First State launching local currency EMD fund

First State Investments intends to launch a local currency emerging market debt fund to sit alongside its existing hard currency open ended investment company (OEIC) which invests in the same sector.

The fund is likely to be led by Helene Williamson (pictured) who heads the group’s EMD team and is aimed at taking advantage of a shift towards greater issuance in local currency.

The EMD market is currently only around $1.4trn is size with the majority of the market dominated by sovereign issues. The existing First State fund, which has sterling and euro share classes, invests in a mixture of local and sovereign issues.

But according to Philip Fielding, a part of the EMD team, there is a growing trend for corporates and sovereign to issue debt in their local currencies to satisfying pension schemes and other institutional investors.

The relatively small size of the sovereign market is an advantage for investors already in the sector because of the simple supply and demand arguments, according to Fielding, but the group does see some opportunities with the new fund to achieve additional alpha through active currency exposure.

There has been significant appreciation of some EM currencies over the last few years and with its current fund First State is limited with how much of this movement it can capture because the majority of issues on the fund are dollar denominated.

Currently, First State is overweight in the sovereign markets to both the UAE and Russia, and it has been trimming its overweight position to both Turkey and Venezuela, which is cites as a good example of the opportunity within EMD.

In the last 12 months there are been significant price moves in Venezuelan bonds associated with market reactions to the state of president Hugo Chavez’s health which provides opportunities, according to Fielding, who was speaking at the Alpha Generators conference in London.


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