Get a high yield with Aberdeen Emerging Markets Bond

"In a scenario where the world economy continues to grow, emerging markets debt will do well," says Rory McPherson, head of investment strategy at Psigma Investment Management. "The yields you are getting for holding emerging markets debt are typically over 5 per cent and valuations are pretty good."

Aberdeen Emerging Markets Bond Fund (GB00B5V8SG93) aims for income and capital growth by investing mostly in bonds issued by companies and governments based in emerging market countries. It can invest in both US dollar-denominated and local currency bonds.

The fund has an attractive yield of over 6 per cent and pays a monthly income. It also beats its benchmark, JPM EMBI Global Diversified Hedge GBP index, over one and three years, and the Investment Association (IA) Global Emerging Markets Bond sector average over five.

The fund is run by the 17-strong emerging markets debt team at Aberdeen who have a broad range of specialist skills. The team also has access to around 70 specialists worldwide in seven offices.

"Aberdeen has a huge footprint in emerging markets investing," says Darius McDermott, managing director at FundCalibre. "The well-resourced, experienced and stable emerging markets debt team has an extensive network of contacts in governments, central banks and the International Monetary Fund (IMF). This leaves them well placed to give consistent performance."

The fund's managers won't invest in a bond until they fully understand it, and will often travel to meet managements of issuing companies and officials when deciding whether to invest.

The fund is well diversified with holdings in 145 bonds. It has more exposure down the credit scale than its benchmark. For example, the fund has 30.2 per cent of its assets in bonds rated BB, compared with 25.6 per cent for JPM EMBI Global Diversified Hedge GBP index, and 29.3 per cent in bonds rated B compared with 22.5 per cent for the index. 

Its managers have recently been exploiting some weakness in local currency to top up their Brazilian rates position. They have also increased their position in Russian 30-year US dollar denominated bonds and added a new 30-year bond from Nigeria.

Investing in emerging markets debt is higher risk than investing in developed market debt, as in those regions there is typically lower corporate governance, less stable politics and increased default risk. Currency can also be a problem, especially if the US dollar strengthens against local currencies, as this can negatively affect the ability of some emerging markets borrowers to repay their debt.

Over one and three years Aberdeen Emerging Markets Bond has lagged its sector average. But the fund has maintained a consistently high yield over both the short and long term, and performance has improved. Emerging markets debt also looks attractive in light of the increased risks of developed markets debt.

"Many of the more exposed emerging economies have undertaken meaningful reforms to reduce external vulnerabilities," says Hartwig Kos, chief investment officer at SYZ Asset Management. "Given the frothiness in global high-yield valuations, one could even see emerging markets debt as a relative safe haven, regardless of what the US central bank, the Federal Reserve, is going to do."

So if you have a high risk appetite and long-term time horizon, and want to diversify your bond exposure and get a high monthly income, Aberdeen Emerging Markets Bond Fund looks like a good option. Buy. EA

Source: Morningstar as at 05/01/2018, *Aberdeen Asset Managers as at 30/11/17

Performance

Top 10 holdings as at 30/11/17 (%)

Source: Aberdeen

Source: Aberdeen