April 6, 2022 | Emerging Markets Debt
Portfolio Manager
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https://youtu.be/nTpTgctDM5M?si=gCI8uAmX-ZcCucfN
Corporates are becoming an ever more important part of emerging markets hard currency debt investments.
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Corporates are becoming an ever more important part of emerging markets hard currency debt investments.
There are several advantages to a corporate credit allocation in the current market environment.
First, corporates are predominately of lower duration than sovereigns—a key performance driver in times of higher and more volatile interest rates.
Second, over 80% of the corporate bonds we analyze currently trade at a positive spread to their respective sovereign. For a manager that is able to appropriately navigate these credit risks, this additional yield can be additive to performance.
Third, the diversity of corporates also provides for an assortment of investment drivers above and beyond a sovereign’s credit quality. While sovereign risk is a driver of corporate bond returns, corporate credit drivers can at many times dominate, particularly when the sovereign credit landscape is stable or improving.
We assess corporate fundamental risks through our corporate risk model and ESG scorecard.
Our corporate risk model views credit risks through a multi-angle approach.
We look at an issuer’s financial risk through a financial model with a focus on credit trajectory and potential downsides.
An issuer’s business risk is annualized by studying its industry’s competitive environment and the issuer’s market position within it.
We assess a company’s management strategy by scoring its policies, track record, and growth plans.
One of the most important risks in corporate analysis is the debt structure risk. This looks at an issuer’s maturity profile and its debt composition, which is crucial to assess a likelihood of default.
Last but not least, we assess the issuer’s degree of sovereign-related risks by examining the country’s macro, political, and regulatory environment, as well as the probability of a sovereign ratings change given their effect on corporate issuer ratings.
Our ESG scorecard is our tool to analyze an issuer’s ESG risks. We have built this scorecard based on SASB materiality factors, our assessment of what is material, and a double materiality framework based on sustainability and business impacts. Our analysis is done through informational engagement with issuers and complemented with third-party sources leading to an overall score for ESG pillars, an incident management assessment, and an outlook for the issuer.
At William Blair, we use a systematic, repeatable framework for our corporate credit allocation.
Our process begins by taking the sovereign and corporate universes and applying ESG-related exclusions for global norm violators and controversial sectors, as defined by William Blair’s internal policies.
We then duration match corporates and sovereigns by country and by applying our proprietary beta-bucketing approach.
Using external ratings as a guide, we limit the max credit rating differential as a way to limit excess credit risk.
We then run a valuation screen, focusing on the historical spread relationship between the corporate and sovereign. This is important as we aim to enter a trade when historically more attractive.
Our fundamental analysis now takes a key role. Using our corporate risk model and ESG analysis, our analyst team provides their fundamental assessment of the issuer. This assessment and the valuation screen are then reviewed on a monthly basis by portfolio managers for potential investment.
Complementing this process is our ongoing monitoring as well as our formal bi-weekly performance assessment, which is performed by the whole EMD team in an open discussion.
Filmed March 2022
The views and opinions expressed herein are those of the speaker(s) as of the date of publication, are subject to change without notice as economic and market conditions dictate and may not reflect the views and opinions of other investment teams within William Blair. Factual information has been obtained from sources we believe to be reliable, but its accuracy, completeness, or interpretation cannot be guaranteed. This material may include estimates, outlooks, projections, and other forward-looking statements. Due to a variety of factors, actual events may differ significantly from those presented. This video has been provided for informational purposes only and should not be considered as investment advice or a recommendation of any particular strategy or investment product, or as an offer to buy or sell any securities or related financial instruments in any jurisdiction. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions. Investing involves risks, including the possible loss of principal. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks. These risks may be enhanced in emerging markets. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. Rising interest rates generally cause bond prices to fall. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. The inclusion of Environmental, Social and Governance (ESG) factors beyond traditional financial information in the analysis of securities could result in a strategy's performance deviating from other strategies or benchmarks, depending on whether such factors are in or out of favor. Diversification does not ensure against loss. Past performance is not indicative of future results.
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