AXA Investment Managers has launched the AXA WF Emerging Markets Euro Denominated Bond fund, which will be available to retail and professional investors across the UK and Europe.
The fund, which aims to provide ethical exposure to emerging market debt while removing US dollar hedging costs, will focus on EM growth opportunities rating B- or higher, thereby avoiding distressed debt names.
All holdings will be domiciled in countries where the local currency is either pegged to the euro or received in euros and its focus will be on both corporate and sovereign debt.
The fund will also adhere to AXA IM's ESG standards and will apply screening policies to minimise exposure to firms with low ESG scores.
AXA WF Emerging Markets Euro Denominated Bond will also only invest in issues that are over €500m in size to minimise liquidity risk and will have a short-duration bias to minimise volatility.
It is able to invest up to 20% of its portfolio in US dollar-denominated bonds given that some countries do not issue in euros.
Mikhail Volodchenko, manager of the fund, said: "While hedging costs have fallen, we believe they are likely to rise in the future, and this strategy removes the complication of this effect. There has clearly been a significant amount of volatility in capital markets this year as a result of the economic impact of coronavirus, and emerging markets have not been exempt from this.
"However, with unprecedented support from developed central banks and governments, we believe this has led to attractive opportunities for those sovereign and corporate issuers best placed to weather the storm and bridge the gap to the other side of the pandemic, and we believe this fund has the flexibility to take advantage of them."
He added that the euro emerging market asset class has "exhibited substantial growth over the past ten years", with many euro issuers debuting in the market and the asset class seeing an increase in breadth as a result.
"This is a trend we expect to continue in the coming years, therefore presenting an opportune moment to add a euro EM debt fund to our offering capitalising on this expansion," he added.
Sailesh Lad, head of active emerging markets fixed income at AXA Investment Managers, said the EM debt sector has long been dominated by US dollar-denominated products, which have "not produced expected yields for investors" as hedging costs have continued to rise.
"The euro-denominated universe is now big enough for us to launch such a product that provides a cleaner and more favourable alternative for investors looking to increase their EM debt exposure but are impacted by US dollar hedging costs," he explained.
"With attractive market developments, matched with our heritage of managing short duration portfolios, the fund is a strong addition to our emerging market fixed income offering."