Gaining Insight Into Emerging Markets Bonds

Close inspection of investment prospects is essential for fixed income investing in developing economies.

Chris Alderson

Taking a hands-on approach is an important component of fixed income investing in emerging markets, especially with the burgeoning development of corporate bond markets. "Corporate debt in emerging markets is highly inefficient because you don't have the transparency that would make information easily available," says Samy Muaddi, an emerging markets debt analyst with
T. Rowe Price. "The best way to capitalize on those inefficiencies is a bottom-up approach that involves learning more about companies than anyone else. And you can't really accomplish that without being on the ground."

Mike Conelius, portfolio manager of the T. Rowe Price Emerging Markets Bond Fund, agrees. He first visited Iraq in 2005, during the Gulf War. "It was a real risk to be there at that time," he says, "but given the country's vast oil deposits, we thought there was opportunity there." Conelius met with government officials and ultimately invested in some commercial bank loans to the Iraqi government that were in default, thus buying them at steep discounts. The bonds recovered and proved to be a profitable investment. Since then, Conelius has revisited Iraq twice and has made additional investments in the country's debt securities.

Emerging and frontier markets likely will continue to offer a broad range of challenges and opportunities for investors. "We've been focused on these markets for a long time, and we understand the risks and the opportunities," Alderson says. "Our research platform today is very comprehensive. We have more analysts located outside the U.S. than inside—and they are split among London, Hong Kong, Singapore, Tokyo, and Sydney." The majority of T. Rowe Price mutual funds are actively managed. And this approach is what often gives the firm a competitive advantage. Building and maintaining active portfolios involves much more than gathering data and research in isolation. "Our investment professionals could sit in their offices in London or New York and wait for management at companies to visit them, but there's just no substitute for the knowledge you can gain by going to see their operations in person."

Note that investments in emerging markets are subject to abrupt and severe price declines. The economic and political structures of developing nations, in most cases, do not compare favorably with the U.S. or other developed countries in terms of wealth and stability, and their financial markets often lack liquidity. Share prices are subject to market risk, as well as risks associated with unfavorable currency exchange rates and political or economic uncertainty abroad.

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