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Industry Voice: Active vs. Passive in Emerging Markets Debt
Eaton Vance proactive management of emerging markets debt goes beyond the constraints of common active and passive approaches. We outline our process — refined over three decades — for seeking alpha in the sector for clients.
These are promising times for emerging markets (EM) debt, as we see a number of macro factors aligning in a broad tail wind for the sector. EM economic growth is leading the global recovery, yet EM is the only major sector with broadly attractive valuations. In developed markets, while rates have backed up from their extreme lows at the start of the year, monetary policies continue to anchor core interest rates at low levels. The U.S. dollar is likely to remain weak as deficits continue to soar. The widespread search by investors for the higher yields available from EM debt will likely continue to provide support.
At the same time, COVID-19 continues to wreak havoc on lives and livelihoods in EM countries, which vary widely in their ability to navigate the economic challenges, with a growing roster of defaults and debt restructurings.
What investment approach is best suited to a sector with a clear tail wind but pockmarked with trouble spots?
In developed markets, the choice between active or passive management offers investors a valid baseline distinction. But in emerging markets, the same choice is likely to mislead rather than enlighten. Fortunately, in EM there is a third choice: proactive management from the Eaton Vance EM debt team.
This paper outlines how our proactive investment process is optimized to generate alpha from the sector's unique challenges and opportunities. We start with the flaws inherent in passive and most active EM management.
Passive problems
While passive portfolios have surged in popularity in developed markets, the approach has a number of fundamental shortcomings for EM. Benchmarks are not designed with the goal of generating strong performance, but to make them easy to replicate within passive portfolios…
Source of all data: Eaton Vance, as at February 28, 2021, unless otherwise specified. This material is for Professional Clients/Accredited Investors only.
Risks and important information: In emerging-market countries, the risks may be more significant in regard to sensitivity to stock market volatility, adverse market, economic, political, regulatory, geopolitical and other conditions. Sources of data: Eaton Vance. In the EU this material is issued by Eaton Vance Global Advisors Ltd ("EVGA") which is registered in the Republic of Ireland with Registered Office at 70 Sir John Rogerson's Quay, Dublin 2, Ireland. EVGA is regulated by the Central Bank of Ireland with Company Number: 224763. Outside of the EU and US, this material is issued by Eaton Vance Management (International) Limited ("EVMI") 125 Old Broad Street, London, EC2N 1AR, UK, and is which is authorised and regulated in the United Kingdom by the Financial Conduct Authority.
Investing entails risks and there can be no assurance that Eaton Vance will achieve profits or avoid incurring losses. It is not possible to invest directly in an index. Past performance is not a reliable indicator of future results.
