bonds will pull to par and you earn a coupon- plus return. Lasocki: This is a great point. It is one of the problems with investing in bonds. For many, passive investing may sound appealing, but this is exactly what you should not be doing with your bonds if you are a long-term investor. Pricing this year has been unprecedented as spreads went up to 600 to 700 basis points and they are still significantly lower by a half, but we are talking about levels we saw in 2015 when China scared everyone with their renminbi de- valuation. That was scary then, but we feel safer now, so it is relative. From a long-term investment perspective, it would not be prudent to take those decisions when something like March happens again. Patience is required in emerging market debt. Ghosh: In the first half of the year, our manager was down 3%. Compared to high yield, bank loans and the credit spread component of in- vestment grade that stacks up well. The days when emerging market debt is going to be out of kilter with other markets in a sell-off are po- tentially no longer with us. People recognised that some balance sheets are not as scary as they might be in developed markets, that the yield is likely to still come and it did not sell-off in a bas- ket case way.


On the point of it being an idiosyncratic game, we allow our manager to access frontier mar- kets, which have been a positive contributor to performance in the first half of the year. They have generated positive returns while wider local emerging market debt has sold off.


PI: Are the schemes you work with bullish on emerging market debt, Alan?


Pickering: I would not say they are bullish, but trustees are increas- ingly willing to have a dialogue with their consultants and asset managers to take a contemporary forward-looking view of all asset classes.


What irritates me is the mantra that diversification is a free lunch, which suggest that it is something of a silver bullet. That is too simplistic and if you are seeking to avoid correlation you need to take a forward-looking view rather than believing that random di- versification equals a four-course free lunch. It is not that easy.


PI: This is a crisis and people see opportunity in a crisis. Where are you seeing the opportunity in emerging market debt?


12 November 2020 portfolio institutional roundtable: Emerging market debt


Muaddi: I would cast a wide net when looking at emerging mar- kets. An investor should consider a larger allocation to corporates, if not make emerging corporates your core and sovereigns your satellite. The key differential is Asia credit.


When you invest in emerging market sovereigns you typically have a higher weighting towards frontier markets. We have seen several defaults in frontier markets and they could happen again. Whereas with Asia credits – China, Malaysia, Korea, Singapore, Thailand and India – we are more comfortable with the macro-eco- nomic framework of the four pillars of emerging market sovereign risk. We can earn additional yield and potential capital apprecia- tion by going into the corporate market.


Usually the problem with emerging markets is that in a bad year, investors lose more than the coupon. When you look at Asia credit in a drawdown you rarely if ever do you lose more than the cou- pon, so a bad year is a zero return or a +1% or -1%. That allows you


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