Emerging Markets Local

Currency Debt and

Foreign Investors
Recent Developments

Daniela Klingebiel
Pension & Endowments Departments
Nov. 20, 2014

Outline
Structural trends in emerging markets (EM) external and local
currency sovereign debt

Development of size of EM debt market and composition

Inclusion of EM debt in fixed income benchmarks
Developments of foreign holdings in EM debt (local and hard currency) and their
effects

Why do foreign investors move into EM local currency bonds

Strategic asset allocation and EM local currency bonds

Opportunistic investing in emerging market sovereign local bonds
How do institutional investors view local emerging markets bonds

How do foreign investors access local emerging market bonds

Investing through external managers

Direct investing in markets
ETFs
1

Structural trends in EM hard and local

currency sovereign markets

Explosive growth of EM local currency debt

Total EM debt outstanding (US $ bn)
16,000.00

EM DX debt vs. FX debt outstanding (US $ bn)

6,000.00

14,000.00

5,000.00

12,000.00
4,000.00

10,000.00
8,000.00

3,000.00

6,000.00

2,000.00

4,000.00
1,000.00

2,000.00
-

Emerging Markets
Source: Bloomberg.

United States

EM FX Debt

EM DX Debt

The market capitalization of EM debt grew significantly during last 14 years. While sovereign debt
outstanding for 55 emerging markets, amounted to $1.3 trillion in 2000, 13 years later it had grown sixfold to $6.3 trillion. With $6.3 trillion, EM debt outstanding now almost half of the size of the US
Treasury markets, the world biggest and most liquid market.

Growth in EM debt outstanding driven by local currency debt (EMDX). While EM external debt (EMFX)
almost doubled over this period from $576 billion to $1.0, EM local currency debt grew sevenfold from

EM external debt now presents only small portion of Total

market cap of EM debt
EM DX debt as % of total EM debt
6,000.00

90.00%
85.00%

5,000.00

80.00%

US $ bn

4,000.00

75.00%

3,000.00

70.00%

65.00%

2,000.00

60.00%
1,000.00

55.00%

50.00%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Bloomberg

EM DX Debt

EM DX Debt as % of Total EM Debt

In 2000, local currency debt accounted for roughly 55% of outstanding tradeable debt in
EM.
By 2013, the share of EM local currency debt to 83% of total outstanding EM debt.

Market highly concentrated with few issuers accounting for

bulk of outstanding EM local currency debt
Top 10 EM DX stock as % of total EM DX debt
4,500.00

85.00%

4,000.00
84.00%

3,500.00

US $ bn

3,000.00
83.00%

2,500.00
2,000.00

82.00%

1,500.00
1,000.00

81.00%

500.00
-

80.00%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Top 10 EM DX stock

Top 10 as % of total EM DX debt

EM local currency debt market is highly concentrated with the ten largest issuers
accounting for 81% of the local currency debt market and 74% of overall EM debt.
With $1.3 trillion, Chinas market cap of outstanding local currency debt largest in EM
space.
5

China, Brazil and India alone account for 50% of

outstanding market cap of EM local currency debt
Table 6. Top 10 Largest DX EMD Issuers Stock Comparison
Federal government debt, all maturities, amounts outstanding, by issuer
(In billions of US dollars)

Country
China
Brazil
India
Mexico
Turkey
Poland
Malaysia
Russia
South Africa
Thailand

DX Stock (USD billions)

Dec-00
Dec-13
133.89
1,361.82
134.26
912.21
11.92
618.04
59.64
306.68
15.77
243.74
36.97
212.55
44.24
160.93
8.95
144.27
71.35
126.68
16.17
113.69

DX Stock (% GDP)
Dec-00
Dec-13
11.17%
14.74%
20.82%
40.62%
2.50%
32.93%
8.72%
24.32%
5.92%
29.72%
21.59%
41.07%
47.17%
51.51%
3.44%
6.88%
53.69%
36.13%
13.17%
29.36%

