An actively managed, pure play approach to emerging market local currency debt. The Fund seeks to provide investors with attractive total returns through actively managed portfolio compromising local-currency denominated emerging market sovereign bonds and government-related debt securities.
Federico Garcia Zamora
Fund Inception Date
15 May 2008
Why invest in this Fund?
1. Multiple sources of performance – The Fund has the ability to pursue returns from multiple sources such as changes in spot exchange rates, duration and carry, enabling the portfolio managers to position the portfolio to exploit opportunities as they arise.
2. Distinctive, fine-tuned investment approaches – The approach combines top-down fundamental and proprietary quantitative models to identify opportunities within spreads, currencies and local interest rates that have the greatest potential to deliver strong risk-adjusted returns.
3. Specialist knowledge, resources and experience – The firm’s active fixed income teams have been managing emerging market debt mandates for over a decade. The dedicated team has an average of 16 years investment experience across the entire emerging market debt spectrum.
Given the interdependence of EM countries and the basic materials they tend to specialise in, it’s no surprise that trade policies and their effect on commodities pricing is one of the factors that helps determine how the investment team allocates to different geographies.
Take the example of ‘rare earths,’ the group of 17 chemically similar elements that are crucial for the manufacture of the high-tech magnets, catalysts, metal alloys, electronics, display panels, glass, and ceramics that are essential components for the coming revolution in electric vehicles. While not as rare as their name suggests only one country – China – has a stranglehold on the world’s production of rare earth materials, accounting for 95% of annual output.
While avoiding direct exposure to Chinese government debt, the fund maintains holdings in Brazil and Russia, two countries with the second- and third-largest reserves of rare earths materials globally. As global demand for rare earths rises in line with the evolution of EVs, the smartphone revolution and an increasingly connected world this freedom to allocate across EM geographies and in local currency is of obvious benefit for investors.
Indonesia is the largest spender on IT in Southeast Asia.1 According to Cekindo Bisnis Grup, this rapid development in the information technology sector, combined with drivers like mass consumption, urbanisation, a surge in mobile usage, and a tech-hungry young population, makes a positive impact on economic growth. While it indicates promising potential for the digital market in Indonesia, it also creates a big concern for cyber security, which must be developed hand-in-hand with these e-commerce trends.
Meanwhile, Indonesia expects to have five more tech ‘unicorns’ by 2019.2 It already has four companies that have reached US$1 billion in valuation without tapping the stock markets – including ride-hailing company Go-Jek, travel site Traveloka, and online market places Bukalapak and Tokopedia. Driven by a youthful population of more than 250 million people owning at least 100 million smartphones, Indonesia has seen a rapid growth in the number of start-ups trying to capitalize on this potential in a growing economy.
For the BNY Mellon Emerging Markets Debt Local Currency Fund, exposure to this story of high growth tech take-up in Indonesia is expressed through its geographical allocation and exposure to the Indonesian Rupee.
Commodity-based countries and those with young demographic profiles continue to dominate the EMD LC portfolio. Indonesia, which has an average age of 30.2 years 3, remains among the largest positions in the Fund (as at 31 January 2019).
In addition to having a young demographic, or perhaps because of it, Indonesia is one of the biggest online markets in the world. The number of internet users in Indonesia in 2017 was 104.96 million people and this figure is projected to grow to 133.39 million by 2021. As of March 2017, online penetration in the country stood at slightly over 50% and popular online activities include mobile messaging and social media.4
However, the current allocation to Indonesia versus the index at the moment is more about the political and inflationary picture in the country, which bodes well for its debt profile, according to portfolio manager Federico Garcia Zamora.
Source: Mellon as at 31 May 2018
While the geographic weightings in the EMD LC Fund show a number of Latin American country positions, on a relative overweight basis the portfolio is biased towards central Europe, Middle East and Africa. Within both regions, the Fund does have exposure to commodity-sensitive economies, especially oil sensitive, such as Russia, Colombia and Mexico. The team says: “With respect to how these weights might change going forward, based on our outlook of steady to improving commodity markets, we feel comfortable with these countries right now. If our outlook on commodities changes we would adjust the portfolio accordingly.”
Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.
Mellon was formed on 31 January 2018, through the merger of The Boston Company and Standish into Mellon Capital. Effective 2 January 2019, the combined firm was renamed Mellon Investments Corporation.
1 International Data Corporation, Google Temasek, Cekindo: ‘Information Technology’, accessed 12 July 2018
2 Reuters: ‘Indonesia expects to have more than 5 unicorns by 2019: minister’, 19 February 2018. A tech ‘unicorn’ is an unlisted technology company with a putative valuation of more than US$1bn.
3 The World Fact Book: https://www.cia.gov/library/publications/the-world-factbook/fields/2177.html, as at June 2018.
4 Statista.com https://www.statista.com/statistics/254456/number-of-internet-users-in-indonesia/