| NEW YORK
NEW YORK Nov 15 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
"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
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
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
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
"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
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