AL&P launches local currency emerging market fixed income strategy
Adrian Lee & Partners (AL&P) has launched a local currency emerging market fixed income strategy. This is available either as a separate account or through a fund vehicle.
The strategy employs two separate investment processes, one for fixed income markets and one for currency markets or forward contracts. These two processes give investors the best combination of overall return from both sources while requiring no additional capital.
AL&P believes that emerging market fixed income represents two fundamental investments, one in fixed income and another in currency – the latter accounting for over 75 per cent of the risk. These investments are different and do not move together in any fundamental or systematic way. This therefore demands two investment processes one that buys the right bonds market and another that separately hedges or cross hedges into the right currency.
This need to unbundle bond and currency decisions is often ignored by managers who tend to make some form of aggregate decision such as buying a bond market and holding its associated currency exposure. AL&P’s research suggests that this unbundling alone can contribute up to 15 per cent per annum extra excess return versus using an aggregate decision based on one process.
AL&P’s bond process and currency process are both quantitative and fundamental, with a discretionary component. It employs AL&P’s currency approach alongside a research driven quantitative fixed income process.
Adrian Lee, president and chief investment officer, says: “Emerging markets fixed income investments today represent a tactically and strategically attractive opportunity for global investors. A combination of strong macroeconomic fundamentals and sound fiscal management can be expected to lead to enhanced returns on both the underlying bonds and currencies.
“It’s not commonly understood that investors in local currency emerging market fixed income are really investing in two things – a bond and the associated currency – and should make two separate decisions. Given the higher risk attached to currencies than the bonds, it is most important to get the currency decision right, to safeguard against undesirable swings in foreign exchange rates and to exploit inefficiencies in the currency markets.
“This new fixed income strategy is expected to emulate the success of our emerging market currency strategies and provide institutional investors with additional opportunities for active return.”
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