Nomura Global Emerging Market Local Currency Bond Strategy

Asset Class

The “Emerging Market Local Currency Bonds” asset class offers an attractive mix of performance drivers covering all stages of the business cycle:

Emerging Markets: Very attractive local government bond yields with moderate credit risk (the majority of core markets has at least 1 investment grade rating); significant potential for diversification due to heterogeneous economic structures, differing business cycles and a variety of currency regimes.

Local Currency: The FX component (equity-like) tends to benefit from improving growth prospects during an economic expansion and boom phase (enabling participation in the “EM growth story”).

Bonds: The interest rate/duration component tends to benefit from reduced growth prospects during an economic contraction and recession phase, when central banks cut interest rates (active FX management is essential in this phase).

Investment Approach

Quality-conscious: Our philosophy “value instead of carry” emphasises the management of FX and interest rate risk, with less focus on credit risk; our total return approach seeks to generate a balanced value-added from interest income, capital appreciation and currency management.

Concentrate and diversify: Our high conviction, macro-based portfolio concentrates on a selection of major (benchmark) markets; diversification is added by exploiting less correlated risk opportunities from the off-benchmark parts of our universe.

Dynamic, contrarian risk capital allocation: We screen for and distribute capital flexibly between tactical and strategic investment ideas. We seek to avoid allocating risk capital pro-cyclically and to minimize uncompensated and unintended risks. The use of derivatives is essential to our approach.

Holistic risk management: Our Sharpe ratio-oriented risk management aims to smooth volatility and drawdown to achieve an optimal risk-adjusted return. Essential tools are long/short FX strategies and active beta and cash management.

Team oriented approach: Our Europe-based investment team consisting of 5 experienced investment professionals divides up the universe by risk drivers (EM rates, EM FX, global factors) and not by regions for top-down analysis and bottom-up idea generation.

Target: Outperformance over the cycle versus peers with risk-adjusted return of the fund > benchmark (expected relative VaR ≤150%, which is below the regulatory limit of 200%).

Investment Strategy

We offer an Emerging Market local currency bond product

• with active currency management vs USD
• with an average investment grade rating and an attractive yield to maturity
• which invests in local currency bonds issued by governments, government agencies quasi-sovereign entities and supranational organisations (hard currency bonds and corporates may be added opportunistically)
• which offers significant potential for diversification within a global, heterogeneous universe
• Benchmark: JPM GBI-EM GD Unhedged USD; coverage: emerging markets in Asia, Latin America, Eastern Europe and Africa

Historically, global EM currencies and interest rates markets have been highly dynamic; a significant interest rate differential to developed markets exists.

Potential Significant Risks

Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries.

Pooled Fund Availability

The Nomura Global Emerging Market Local Currency Bond strategy is available for investment via our Irish domiciled UCITS fund.