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Yield-starved investors grab emerging market corporate bonds
November 15, 2012 / 9:11 PM / 5 years ago

Yield-starved investors grab emerging market corporate bonds

NEW YORK, Nov 15 (Reuters) - Emerging market corporate bonds are attracting non-traditional buyers who are starved for higher yields and drawn to their competitive economic backdrops.

These investors who do not typically invest in emerging market corporate bonds - also known as “crossover buyers” - are adding them to their portfolios and touting their advantages over U.S. corporate bonds.

In total, money managers and hedge funds have purchased a record $288 billion of the bonds so far this year, according to J.P. Morgan, which said it is now a more than $1 trillion market.

“The corporate market hasn’t seen this type of interest from non-dedicated EM investors for a long time,” said David Hinman, chief investment officer of SW Asset Management, a firm that specializes in emerging market corporate bonds.

Investors are delving into the corporate bonds issued by companies based in such countries including Brazil, Russia, India and China, or BRICs, whose economies are running current account surpluses or near surpluses.

“We have crossed over into that asset class because we see some very attractive opportunities,” said Robert Lee, manager of the Lord Abbett Short Duration Income Fund, which has more than $25 billion in assets.

Lee said that his fund is overweight emerging market corporate bonds and views them as a “core” holding given their lower debt overhang, high-yields, and potential to diversify.

Fundamentals and technicals are at play.

Emerging market corporate bonds are sporting lower debt levels, strong returns, and the ability to diversify. The Bank of America Emerging Markets Corporate High-Yield index has returned 18.54 percent so far this year, far surpassing its U.S. counterpart which is returning 12.67 percent.

Those gains have been a magnet for investors looking for yield.

Returns from developed-world investments in “junk” bonds, government guaranteed mortgage securities and battered euro-zone debt have plunged in the wake of global central bank policies intended to suppress borrowing costs.

The yield on the Bank of America Emerging Markets Corporate High-Yield index is currently 8.025 percent, above the 6.636 percent yield of the bank’s US High-Yield index.

Institutions such as pension plans, endowments and foundations, and insurance companies are also interested in adding positions, said Alexander Kozhemiakin, who oversees $13 billion as managing director of emerging market strategies at Standish Mellon Asset Management.

Emerging markets are home to industry leaders like Brazilian metals and mining company Vale SA, said Robert Bishop, institutional account and portfolio manager at Newfleet Asset Management.

Bishop, who is looking to add emerging market corporate debt to his institutional accounts, said that many of the bonds cannot be called back by the company and refinanced at a lower interest rate, while U.S. high-yield bonds may be subject to that move.

FLAVOR OF THE YEAR

Investors are used to getting higher yields for riskier bonds, but many say that certain emerging market corporates are less risky than U.S. corporates while still offering higher payouts.

“I have never seen better technicals in the asset class than I‘m seeing today,” said Polina Kurdyavko, senior portfolio manager at BlueBay Asset Management in London.

Kurdyavko said that emerging market governments have lower debt levels, stronger balance sheets, and higher growth rates than the U.S. and Europe, which leads to lower default rates than U.S. corporate bonds.

Emerging market corporates have “better standalone fundamentals, but you are being paid more,” said Kurdyavko, who added that high inflows this year have lent support to the asset class and reduced volatility.

Emerging market debt funds, including those that focus on sovereign and corporate bonds, have attracted $46.1 billion in new cash this year according to fund-tracker EPFR Global.

The figure modestly trails the 2010 record of $53.29 billion but will exceed it if flows sustain their current pace, said Cameron Brandt, director of research at the firm.

“There is value and good quality in EM corporates, but getting big institutional managers to see this takes time,” said Jan Dehn, emerging markets strategist at Ashmore Investments in London.

It may not be for long, though.

“The skepticism that some investors have had on emerging markets over time is now dissipating,” said Dick Oswald, managing director and client portfolio manager at J.P. Morgan Asset Management.

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