The Schroder ISF Emerging Markets Debt Absolute Return Fund has been removed from the Wealth 150 list of our favourite funds for new investment.
The fund is managed by Abdallah Guezour and his team using a highly flexible approach. They can invest in bonds issued by emerging market governments and corporations, whether denominated in a country's own local currency or an established, stable currency such as the US dollar. They can also invest directly in emerging market currencies and, if they have a cautious view, hold up to 40% in cash or near-cash investments, such as US government bonds.
The team's aim is firstly to shelter capital by not losing money over any 12-month period, although this is not guaranteed. They then aim to maximise returns, but not at the expense of their primary objective.
In recent years the managers have maintained a cautious outlook and the fund has done a respectable job of sheltering capital when emerging debt markets have fallen. However, overall the cautious view has been incorrect and the fund has significantly lagged rising markets. Over the past five years the fund has grown by 4.7% compared with 50.4%* for an index of emerging markets debt. Please note the fund does not have an official benchmark and is managed to achieve a total return, but we believe the index below gives a reasonable illustration of how emerging market debt has performed over the past five years:-
Percentage growth of the Schroder ISF Emerging Markets Debt Absolute Return Fund over five years
|Annual percentage growth|
| Jan 10 -
| Jan 11 -
| Jan 12 -
| Jan 13 -
| Jan 14 -
|Schroder ISF EM Debt Absolute Return||1.28%||-0.09%||4.58%||-0.81%||-0.26%|
|JP Morgan EMBI Global Diversified||16.85%||6.18%||12.77%||-6.37%||14.79%|
Past performance is not a guide to the future. Source: Lipper * to 02/01/2015
The managers' cautious view is understandable. In recent years ultra-low interest rates in the West have seen investors hunt higher yields elsewhere, including in emerging market debt. Investors have been prepared to lend to emerging markets at ever-lower yields and those on offer have, in some cases, fallen to levels arguably insufficient to compensate investors adequately for lending to higher-risk emerging markets.
That said the fact remains the managers have not adequately used the flexibility afforded to them to maximise returns in recent years. They have also made modestly negative returns in the past two years, failing to achieve their primary objective. We believe this fund could continue to offer some capital shelter during tougher times, but we have lost conviction in the team's ability to deliver attractive returns over the long term.
In addition, in a world where the cost of investing is being driven down, we believe the charges on this fund are high. The fund's net ongoing charges are currently 1.01% a year, which includes a 0.23% rebate for HL clients. In recent years we do not believe the managers have taken enough advantage of the investment opportunities available in order to justify these fees.
In recent months the managers have seen more opportunities and they currently have investments in Brazilian, Indonesian and South African bonds, among others. However, overall they are still cautious, with around 32% of the portfolio held in cash.
At present we remain cautious on emerging market debt. Yields do not offer investors significant rewards for the risk of lending to higher risk emerging markets. While interest rates remain low in the West some investors are likely to continue to seek higher returns elsewhere, which could see emerging market debt perform well. However, bonds are sensitive to interest rate movements so investors need to be aware of potential volatility.
This is not a suggestion to sell the fund. Investors should ensure the aim of the fund continues to meet their objectives and be aware they are not normally entitled to compensation through the UK Financial Services Compensation Scheme for Offshore funds. We do not currently have any funds on the Wealth 150 dedicated to emerging market debt.
Please note the fund's charges can be taken from capital, which can increase the yield but reduces the potential for capital growth.
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