In this series, Investment Week speaks to some of the winners of the Fund Manager of the Year Awards 2020.
Today we talk to Eaton Vance, whose Emerging Markets Local Income fund - run by Mike Cirami, Eric Stein, Danat Abdrakhmanov and John Baur - won the Bonds: Emerging Market Debt Award.
Can you tell us about the winning team on the fund and how you construct the portfolio? How do you manage risk on the fund?
The investment team, which consists of 40+ professionals across four global offices, manages about $5bn in emerging market debt (EMD).
The core of the group has worked together since the mid-2000s and has managed the Emerging Markets Local Income strategy since its inception in 2007.
Our team culture is focused on generating top-notch investment performance, which motivates us to strive for constant improvement in our areas of competitive advantages: breadth of coverage, approach to research and access to markets.
A broad research and investment universe of 100+ countries offers a diverse opportunity set for the team to seek out compelling investment ideas.
The research approach has two goals: identifying countries on the brink of positive structural change and isolating the specific currency and/or interest rate risk that is likely to lead to a positive absolute return.
An industry-leading trading and operations infrastructure within the team ensures prudent access to 80+ currency and local bond markets.
Portfolio construction features a best-ideas, bottom-up approach within the expected beta and tracking error risk guidelines.
Limits on active position size guide tracking error, while stress tests, scenario analysis, and value-at-risk measurements capture deviations from the portfolio's expected beta.
What differentiates the fund from others in the sector and what part could it play in clients' portfolios?
While the fund's historical performance is a clear differentiator within the peer group, it is important to note that its excess returns have little historical correlation to competitors' excess returns.
The fund's historical overweights, underweights and off-benchmark investments account for that diversification, while the sector's broad investment universe provides the wherewithal to take such active risk and remain within the fund's risk management guidelines.
In our view, EM local debt offers investors three meaningful benefits: enhanced return potential, as developing economies mature; improved diversification from different currencies and interest rates; and, lastly, higher income, as nominal and real rates remain far higher in emerging versus developed markets.
Forward-looking clients often fund allocations to local debt by reducing holdings in EM hard currency sovereign debt and EM equities.
This rotation is likely to continue as the US duration component of EM hard currency becomes increasingly unattractive and EM equity indices become further dominated by China.