DX Stock (% of total
EM DX Debt)
Total Debt (USD billions)
Dec-13
Dec-00
Dec-13
26.29%
139.20
1,363.49
17.61%
216.13
986.88
11.93%
11.92
618.04
5.92%
138.70
405.26
4.70%
42.63
299.78
4.10%
50.58
299.88
3.11%
49.08
164.78
2.78%
98.51
237.71
2.45%
75.40
139.03
2.19%
18.13
113.79
81.08%

Total Debt (% GDP)

Dec-00
Dec-13
11.62%
14.76%
33.52%
43.95%
2.50%
32.93%
20.29%
32.14%
15.99%
36.55%
29.53%
57.94%
52.33%
52.74%
37.93%
11.34%
56.75%
39.65%
14.77%
29.38%

Total Debt (% of
total EM Debt)
Dec-13
21.85%
15.82%
9.91%
6.50%
4.80%
4.81%
2.64%
3.81%
2.23%
1.82%
74.19%

China, Brazil, and India also have debt stock of local currency bonds that exceed $500 mn.
Also interesting to note that largest issuers of local currency debt also issue very little hard
currency debt.

Six of largest 10 issuers have investment grade rating and

all are at least part of one index

Country
China
Brazil
India
Mexico
Turkey
Poland
Malaysia
Russia
South Africa
Thailand

S&P Credit Rating1

Dec-00
Dec-13
BBB
AABB
ABBB
BBBBBB+
A
B+
BBB
A+
A
A
A
BBBB+
ABBB+
AA-

GBI-EM
*
*
*
*
*
*
*
*
*
*

Local Currency Index Membership2

EMLCTRUU
LEGATRUU
LCEMTRUU
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*

EMGBI

WGBI

*
*
*
*
*
*
*
*

*
*
*
*

Notes:
1. Local currency long-term debt
2. GBI-EM = JPMorgan Government Bond Index Emerging Markets, EMLCTRUU = Barclays Emerging Markets Local Currency
Government Bond Index, LEGATRUU = Barclays Global Aggregate Index, LCEMTRUU = Barclays Emerging Markets Local Currency
Government Universal Bond Index, EMGBI = Citi Emerging Markets Global Bond Index, WGBI = Citi World Government Bond Index

From a regional perspective, Total EM sovereign debt

outstanding concentrated in Asia and LATAM
Total sovereign EM debt breakdown, FY13

11.32%
31.37%

3.03%
3.10%

Sub-Saharan Africa
Middle East & North Africa
East Asia Pacific
Europe & Central Asia

30.45%
20.73%

Latin America & Caribbean

South Asia

With 31.3% LATAM region highest share of total sovereign emerging market debt
outstanding, followed by with 30.5%.

From a regional perspective, local currency debt

outstanding concentrated in Asia
Total EM local currency debt breakdown, FY13
13.40%
28.41%

Total EM hard currency debt breakdown, FY13

1.18%

Sub-Saharan Africa
3.33%
2.90%

Middle East & North

Africa

45.86%

4.10%

East Asia Pacific

16.66%

35.31%

Sub-Saharan Africa

1.55%

6.67%

Middle East & North

Africa
East Asia Pacific

Europe & Central Asia

Europe & Central Asia

Latin America &

Caribbean

Latin America &

Caribbean

40.63%

South Asia

South Asia

Asia dominates the EM tradeable local currency debt market.

While LatAm and European emerging market countries dominate the EM external debt
market.
9

Foreign ownership of EM local currency debt has increased

significantly over last 6 years
For a number of
countries foreigners
constitute an
important part of the
Foreign Holdings (USD billions) Foreign Holdings (% of DX stock)
Dec-06
Dec-13
Dec-06
Dec-13
investor base.

