The Emerging Markets Hard Currency Debt Strategy seeks to outperform the JPM EMBI Global Diversified Index (the "Index") or similar index by +200 bps over a full market cycle by investing in hard currency sovereigns and quasi-sovereigns, with opportunistic allocations to hard currency corporates, local rates, and FX.1,2
PGIM Fixed Income’s Emerging Markets Debt investment philosophy is grounded in four beliefs:
1) The ever-changing risk appetite of investors is a primary contributor to both market opportunity and market volatility. We therefore begin our investment process with a comprehensive assessment of the global appetite for risk.
2) Country allocation is a primary determinant of emerging markets portfolio returns. We therefore focus a significant part of our investment process on determining our country views. Our country decision process incorporates our global risk view along with an analysis of a country’s foreign exchange, local bonds, and hard currency bonds from a fundamental, relative value, and technical perspective. We heavily emphasize qualitative factors in our fundamental analysis, as they are often the best predictors of performance.
3) Security selection is also a primary source of alpha generating opportunities.Our philosophy is to seek the widest possible universe of security selection opportunities, guidelines permitting. We analyze sovereign issuers as well as “quasi-sovereign” issuers within the same country. We evaluate opportunities in both hard currency and local currency bond curves based on potential changes in policy rates and inflation outlook. We evaluate corporate issuers, guidelines permitting.
4) Dynamic risk budgeting provides a disciplined framework for investment decision-making and provides important risk management as well. We heavily rely on risk budgeting and management to provide a consistent and disciplined framework for all investment decisions. We develop a broad strategic risk budget for each client portfolio that reflects the client’s long-term objectives and risk parameters, as well as a tactical risk budget that permits us to incorporate our day-to-day views of market risk tolerances and opportunities within the broader strategic risk budget.
PGIM Fixed Income’s investment approach seeks to add value primarily through research-based country allocation, security selection, FX, and, to a lesser extent, yield curve management. The Emerging Markets Team’s duration management decisions are made on a country by country basis based on the outlook for central bank policy, inflation, and output gaps. It is also a function of our assessment of the global appetite for risk, which is Step 1 of our investment process. Yield curve decisions are made with similar considerations. When we interpret the global appetite for risk as a positive factor (i.e. global investors appear willing to assume more risk), we will tend to express this through slightly more aggressive yield curve positioning.
PGIM Fixed Income implements an actively-managed, four-step decision-making process to construct and manage Emerging Markets Hard Currency portfolios:
1. Global Backdrop & Portfolio Strategy:
Senior portfolio manager assesses global risk appetite to determine portfolio risk profile and refine portfolio positioning, leveraging firm's resources
2. Country Analysis:
Regional economists evaluate each country from quantitative and qualitative perspective and assign internal ratings
3. Security Selection:
EM corporate portfolio managers/analysts seek to determine best risk/reward opportunities across all regions. Use proprietary tools to highlight relative value opportunities within markets.
4. Risk Monitoring:
Senior portfolio manager/risk manager employ a rigorous process to tightly monitor risk at all levels. Use proprietary tools to verify performance achieved is appropriate for risk taken.
1 There is no guarantee that these objectives will be met.
2 On average, over a full market cycle defined as three to five years.
No risk management technique can guarantee the mitigation of elimination of risk in any market environment.
Source: PGIM Fixed Income as of June 30, 2020.