When we first launched the WisdomTree Emerging Markets Local Debt Fund (ELD) eight years ago, we opted for a structured approach to portfolio management that was anchored by macro fundamentals but dynamic enough to evolve with changes in the market. Recently, we changed the way weights are assigned across ELD’s tiering structure.
After a phenomenal 2017, the last eight months have been painful for emerging market investors. However, despite this period of negative performance, we believe this year’s downdraft could lead to opportunity.
As geopolitics shakes investor confidence, emerging market assets have come under pressure. In our view, this move could present a unique buying opportunity for investors looking to manage their interest rate risk while enhancing the income profile of their core bond portfolio.
Following the U.S. election, most of the attention in the fixed income arena seemed to be paid to rate developments here at home, as bond investors found it increasingly difficult not to focus on the twin pillars of domestic policy (monetary and fiscal) creating a more challenging domestic fixed income setting in 2017. Obviously, such policy considerations can have global ramifications as well, so we thought it would be useful to provide some updated thoughts on what has been “emerging” thus far.
Over the last 11 years, the three-month investment window from February 1 through April 30 has, on average, produced the strongest returns for EM assets, in particular EM local debt and EM equities, and generated the fewest and the smallest shortfalls.
One of the key themes dominating the exchange-traded fund industry flows over the last 12 months has been the meteoric rise in assets of minimum-volatility porfolios. For emerging markets, the single largest driver of volatility over the last several years has been the dramatic decline of foreign currencies against the U.S. dollar.