BNY Mellon Asset Management explains its themes at Lausanne Summit
InvestmentEurope’s recent Lausanne Summit saw ten management groups outline their unique investment ideas, including BNY Mellon Asset Management.
Emerging debt has further to go
Emerging market debt (EMD) is not experiencing a bubble, and given improving fundamentals for the asset class, it may instead be at the start of another run higher, according to Cathy Elmore, portfolio manager, emerging market debt at Standish Mellon Asset Management, one of BNY Mellon Asset Management’s 16 boutique subsidiaries.
Elmore agreed that the EMD asset class has grown rapidly over the last five years. “But I do not agree that EM debt is a bubble,” she told fund selectors at the InvestmentEurope summit.
“It may look expensive relative to recent levels but it could get even more so. Emerging markets will account for more than 50% of global GDP in five years. This is a buying opportunity.”
She points to the “resilience” of the asset class since the financial crisis. “No one is saying there is a decoupling, but EMD tends to bounce back from lows quite quickly,” Elmore added.
That is not surprising, because the underlying economic fundamentals are strengthening. Emerging countries have increased foreign reserves, lowered foreign debt ratios and pursued more credible monetary policies. The team’s investment philosophy is based on identifying long-term structural opportunities, rather than relying on short-term capital flows.
Managers are willing to explore opportunities but also put strong emphasis on “avoiding costly mistakes”.
Elmore said the qualitative process is “supported but not over-ridden” by quantitative models. To minimise the chance of negative surprises, managers must employ a set of overlapping risk management techniques. The team’s portfolios have a maximum of 300bp of tracking error, and “that is a maximum, not a guide”, Elmore said. There are other limits on currencies and themes to limit risk.
“We minimise the use of derivatives, and although we are permitted to use futures, we rarely do.”
She expects the EMD asset class to evolve rapidly in coming years, including funds that combine different types of debt, allowing the manager to switch for maximum performance.
The Standish Mellon team, with staff based in Boston, London and Singapore, manages dollar denominated debt strategies investing in sovereign and corporate credit; local currency strategies investing in currencies and interest rates; and also customised “blended” portfolios.
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