Emerging Markets Debt

Portfolio Managers

Rob Drijkoningen, Co-Head of Emerging Markets Debt

Gorky Urquieta, Co-Head of Emerging Markets Debt

Introduction

ING IM has a historically strong involvement in and commitment to emerging markets debt with a track record dating back to 1993. Our longstanding presence and extensive local knowledge allow us to capitalize on information asymmetries — a strong differentiating factor setting us apart from the competition. Our global multi-site team provides direct access to multiple jurisdictions thus allowing us to gauge local conditions, visit companies and develop relationships, and gain timely information that may otherwise be difficult to obtain. Local expertise also gives us better access to less efficient and under-researched companies and countries, which effectively positions ING IM to design well-structured emerging market debt portfolios.

As a top-3 player in the three main emerging regions, with a presence in 21 emerging market countries and a decades-long tradition in emerging market investments, we are able to leverage our skills within a disciplined, experienced and globally coordinated team structure.

Our approach is based on the belief that, in general, emerging markets offer superior growth potential, structural improvement of risk parameters, fast-paced changes in fundamentals and unrecognized value potential. Moreover, performance tends to be driven by country- and regional-specific factors more than other factors, supporting our geographic classification of assets.

Diligent top-down and bottom-up research provides an information advantage which increases the chances of uncovering potential value across the investment opportunity set in less efficient emerging markets. A specialized global investment team is important for timely, proportionate and unbiased understanding of opportunities. From a top-down perspective, this relates to country views and currency views. From a bottom-up perspective, appreciation of companies’ management quality, profitability drivers and market positioning is a prerequisite to meaningful research on debt securities.

Philosophy

The ING Emerging Markets Debt investment process is based on the following core beliefs:

We believe emerging markets will deliver strong growth and returns, based on a medium- and long-term investment horizon
• Favorable macroeconomic developments in emerging markets translate into strengthening creditowrthiness of the countries concerned, which in turn improves the cost of capital for companies
Risk premia in emerging markets are declining structurally, due to improving fundamentals in the countries or companies concerned
• We expect risk premia in emerging markets to continue to converge along with improving fundamentals in the asset class, the macroeconomic environment and for corporations. However, the market may take time to realize and discount the full potential; the process is not linear over time and does not apply equally to all emerging markets. We therefore have an investment horizon that ranges from 6 months to 3 years.
Emerging markets are less efficient than developed markets Alpha opportunities are larger in under-researched emerging market companies over the cycle
• Emerging markets are characterized by less transparency and coverage, lower corporate governance and disclosure levels and lower liquidity. Often, local restrictions on investment apply, and capital constraints are in place, which may lead to a home bias and offer alpa opportunities - particularly in smaller and mid-sized entities
Alpha opportunities are larger in under-researched emerging market companies over the cycle
• Greater alpha opportunities come, however, with a higher risk profile and require more in-depth analysis to build conviction. Besides instrument-specific risk, the most important factors driving returns are macroeconomics, politics and currencies, which are combined in the country factor. Our in-house research on companies and countries translates into alpha from bottom-up security selection and top-down country allocation, two main sources of alpha which are applied with varying emphasis acrosss our strategies.
Risk control and diversification are key to generate consistent and repeatable excess returns
• Risk management is an integral part of our process on several levels, leading us to construct portfolios that are balanced across multiple risk perspectives and from more than one organizational angle. We aim for prudent diversification of alpha sources. Market timing is not a significant source of alpha in our process and not part of our risk control efforts.

Objectives

The overall objective for each of the emerging markets debt sub-asset class strategies is to obtain an information ratio of at least 0.50, typically on a rolling three year basis relative to the appropriate JP Morgan Emerging Markets benchmark.

The Hard Currency Sovereign strategy is benchmarked to the Emerging Market Bond Index Global Diversified (EMBI GD) index with an excess return target of 1.0%-2.0% annually and target tracking error of 2-6%
The Hard Currency Corporate strategy is benchmarked to the Corporate EMD Bond Index (CEMBI) with an excess return target of 1.0% - 2.0% annually and target tracking error of 2%-4%
The Local Currency Money Market strategy is benchmarked to the ELMI Plus Index (ELMI +), and the Local Currency Bond Strategy is benchmarked to the Global Bond Index Emerging Market Global Diversified (GBI-EM GD). For each, the current excess return target is 1.0% - 2.0% annually with tracking error of 2% - 5%.
The EMD Opportunities strategy integrates all four EMD sub-asset classes into one strategy and is benchmarked to a weighted average of the component benchmarks. The current excess return target is 1.5% - 3.5% annually with tracking error of 3% -7%.

Process

Key investment decisions are customized for each EMD Strategy

The ING Emerging Markets Debt team strives to maximize value-added through a holistic, fundamental and active approach.

A holistic approach recognizes that the factors affecting asset classes are not bound by asset class definitions. As part of our investment process, we actively share macro, sector and company insights between our emerging market equity and debt teams which provides us with a deeper understanding into the risk/reward structure of the credit. Regular interaction with ING IM’s Developed Markets Strategy team ensures that non-emerging market factors are also captured.
We believe in a fundamental approach, given the “structural breaks” that frequently happen both on the country and company levels, which reduce the value of any rear-view mirror. Structural breaks, such as a sudden policy or regime change, are still more frequent than in developed markets, causing unexpected shifts in macroeconomic time series. Structural breaks can disproportionally change opportunities in countries, sectors or companies.
An active approach benefits from alpha opportunities caused by reduced transparency, visibility and information asymmetries. To allow dedicated coverage of the various performance drivers in our processes, we employ a three-layered team consisting of Strategists, Corporate Analysts and Portfolio Managers.
An active approach benefits from alpha opportunities caused by reduced transparency, visibility and information asymmetries. To allow dedicated coverage of the various performance drivers in our processes, we employ a three-layered team consisting of Strategists, Corporate Analysts and Portfolio Managers.

A team effort translates the knowledge of the various specialist areas into actual performance. While dedicated resources allow specialization, extra effort is needed to fully capitalize on the knowledge base. Each team is fully accountable for the recommendations within their assigned companies and countries and the portfolios they manage, but by challenging each other, the best ideas survive.