goes wrong in South Africa or Turkey domestic government bond yields rise. That is the difference between an emerging nation and a developed nation. Even though emerging countries have lower lev- els of debt and can get their fiscal policies in order faster than developed markets, the prob- lem is that they cannot afford it when rates are going higher. They do not have the luxury of working things out over a longer period. We have to accept reality, but it should not stop us from investing. The best returns occur when things transition from terrible to bad. When a country is in a crisis and transitions towards a degree of stability is the biggest point of value


the number of issuers is huge. There are opportunities which will emerge from the recovery and investors will be expecting a lot from China and Brazil in the coming months. There are reasons to be optimistic, but globally we know as little as everyone else. Ghosh: I agree that this an idiosyncratic universe, so you cannot talk generally. What that manifests as is giving your manager as much license as possible to express their idiosyncratic views and choices. Particularly in local currency emerging market debt, the composi- tion of the index forces you to have high weightings in countries you might not like. That presents a problem for managers in that they can hold zero in one country, but it is hard for them to hold zero in two within that index. Having mandates that allow managers to access hard currency, corporate, frontier debt or hold cash in times of trouble gives them


creation in emerging market debt.


PI: What conversations did you have with your clients during the emerging market debt sell-off in March, Samy? Muaddi: We had a weekly dialogue with our clients, who used it as an opportunity to provide liquidity. That was rewarding for them as returns are up by 25% since the end of March. This is an asset class that has rewarded a contrarian mindset.


Emerging market debt has a coupon of roughly 6% in US dollars. You will earn that coupon historically in three of 30 years. In 27 of the 30 years you did not earn the 6% carry. You can compound over a longer period, but seldom in a single year do you earn the exact coupon, which is the nature of the emerging markets. If you have a view that defaults will remain suppressed, I would encourage you to be a liquidity provider because, inevitably, these


November 2020 portfolio institutional roundtable: Emerging market debt 11


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