March 12, 2024 | Emerging Markets Debt
A View from the Summit
Portfolio Manager
Featured Fund
WEDIX
View Fund:
https://im.williamblair.com/investments/mutual-funds/wedix-emerging-markets-debt-fund
To help us synthesize information about the countries we invest in, as well as global trends, our emerging markets debt (EMD) team uses an internal technological research platform called Summit.
Watch the video or read the recap below.
Emerging markets debt is influenced by global macroeconomic conditions, international relations, and country-specific idiosyncratic factors.
To help us synthesize information about the countries we invest in, as well as global trends, we use an internal technological research platform called Summit. The name Summit represents the perspective that one gets from the top of a summit—the ability to see the panorama, which is important for investing.
Broadly speaking, we believe there are a number of reasons Summit gives us an edge. Summit reinforces discipline and structure in our investment process, which helps us be better decision-makers as we seek more consistent alpha. Summit helps us to integrate information into one platform rather than going through myriad spreadsheets and terminals to gather information. And because our team operates across five different time zones and geographies, Summit allows us to communicate more effectively.
Now I want to show you how Summit helps us, using the technology in real time.
Beta Bucketing
Here, we can see how Summit helps us manage our beta-bucketing approach. One of our key differentiators of our strategies is that we segment the investable universe into high-, medium-, and low-beta countries. We believe this helps us allocate capital more efficiently and make better relative value decisions.
We have an economic data dashboard in Summit. In this dashboard, the team maintains data and forecasts across the different countries we cover, and Summit aggregates it. That allows us to quickly identify changes in emerging markets fundamentals and turn them into actionable insights.
The high-beta segment of the universe looks the most vulnerable right now.
As you can see from our dashboard, the high-beta segment of the universe looks the most vulnerable right now, although the fiscal trajectory and debt dynamics are improving in this bucket. Of course, these factors can change over time.
Top-down Analysis
Our process combines bottom-up and top-down analysis to help us uncover mispricings in inefficient emerging markets debt. We look at top-down factors to help guide us in determining how much risk we want to take in the portfolios.
We hold a monthly meeting where we discuss the outlook for various fundamental factors, such as global growth, liquidity conditions, and monetary policy outlook.
We became more bearish on global risk appetite following Russia’s invasion of Ukraine and the collapse of Silicon Valley Bank in the United States.
Ultimately, we end up with a global macro score, which is our assessment of how global risk appetite will impact emerging markets debt. And this top-down research is captured in Summit. The blue line in the bottom left corner indicates that we became more bearish on global risk appetite following Russia’s invasion of Ukraine and the collapse of Silicon Valley Bank in the United States.
Our global macro score then feeds into scorecards for our other EMD sub-asset class scorecards, such as hard currency sovereigns, corporates, and local markets, which help us determine which EMD sub-asset classes are more attractive and guides our tactical asset allocation decisions.
Bottom-up Analysis
But as I mentioned, we believe one of the keys to delivering outperformance in emerging markets debt is in-depth country and security selection. Our bottom-up country research pages in Summit help us to analyze the attractiveness of a country, and they also help us to determine what we view are the most attractive investments within that country.
Putting It All Together
Now, let’s pull it together with an example. Here we see a middle-beta country.
We start by analyzing the economic data in the top middle box. This data includes our own forward-looking projections of economic variables.
These projections are then fed into our sovereign risk model, as seen in the lower left-hand corner. This is the starting point of our country investment decision-making process. The sovereign risk model helps us to assess how risky each country is, as well as whether we believe spreads properly compensate us for the risk. However, we are fundamentals-first investors, and the sovereign risk model is the starting point in our investment decision-making process
The top left box is a written summary of our investment decisions and justification, which makes it easier for our team members around the world to get up to speed on current conditions across time zones.
We use technology to help inform decisions made by portfolio managers and analysts and hopefully make us better decision-makers.
Then the opportunity set box in the middle helps us to assess which bonds along the country’s curve we consider to be most attractive.
We are also able to analyze the local currency opportunity set and determine whether hard currency or local currency investments are more attractive. Here, we can see that the local currency curve is upward-sloping, rates are high, and it appears the market is pricing in considerable cuts over the next two years. However, in our view, the currency has rallied significantly after being oversold, and we are more cautious on the outlook.
Circumstances can change, so I don’t want to go into much detail, but this illustrates the way in which we use Summit.
Our Edge
Technology at William Blair is not about trying to build better machines for the sake of better machines. We use technology to help inform decisions made by portfolio managers and analysts and hopefully make us better decision-makers. We believe Summit, by helping us integrate information and communicate more effectively, helps us do just that.
Jared Lou, CFA, is is a portfolio manager on William Blair’s emerging markets debt team.