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Why investors are wrong to overlook emerging market debt

August 2019 
By Jim Barrineau and Duncan Lamont, CFA

Some investors see emerging market debt as obscure and risky, but the view doesn’t stack up with our research. It can form a valuable part of investors’ core fixed-income exposure.

Jim Barrineau
Portfolio Manager Hartford Schroders EM Multi-Sector Debt Fund
Duncan Lamont, CFA
Head of Research and Analytics

 

Emerging market debt (EMD) is often considered to be an obscure and risky outpost of the fixed-income universe. This view, which we believe is misplaced, has resulted in EMD being under-represented in most portfolios. 

  • EMD has not been meaningfully riskier than US high-yield bonds
  • EMD offers a material and sustained historical income advantage
  • Currency risk is lower than many believe, as correlations between emerging market (EM) currencies is very low

The opportunity set is wide and can offer risk-and-return qualities that are similar to, if not potentially better than, more “traditional” fixed-income allocations. Indeed, our analysis demonstrates that a strategic allocation to EMD can improve returns for portfolios of all degrees of sophistication.



Important Risks: Investing involves risk, including the possible loss of principal. Security prices fluctuate in value depending on general market and economic conditions and the prospects of individual companies. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. • Restricted securities may be more difficult to sell and price than other securities. • Derivatives are generally more volatile and sensitive to changes in market or economic conditions than other securities; their risks include currency, leverage, liquidity, index, pricing, and counterparty risk. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political and economic developments. These risks may be greater for investments in emerging markets or if the Fund focuses in a particular geographic region or country. • The Fund may have high portfolio turnover, which could increase its transaction costs and an investor’s tax liability. • The Fund invests in a smaller number of issuers, so it may be more exposed to risks and volatility than a more broadly diversified fund.

The views expressed may not reflect the opinions of Hartford Funds or any other sub-adviser to our funds. This information is current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Schroders or Hartford Funds. 

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