Lukas Strobl: Morningstar Senior Analyst, Elbie Louw and I recently spoke about opportunities in local currency-denominated emerging market debt. Shortly thereafter, her team took on a new fund into coverage. It is the Capital Group Emerging Markets Local Debt strategy.
Now, Elbie, this strategy got a Morningstar rating of Silver for the cheaper share class and for the more expensive ones, Bronze and Neutral. How does this compare with peers in the category and why have you picked it up at this time?
Elbie Louw: Thank you, Lukas. The Capital Group Emerging Markets Debt strategy is one of only two funds in this category that has a share class with a Silver rating, the other fund being the Ninety One GSF Emerging Market Local Currency Debt strategy. The Capital Group strategy also takes care of roughly US$1.3 billion of assets under management, so still ample opportunity to grow, while the biggest strategy in this category looks after roughly US$2.9 billion.
LS: Management is going to be key, of course. What can you tell us about the people behind this fund?
EL: In our analysis, we initiated people and process rating of above average and the parent Capital Group earns a rating of high. What stands out for us with this team is the depth, the quality and the expertise of the portfolio management team, and they are supported by a strong bench of analysts and traders. The three portfolio managers at the helm of this strategy is Kirstie Spence, Robert Neithart and Luis De Oliveira and they boast an average of 30 years' experience and 28 years average firm tenure with Capital Group, and they have extensive experience in emerging markets.
A differentiating feature for us here is that the trio manages equal portions of the portfolio according to their own investment style, while staying within the guardrails of the strategy. Spence tends to focus more on fundamental valuations, Neithart has more of a macro departure point, and Oliveira's favorite hunting ground is out-of-favor but still attractively-valued securities. They are backed by seven experienced sovereign analysts, and they can also draw on the experience of three corporate emerging market analysts.
LS: People and process above average. Then, what is it in this strategy that sets it apart from other funds in its procedure?
EL: In this strategy, the managers source their ideas from the analysts that really focus on fundamental bottom-up research. And the analysts provide them with the view on which securities are attractive as well as they take on currencies of the countries that they cover, that is where they believe that the currencies will appreciate or depreciate. The lion's share of assets are invested in local currency government bonds with hard currency bonds and exposure to currencies limited. But the managers can also take modest off-benchmark forays into local currency inflation-linked bonds as well as into corporate debt. They maintain the duration of the strategy, which is the interest rate sensitivity of the fund to one year of that of the benchmark, which is the J.P. Morgan Government Bond Index-Emerging Market Global Diversified US Dollar benchmark. Most of the alpha that they generate come from the country selection with currency and security selection less important here.
LS: Of course, the asset class has been through turbulent times. How has this strategy been performing lately?
EL: In this strategy, since its September 2010 inception, it delivered an annualized return to investors of 0.9%, beating the Morningstar benchmark as well as the category average, and in doing so ousting 90% of the peers.
LS: Well, we'll stay in touch to make sure it keeps that up. Thank you for going over this fund with me, Elbie. For Morningstar, I'm Lukas Strobl.