Foreign Ownership of Emerging Markets Local Currency Sovereign Debt

Federal government debt, all maturities, amounts outstanding, by issuer
(In billions of US dollars)

Country
China
Brazil
India
Mexico
Poland
Turkey
Malaysia
Russia
South Africa
Thailand
Philippines
Colombia
Indonesia
Egypt
Hungary
Argentina
Ukraine
Romania
Peru
Lithuania
Bulgaria

DX Stock (USD billions)

Dec-06
Dec-13 Dec-13 % of GDP
448.09
1,340.27
14.50%
511.84
859.48
38.27%
337.46
680.49
36.26%
157.08
379.80
30.12%
120.55
191.17
36.94%
153.15
189.78
23.14%
56.20
146.27
46.82%
39.05
120.57
5.75%
63.89
114.34
32.61%
48.78
104.04
26.87%
43.48
84.08
30.91%
37.87
82.35
21.78%
46.55
77.22
8.89%
18.62
65.43
24.06%
53.52
57.61
44.32%
32.74
37.20
6.10%
30.06
16.94%
27.12
14.30%
3.70
12.81
6.33%
1.42
3.30
7.19%
1.44
3.16
5.95%

0.09
14.75
0.89
11.90
25.61
21.20
4.72
0.99
5.49
1.33
6.11
3.46
15.42
5.50
1.01
0.02
-

22.54
138.39
8.36
140.04
66.76
40.86
43.00
29.84
43.28
18.11
12.14
5.30
23.17
0.14
23.25
1.19
1.45
6.05
6.55
0.53
0.03

0.02%
2.88%
0.26%
7.57%
21.25%
13.84%
8.40%
2.55%
8.59%
2.73%
0.00%
0.00%
13.12%
18.57%
28.81%
16.80%
0.00%
0.00%
27.21%
1.26%
0.00%

1.68%
16.10%
1.23%
36.87%
34.92%
21.53%
29.40%
24.75%
37.85%
17.41%
14.44%
6.43%
30.01%
0.21%
40.36%
3.20%
4.83%
22.30%
51.08%
16.09%
0.98%

In 10 of 21 countries
for which information
was available,
foreign investors
hold at least 20% of
outstanding local
currency holding.
In 6 countries,
foreigners hold at
least 30%.

Sources: IMF Sovereign Investor Base Dataset for Emerging Markets, Arslanalp and Tsuda (2014)

10

Foreigners are an important investor base for a number

of EM countries issuing local currency bonds
Universe covered by IMF study included 21 countries accounting for roughly 89%
of the EM universe covered in our analysis.
For these 21 countries, foreigners hold 13% of total debt outstanding.
In 16 countries, foreigner account for a significant higher share of local currency
bonds.
Also interesting to note that two largest issuers of domestic currency bonds,
China and India, have little foreign ownership.
A couple of countries, Egypt and Argentina saw a significant drop in foreigners
holding local currency bonds, each for different regions.

11

Foreign non-banks (retail and institutional investors) important

and large investors in EM debt
Foreign Ownership of Emerging Markets Sovereign Debt 2013
General government debt, all maturities, all currencies, by issuer

South Africa
Egypt
China
Indonesia
Malaysia
Philippines
Thailand
Bulgaria
Hungary
Lithuania
Poland
Romania
Russia
Turkey
Ukraine
Argentina
Brazil
Colombia
Mexico
Peru
India

