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For years, investors of Emerging Markets Debt have unassumingly relied on the EMBI Index to serve as the default benchmarking proxy. However, as the asset class (and the economies that comprise it) have evolved, it can be argued that so too should the parameters with which investment success is measured. In this report, the Schroder Emerging Market Debt Relative Team reviews the reasons to consider a more comprehensive, multi-sector view of the EMD universe and the rationale and potential benefi ts that a ‘blended’ approach to EMD investing can bring.

Executive Summary

It’s hard to overstate William Shakespeare’s impact on modern language as he alone is credited with coining some 1,700 words (including assassination, lackluster, and swagger, to name just a few). It’s a pity then that we don’t have the Bard around anymore to weigh in on the semantics surrounding current developments in Emerging Market Debt (“EMD”) investing.

Several years back, a more compelling approach to this asset class was created by a band of innovators, now commonly called a blended, or multi-sector, approach to EMD. Simply defined, this is the approach of investing in EMD through the use of multiple segments, such as hard currency sovereign, local currency sovereign, hard currency corporate, and currencies (as a stand-alone alpha exposure). In a blended EMD approach, these segments earn definite, non-trivial benchmark allocations, and the manager has the latitude to move among them. This definition should be straightforward enough, but to date it has been susceptible to misinterpretation, if not outright manipulation.

The new labeling, but not necessarily the associated methodology, is being appropriated by some of the more traditional players in this segment – perhaps in an effort to enforce the status quo and maintain their assets. These traditional players remain largely grounded in hard currency sovereign issues and then dabble in other segments with smaller allocations, all the while claiming to manage in a dynamic, multi-sector manner. It’s hard to see how such obfuscation helps the institutional investor in any way. In the event that “confusion now hath made his masterpiece,” as MacDuff implored in MacBeth, we’re taking this opportunity to put forth the true definition of blended EMD investing. The industry needs this and, quite frankly, the investor deserves it. Before we do, however, it would be helpful to take a step backward to understand how this situation came about.