Fund managers series

Emerging market bonds in the limelight

Ms Owi Ruivivar, managing director of emerging market fixed income at Goldman Sachs Asset Management, talks about the opportunities in emerging market bonds and fixed income investing, her investment approach and how to find the real gems, in the latest in our series featuring fund managers and market experts.

Emerging market fixed income is often seen as a less-accessible asset class for retail investors. However, it can offer a high-quality approach to diversifying investment portfolios, says Ms Owi Ruivivar of Goldman Sachs Asset Management.

Based in Singapore, Ms Ruivivar, 46, is a veteran emerging market economist with a PhD from Massachusetts Institute of Technology.

She oversees some of Goldman Sachs Asset Management's leading emerging market fixed income portfolios, including the Goldman Sachs Asset Management emerging market debt portfolio.

Q How has emerging market fixed income investing changed?

A The main change is that today, there is so much more data available. Emerging markets were a particularly treacherous place to invest in when we set up the emerging market fixed income team - this was around the time of the Asian financial crisis, Argentina's economic crisis and the Russian rouble crisis.

There wasn't good enough data or understanding of the various risks at play, and there was a tendency for people to treat emerging markets generically as one, rather than thinking of the individual markets as distinct, idiosyncratic stories.

Today things have changed - there is more and better-quality data available, meaning you can look at emerging markets from a more securities-specific, research- heavy, bottom-up perspective.

Ms Owi Ruivivar, 46, says that despite emerging market bonds having had a rough spell until a year ago, it has turned the corner. "We're now seeing some of the best performance to date," she adds. ST PHOTO: FELINE LIM

This is how we've always approached emerging market investing - early on we were known for being very nimble, and could identify opportunities through a securities-specific approach which wasn't that common in the early 2000s. The ability to choose well-priced investments is key, and that's what we've been doing for over 15 years.

Q What is the investment case for emerging market bonds right now?


When we look at the whole spectrum of fixed income investing, there is value to be found in numerous places, and we complement these exposures by avoiding areas in the asset class where risk is expensive.

MS OWI RUIVIVAR, on opportunities on the horizon.

A In a nutshell, emerging market bonds offer high-quality income. I want to make two points here. First, what do I mean by "high quality"- emerging market countries' fundamentals have improved so that they provide better insulation from exogenous shocks such as hikes by the US Federal Reserve. Investors who are searching for high-quality yields will only benefit from this positive fundamental story.

Second, from a relative value perspective, emerging market bonds are less expensive relative to many other, if not all, fixed income asset classes out there, many of which are currently trading at their historically tightest yields.

Despite emerging market bonds having had a rough spell until a year ago, it has turned the corner and we're now seeing some of the best performance to date. Emerging market debt as an asset class offers a current yield of approximately 6 per cent, which is significantly higher versus developed country bonds at this point in time. Emerging markets are growing in size, imparting greater depth and liquidity, and in combination with the fundamental story - this is why I think there's an opportunity there.

Q With the US raising interest rates, a new US president and elections in Europe - there are many changes right now. What implications do these have for emerging markets?

A Of course, we need to be very cognisant of the geopolitical environment we operate in. While the shocks and potential policy changes from the United States, for instance, can be significant, we need to balance that with the ability of these countries to deal with these changes.

In 2013, the US Fed's "Taper Tantrum" put a lot of pressure on emerging markets when the Fed gradually reduced the amount of capital it was supplying into the economy, meaning that the cost of borrowing went up. If today's capital flows were to reverse from emerging markets because of increased protectionism in the US, or broader risk aversion globally, emerging markets would now have a higher arsenal of reserves when it comes to dealing with these kinds of market shocks.

Q How do you identify investment opportunities?

A If active investors like us are going to be worth their salt, they need to be able to understand the risk that is particular to an individual issuer, which speaks to how important it is to have a research-intensive credit-selection focus when you invest. It is very dangerous to view the market like a monolithic whole. Applying this approach means you start to find real jewels out there.

Regardless of whether we are looking at a corporate bond or a government bond, we run a cashflow analysis that models the payment dynamics of the investment. We ask questions like: Can the entity generate income to pay for its debt? How the political risk will affect it? How will higher US interest rates impact it? We run multiple- scenario analyses to identify how those shocks could have an impact on fundamentals, and how we need to price the investment to account for the multitude of outcomes. It's an active manager's bread and butter to work in this way and set the risk premium on the product.

Q What opportunities are you seeing on the horizon?

A Wherever we see the best relative value. We're not an investor who is going to try and call the timing on the market. As a result, our performance has been strong regardless of whether the market is going up, down or sideways.

As of April, our GS Emerging Markets Debt Portfolio is rated four stars by Morningstar, and is in the top quartile for three- and five-year performance records, returning over 5 per cent net for each period in base shares class.

When we look at the whole spectrum of fixed income investing, there is value to be found in numerous places, and we complement these exposures by avoiding areas in the asset class where risk is expensive.

For example, if you look at currencies, the global macro environment of better synchronous growth and stabilising commodity prices lends support to high-carry emerging market currencies; North Asia currencies may face headwinds from the continuing economic rebalancing in China.

In US dollar bonds, Indonesia is attractive, given that valuations have not completely factored in its low level of debt and its positive fiscal dynamics; the Philippines, with excellent fiscal dynamics as well, may already be priced to reflect that. In Asia, especially South Korea and Thailand, local debt looks compelling given where they are in their business cycles.

I'm now routinely reading positive headlines about emerging market bonds, a significant change from a few years ago. As a result, you're seeing an uptick in participation from retail investors, who have been tactical in their approach to investing in emerging market debt.

However, what is less known is that large institutional investors, such as pension funds and sovereign wealth funds, have without fail provided support for the asset class through down and up markets. This speaks to their longer- term view, which I think makes sense, that emerging market debt is a durable investment to consider.

Correction note: In our earlier story, we had mentioned GS Emerging Markets Debt Fund. It should be GS Emerging Markets Debt Portfolio.

A version of this article appeared in the print edition of The Sunday Times on June 04, 2017, with the headline 'Emerging market bonds in the limelight'. Print Edition | Subscribe