2013 Total Debt (USD billions) Foreign Official Foreign Bank Foreign Nonbank Domestic Central Bank Domestic Bank Domestic Nonbank Total Foreign Total Domestic
151.37
1.59%
3.69%
33.52%
0.55%
22.28%
38.37%
38.80%
61.20%
238.59
9.78%
0.06%
2.57%
24.48%
43.10%
20.02%
12.40%
87.60%
4,630.49
1.17%
0.02%
0.07%
5.45%
91.72%
1.57%
1.26%
98.74%
194.53
30.43%
4.93%
23.29%
14.94%
13.15%
13.26%
58.65%
41.35%
167.60
6.96%
3.34%
20.33%
0.00%
23.89%
45.48%
30.62%
69.38%
99.53
15.95%
4.84%
20.40%
6.73%
32.08%
20.01%
41.18%
58.82%
116.66
1.80%
3.11%
12.43%
6.34%
21.72%
54.60%
17.34%
82.66%
10.40
19.72%
2.57%
10.28%
0.00%
41.45%
25.98%
32.57%
67.43%
107.40
14.08%
5.88%
38.29%
0.60%
21.52%
19.64%
58.24%
41.76%
18.83
11.23%
2.07%
58.41%
0.39%
18.44%
9.45%
71.71%
28.29%
310.38
9.77%
4.49%
33.82%
0.00%
25.11%
26.81%
48.08%
51.92%
74.39
27.65%
5.28%
21.13%
0.00%
33.23%
12.70%
54.07%
45.93%
263.37
1.66%
3.93%
17.96%
4.21%
40.74%
31.49%
23.56%
76.44%
266.68
12.13%
8.43%
20.77%
2.15%
46.43%
10.10%
41.32%
58.68%
59.61
14.06%
1.81%
29.74%
30.36%
19.31%
4.71%
45.61%
54.39%
178.56
10.90%
1.69%
20.78%
42.95%
19.18%
4.49%
33.37%
66.63%
1,346.51
2.28%
3.84%
8.87%
30.00%
22.55%
32.47%
14.98%
85.02%
135.73
11.09%
2.68%
16.38%
0.06%
20.23%
49.57%
30.14%
69.86%
419.58
8.45%
6.78%
34.23%
0.00%
8.17%
42.37%
49.46%
50.54%
37.51
20.31%
9.35%
30.00%
1.49%
9.72%
29.12%
59.66%
40.34%
1,196.95
5.11%
0.14%
0.56%
9.14%
29.76%
55.29%
5.81%
94.19%

Sources: IMF Sovereign Investor Base Dataset for Emerging Markets, Arslanalp and Tsuda (2014)
Notes: This data series covers general government debt, both local and hard currency. This chart is not
comparable to previous tables on foreign ownership of local currency federal government debt securities.

Foreign Central Banks and non-bank holders are largest holders of EM debt.
12

Effects of foreign ownership on local currency bond

markets
In a study for 10 emerging market countries, Peiris (2010) shows
that greater foreign participation significantly reduce long-term
government yield. Results were confirmed by Ebeke and Lu (2014).
Peiris also found that increase in foreign participation does not
necessarily result in increased bond yield volatility, but, could, in fact
dampen volatility in some instances. In their paper, Ebeke and Lus
findings suggest that countries with strong macroeconomic
fundamentals should experience less volatility.
During the Taper tantrum, i. e. concerns about the end of QE in the
US and the rise in US rates in middle of 2013, foreign ownership of
local bonds remained relatively stable in most countries. Roughly
1/3 of countries actually saw increases in foreign ownership.

Sources: IMF Sovereign Investor Base Dataset for Emerging Markets, Arslanalp and Tsuda (2014)
Notes: This data series covers general government debt, both local and hard currency. This chart is not
comparable to previous tables on foreign ownership of local currency federal government debt securities.

13

Inclusion in bond index positive for country as it increases

liquidity in local market and demand for local bonds
Index Name

Ticker

Inception

Market Cap
(USD billions)

Number of
Constituents

Country Criteria

Liquidity Criteria

Instrument Criteria
i. Fixed coupon or zero coupon.
ii. Bonds with option features are excluded.
iii. At rebalance date, maturity > 13 months.
iv. No explicit face value minimum.

J.P.Morgan Government Bond Index Emerging Markets Broad/Diversified

GBI-EM

Jun-05

1,594

18

GNI per capita below the Index Income Ceiling (IIC)

for 3 consecutive years.

i. Daily pricing available

ii. Regularly traded in size at acceptable bid-offer
spreads; readily redeemable for cash.
iii. Low index replication costs.

