Adrian Lee & Partners launches local currency EM strategy

Currency management firm Adrian Lee & Partners has launched a local currency emerging market fixed income strategy.

The strategy employs two separate investment processes, one for fixed income markets and one for currency markets or forward contracts. These two processes give investors the best combination of overall return from both sources while requiring no additional capital.

AL&P believes that Emerging Market fixed income represents two fundamental investments, one in fixed income and another in currency – the latter accounting for over 75% of the risk. “These investments are different and do not move together in any fundamental or systematic way. This therefore demands two investment processes one that buys the right bonds market and another that separately hedges or cross hedges into the right currency,” the firm said.

According to AL&P, this need to unbundle bond and currency decisions is often ignored by managers who tend to make some form of aggregate decision such as buying a bond market and holding its associated currency exposure. Research suggests that this unbundling alone can contribute up to 15% per annum extra excess return versus using an aggregate decision based on one process.

“Emerging markets fixed income investments today represent a tactically and strategically attractive opportunity for global investors. A combination of strong macroeconomic fundamentals and sound fiscal management can be expected to lead to enhanced returns on both the underlying bonds and currencies,” said Adrian Lee, president and chief investment officer.

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