Fixed Income Why market structure rewards active management in local currency EMD

Local currency emerging market debt (EMD) has matured into one of the most diverse opportunity sets in global fixed income. Issuance has grown, liquidity has deepened, yield curves have developed, and the ownership base has broadened across domestic and international investors. For many emerging economies, a functioning local bond market and credible monetary policy are now signals of economic development rather than aspirations.
 

For investors, the question is no longer whether local currency EMD merits an allocation. It is how best to capture it. A passive or smart beta approach offers a low-cost entry point, but it also embeds a series of decisions that many investors may not fully appreciate. In our view, the structural characteristics of this asset class, namely its breadth, its heterogeneity and its multiple sources of return, create conditions in which specialist active management is particularly well placed to add value.
 

The scale of the market underlines how much is at stake. The widely followed JPMorgan GBI-EM Global Diversified Index represents around US$2.8 trillion, compared with approximately US$16.6 trillion of tradable local currency government debt. In other words, the benchmark captures less than 17% of the broader market. A substantial opportunity set therefore sits outside the standard benchmark from the outset. 

These are not available simply because a manager is active, however. They depend on capabilities that are demanding to build and harder still to integrate: specialised research that can tell one economy from another, the operational reach to hold positions the benchmark excludes, the combined rates and currency expertise to work each return driver independently, and a risk function with the standing to shape exposures rather than merely report them.
 

Our own approach is organised around those requirements. Emerging market debt is covered by dedicated sovereign and corporate analysts, macroeconomists and a currency strategist rather than generalists, so dispersion between countries is researched at the level at which it actually occurs. A specialist team assesses market mechanics and counterparty access across more than 75 markets, which is frequently what determines whether an off-benchmark opportunity is genuinely investable rather than merely attractive on paper.
 

The structural features of local currency EMD, its dispersion, the simplifications embedded in its benchmarks, its multiple sources of return, and the inefficiencies and risks created by its own mechanics, are precisely the conditions in which we believe specialist active management can add the greatest value.