J.P.Morgan Government Bond Index Emerging Markets Global/Diversified

GBI-EM

Jan-06

993

16

i. GNI per capita below the Index Income Ceiling (IIC)

for 3 consecutive years.
ii. Accessible to majority of foreign investors. Does
not include markets with capital controls.

i. Daily pricing available

ii. Regularly traded in size at acceptable bid-offer
spreads; readily redeemable for cash.
iii. Low index replication costs.

J.P.Morgan Government Bond Index Emerging Markets Diversified

GBI-EM

Jan-06

873

14

i. GNI per capita below the Index Income Ceiling (IIC)

for 3 consecutive years.
ii. Directly accessible. No impediments for foreign
investors.

i. Daily pricing available

ii. Regularly traded in size at acceptable bid-offer
spreads; readily redeemable for cash.
iii. Low index replication costs.

Citi World Government Bond Index

WGBI

Dec-84

20,361

23

No explicit liquidity criteria but minimum market size of

i. Minimum A- by S&P, A3 by Moody's for entry.
at least USD 50 billion, EUR 40 billion, JPY 5 trillion for
Below BBB- by S&P; below Baa3 by Moody's for exit.
entry; below USD 25 billion, EUR 20 billion, JPY 2.5
ii. Fully accessible to foreign investors.
trillion for exit.

Citi Emerging Markets Government Bond

Index

EMGBI

Dec-07

918

14

i. Minimum C by either S&P or Moody's.

ii. Fully accessible to foreign investors.

22

i. World Bank Income group classifications of

low/middle income OR International Monetary Fund
(IMF) classification as a non-advanced country.
Minimum market size of at least USD5bn equivalent.
Additional countries that bond investors classify as
EM.
Ii. Market investability

i. Fixed coupon Treasuries. Inflation-linked bonds

excluded. Private placements ineligible.
ii. Investment grade, high yield, and unrated securities
permitted.
iii. Minimum maturity of 1 year.
iv. Minimum issue size varies by market.

25

i. World Bank Income group classifications of

low/middle income OR International Monetary Fund
(IMF) classification as a non-advanced country.
Minimum market size of at least USD5bn equivalent.
Additional countries that bond investors classify as
EM.
Ii. Market investability

i. Fixed coupon Treasuries. Inflation-linked bonds

excluded. Private placements ineligible.
ii. Investment grade, high yield, and unrated securities
permitted.
iii. Minimum maturity of 1 year.
iv. Minimum issue size varies by market.

Barclays Emerging Markets Local

Currency Government Bond Index

Barclays Emerging Markets Local

Currency Government Universal Bond
Index

EMLCTRUU

LCEMTRUU

Jul-08

Jul-08

i. Minimum market size of at least USD 10 billion for

entry; below USD 5 billion for exit.
ii. Low index replication costs.

i. Fixed coupon or zero coupon.

ii. Bonds with option features are excluded.
iii. At rebalance date, maturity > 13 months.
iv. No explicit face value minimum.
i. Fixed coupon or zero coupon.
ii. Bonds with option features are excluded.
iii. At rebalance date, maturity > 13 months.
iv. No explicit face value minimum.
i. Fixed coupon
ii. Investment grade
iv. Minimum maturity of 1 year.
v. Minimum issue size varies by market.
i. Fixed coupon
ii. Minimum C by either S&P or Moody's.
iv. Minimum maturity of 1 year.
v. Minimum issue size varies by market.

In response to an increase in investor appetite, local currency debt indices were developed: the Government Bond Index-Emerging Markets (GBIEM) series; index exists in three variations - the GBI-EM, GBI-EM Global and GBI-EM Broad - which cater to different investment objectives and
inclusion criteria; the indices span over 15 countries and are also available in diversified weighting versions.
4 EM countries (Malaysia, Mexico, Poland and South Africa) are also part of the Citi World Government Bond Index that tracks the performance of
local government investment grade bonds. And finally, the Barclays Agg Index now has a small portion of the index dedicated to a number of
EMS. The weight of these indices, however, is below 3%.

