Investment Objective
The Emerging Markets Hard/Local Currency Blend strategy seeks to maximize excess returns versus a Blend of JPM EMBI Global Diversified & GBI-EM Global Diversified Index over the long term.1
Investment Philosophy
PGIM’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’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.
Investment Process
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 develop comprehensive economic outlook by country and evaluate each country from quantitative and qualitative perspective and assign internal ratings
3. Security Selection
Regional portfolio managers/economists/analysts seek to determine best risk/reward opportunities across hard currency, local rates, and FX and 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 and use proprietary tools to verify performance achieved is appropriate for risk taken
