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Institutional Update Q4 2016

Victoria Harling Strategy Leader
Peter Eerdmans Co-Head of EMFI

Investec Emerging Market Corporate Debt

Victoria Harling Strategy Leader
Peter Eerdmans Co-Head of EMFI

Strategy Focus:
Investec Emerging Market Corporate Debt


Evolving in adversity

The political and economic environment for emerging markets has been challenging over the past three years. However, we believe that investors have overestimated and mispriced the risk in emerging market corporate bonds.

To test this hypothesis, we undertook in-depth analysis of the 347* non-financial companies in the JP Morgan CEMBI Broad Index, representing the core emerging market corporate bond issuer investible universe.


Key findings

Our research into the emerging market corporate debt asset class revealed a diverse, dynamic and evolving investment universe, filled with bonds issued by high quality national champions with proven resilience and strong global brands.

  • Companies have leveraged competitive advantages to expand internationally and build a global customer base.
  • Companies have diversified their sources of financing in both US dollar and local currency.
  • Strong ties between large emerging markets have typically helped companies with loans, equipment and customers.
  • We believe larger emerging market companies with outstanding bonds can continue to weather future currency declines reasonably well.
  • Financial conservatism born of historic volatility means that typically corporate debt levels appear manageable in absolute terms and are lower than many developed market ratios, which should help to contain default risk.

As such, we believe the asset class provides a unique investment opportunity for active investors with the ability to select companies and sectors that will benefit from current conditions especially as emerging market corporates usually offer a higher yield for lower leverage than their developed peers.


Why Investec Emerging Markets Corporate Debt (EMCD)?

Good long-term performance

Since inception the Strategy has delivered attractive long-term risk-adjusted returns primarily through investment in a diversified portfolio of:

  • Predominantly USD denominated debt securities.
  • Companies operating in emerging market countries.

Annualised performance in USD

Past performance should not be taken as a guide to the future, losses may be made.. Performance is shown gross of fees in USD. Please refer to composite disclosure in the appendix. Source: Investec Asset Management, 30.0916, returns are based on the composite strategy. *Emerging Markets Corporate Debt inception date: 01.05.2011. **Comparison index: JPMorgan CEMBI Broad Diversified.


A distinctive philosophy

Investec Asset Management started in an emerging market and has been managing institutional emerging market mandates for more than 24 years.


We believe:

  • That the corporate EMD opportunity is best captured by a rigorous bottom-up approach, informed by top-down analysis.
  • A diversified portfolio composed of our top individual credit ideas across the universe optimises returns.

A disciplined process

We believe the best way to deliver alpha is by following three principles:

  1. Compelling forces drive returns: Our investment approach considers three key factors; changing fundamentals, valuations and market price behaviour.
  2. Checks and Balances: Top-down inputs from the wider team ensure the overall portfolio reflects our view of forward looking risk-adjusted returns and economic themes.
  3. Considered Portfolios: We aim to ensure no one theme dominates the risk in the portfolio. Rigorous risk management plays a key part in constructing our portfolios.

Experienced team

Our Emerging Market Corporate Debt Strategy is run by two established and experienced portfolio managers and is supported by a 42 strong team, with and average 12 years industry experience. Our specialist, experienced team manages assets of US$33.9 billion (as at 30.09.16).

*Note: The companies were predominantly selected as constituents of the JPM Morgan CEMBI Broad index, which is our primary index family. The companies are therefore part of our active coverage universe, and if not directly covered, are used to understand relative value and industry conditions. This group of companies makes up 90% of the index, excluding financials. Companies were excluded primarily because we were unable to obtain recent financial statements for private companies, or obtain financial statements that were directly relevant to the bonds in the index, or we believe the bonds don’t actively trade. Investec Asset Management’s sector leverage figures are not directly comparable to BoAML’s sector leverage figures due to different coverage universes and some calculations, such as the inclusion of restricted cash for certain companies. For full details of our research, please see our white paper “Evolving in adversity”, September 2016.

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Important information

This communication is only for institutional investors. It is not to be distributed to the public or within a country where such distribution would be contrary to applicable law or regulations. Unless stated otherwise, all information is sourced from Investec Asset Management Limited, Investec Investment Management Limited and Investec Asset Management North America, Inc (“Investec”). Investec has prepared this material based on internally developed data and public and third party sources. Although we believe the information obtained from public and third party sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Information is presented for informational and illustrative purposes only. Information presented should not be viewed as a recommendation or a solicitation of an offer to buy, sell or hold a security or investment, or as a recommendation to adopt any investment strategy. No one should rely upon this information as research or investment advice. The stated opinions and investment views, including those regarding possible future events, constitute only subjective views and/or present intentions, and are not guarantees, representations or warranties, and are subject to change at any time without notice. There is no guarantee that views and opinions expressed will be correct and our intentions to buy or sell particular securities in the future may change. The investment views, analysis and market opinions expressed may not reflect those of Investec as a whole, and different views may be expressed based on different investment objectives. Securities referenced do not represent all of the securities purchased, sold or recommended for portfolios. Do not assume that investments in securities, companies, sectors or markets described in this material have been or will be profitable. Past performance cannot guarantee future results. Characteristics and performance of individual portfolios will vary. Unless specifically noted, past performance figures are not audited and should not be taken as a guide to future results. Investec does not guarantee the achievement of investment objectives, target returns or measurements such as alpha, tracking error, security weightings, and information ratios. The use of tools cannot guarantee performance. Investing entails risks, including possible loss of principal. If anything is unclear, please either telephone or email the contact provided with this material. This information is intended for use by our clients and their authorized representatives and is not intended for public distribution. Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Investec’s prior written consent. Indices are for illustrative purposes only, are unmanaged, assume reinvestment of income, do not represent the performance of actual accounts and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number or types of securities) that are different from a particular product. Index returns do not reflect deductions for management fees or expenses, and assume reinvestment of dividends and distributions. One cannot invest directly in an index.
This communication is intended for institutional investor use only.

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