14

AUM benchmarked against the JP Morgan sovereign

indices amounts to $554 bn or 9% of outstanding debt

Now $554 bn managed against various JP EM sovereign bond indices. Market cap of bond indices together account for
roughly $3 trillion in EM market cap or roughly 50% of EM total outstanding debt.

External debt still dominates. Despite its significantly smaller size, assets managed against hard currency index amount
to $310 bn in 2014 up from $178 bn in 2007. Market cap of debt of countries allocated to index amount to roughly $830
mn, indicating that more than a third of outstanding debt is managed against the index.
But assets managed against the EM local currency market index has increased ten fold from $21 bn to $221 in
September 2014.

15

Why do foreign investors move into emerging

market local bonds

Moving into EM local currency bonds involves

Investing in EM local currency bonds entails two sets of decisions:

Rate/Credit view reflecting a view of future monetary policy/ and development of fiscal
balance.

Currency view reflecting what extent home market currency may appreciate or
depreciate vs currency of country.

Easier for investors to express their view if they can separate decision:

In order to do that need functioning interest rate swap market that allows investor to
take exposure to market without taking on currency risk (to create synthetic exposure).

Ability to hedge currency including through liquid fwd markets.

17

Why have foreigners increased exposure

to EM local currency debt
Anecdotal evidence and investor surveys suggests that increase in EM allocation
since 2008 driven by search for yield given low level of interest rates in the US,
Europe, and Japan after financial crisis.
Inflows occurred against backdrop of significant improvements in economic
fundamentals and policymaking from 2000-2008 in EM. Improvements in
fundamentals reflected in fact that now a large number of universe is rated
investment grade.
Inflows further supported by better liquidity in local markets and an overall
improvement in debt issuance (larger market size).
Up to 2013, Inflows also supported by view that EM currencies will strengthen
given EMs growth differential with developed markets and their lower levels of
debt.
18

Strategic asset allocation and

emerging market local bonds
Investors often use strategic asset allocation exercises to determine the
optimal allocation to asset classes with a given desired risk spectrum.

Typically the following considerations determine whether an asset class will

be included in the exercise:

Does an asset offer attractive risk and return characteristics. All else equal, a higher Sharpe ratio
is more desirable as it indicates better rewards per unit of risk.

Are the returns of the asset class normally distributed and risks thoroughly understood?

Does the asset class capture any risk premium, if any. Is there any economic rationale for the
risk premium and if any is this stable over time. Can it be captured through a passive exposure or
does it require skill.

Does asset have any diversification benefit vs main risk exposures of plan. Are diversification
benefits stable.

Liquidity. Is asset liquid and can it be easily traded.

Is market for asset large enough that Plans exposure not meaningful to overall market (to
preserve liquidity)

Is benchmark available to either allow for replication or for performance monitoring.

19

Institutional investors and their allocations to EM bonds

No survey available that provides information on allocation to EM local
bonds for institutional investors.

Table on next slide reveals information of 16 US public pension plan with

their allocation to EM local currency bonds. Plans are among 200 largest
pension plans world wide according to a Tower Watson survey.
Of 16 plans, 9 have allocation to EM local bonds. 8 of these allocations
were part of the SAA.

Notwithstanding in most cases, allocation quite small, ie below 5% of Plan

assets.

20

U.S. pension fund exposure to local currency EM debt

21

No.

Fund Name

AUM ($
billions)

Exposure to Type of DX exposure (SAA

DX EMD?
or opportunistic)

Exposure to FX EMD?

Type of FX exposure (SAA or

opportunistic)

Federal Retirement Thrift

325.7

No

Allocation hedged?

In % AUM

N/A

None

N/A

N/A

N/A

California Public Employees Retirement

System

262

Yes

Opportunistic

No

N/A

No, but by policy currency must be

convertible.

0.05%

New York State and Local Retirement

System (NY State Common)

176.8

No

N/A

None

N/A

N/A

N/A

California State Teachers

166

Yes

Opportunistic

No

N/A

No

0.10%

New York City Retirement Systems

143.9

No

N/A

None

N/A

N/A

N/A

Florida State Board

132.4

No

N/A

None

N/A

N/A

N/A

Teacher Retirement System of Texas

117.1

No

N/A

None

N/A

N/A

N/A

New York State Teachers

95.4

Yes

SAA

Yes

SAA - Global Fixed Income Securities

Yes, by policy

unclear

Ohio Public Employees Retirement System

88.5

Yes

SAA - Emerging Markets Debt

Yes

SAA - Emerging Markets Debt

10

Wisconsin Investment Board

83.9

Yes

SAA

Yes

SAA

Permitted but not required as per

investment guidelines.

0.36%, cannot exceed 10% of global bond portfolio

11

North Carolina Retirement Systems

80

No

N/A

No

N/A

N/A

N/A

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Washington State Investment Board

79.3

Yes

Opportunistic

Yes

Yes

No, no formal policy across funds.

1.30%

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New Jersey Public Employee's Retirement

System

74.4

No

N/A

No

N/A

N/A

N/A

14

Oregon Public Employees

70

No

N/A

No

N/A

N/A

N/A

15

Ohio State Teachers

68

Yes

Opportunistic

Yes (majority)

SAA

No

0.38%

16

Virginia Retirement System

66

Yes

Opportunistic

Yes

SAA - Credit Strategies

Not required

0.71%

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Massachusetts Pension Reserves Investment

Management

53.2

Yes

SAA - Value-Added Fixed Income

Yes

SAA - Value-Added Fixed Income

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Iowa Public Employees Retirement System

24.8

No

N/A

Yes

SAA - Credit Opportunities

Not completely - Non-U.S. dollar based Target allocation of 3% (0-5% range) for the Defined
securities are limited to 25% of the Benefit Portfolio; 5% (2-10% range) for the Health Care
total Fixed Income assets.
Portfolio

Target allocation of 2%. 21% of Value Added Fixed

No - by policy foreign investments are
Income Portfolio invested in EM DX debt. 16% in hard
unhedged
currency. VAFI is 8.9% of total fund.

N/A

N/A

Informal surveys indicate that Plans either contemplate

or have allocations to EMs
Some of these allocations part of SAA.
Others use EM local bond opportunistically by broadening the fixed income
mandate and then measure returns vs a hedged fixed income index.
Many investors surveyed quote search for yield as important component in
their decision to move into asset class.

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How do foreign investors access local

emerging bond markets

Accessing local sovereign debt markets

Investors can access local emerging sovereign in mainly three ways:
Through managers
o Many institutional with smaller AUM (often below $20 bn) do not manage assets inhouse but rather hire external managers to manage the assets for them.
o Even institutions with larger asset bases may decide to hire external managers if the
allocation is relatively small and/or it is difficult to hire talent to manage assets inhouse.
o Institutions then typically hire managers (either long-only or hedge fund managers).
If they hire long-only managers they will decide against which benchmark the assets
will be managed and whether the manager is supposed to just replicate the index
(passive mandate) or aims to achieve an excess return vs the index through active
management

Through internal management

o Institution may decide to manage assets in-house. Even in such case, in-house
managers typically will be given a benchmark and they will either be asked to
replicate the index or allowed to take positions away from the index within a certain
risk budget to achieve excess returns.

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Accessing local sovereign debt markets

Investors can access local emerging sovereign in mainly three ways:
Through ETFs
o In 2011, Blackrock created an ETF that aims to replicate the Barclays EM index.
o The AUM of the ETF now amounts to $35bn.

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