Emerging Market Bonds: an option from the Select 50

It is easy to think of bonds as nothing more than a useful diversifier for equities, but there are times when they can generate some strong returns in their own right. This is especially the case if you are willing to look at opportunities beyond the more familiar fixed income sectors.

A good example is emerging market bonds, an area that is currently paying some attractive yields. Many of these countries have already got inflation under control and are cutting interest rates, which could increase the value of these securities. They should also benefit once western central banks follow suit, as a lot of the region’s debt is denominated in these hard currencies.

A Select 50 option

One option to consider is M&G Emerging Markets Bond, which is a member of Fidelity’s Select 50 list of handpicked funds. It aims to provide a combination of capital growth and income, by investing at least 80% of the assets in government and corporate bonds issued in the emerging markets.

The managers start with a top-down assessment of the global macroeconomic factors, such as risk appetite and the catalysts of economic growth. They then move on to the regional and country-specific level, where they look at the different monetary and fiscal policies, capital flows and political and regulatory environments.

This enables them to determine the country and currency allocations of the portfolio. The selection of the individual bonds is then carried out with the help of an in-house team of credit analysts to complement the fund managers’ views.

Positioning

The fund has a diversified portfolio that contains securities from 189 different issuers. Just over a third of the assets are currently invested in government bonds denominated in local currencies, with a similar amount in their hard currency equivalents and the rest in corporate credit¹.

By far and away the largest exposure is the US dollar at 57%, with the remainder of the assets spread across a whole range of local denominations. The modified duration, which is a measure of how sensitive the portfolio is to changes in interest rates, is 5.79 years, a figure that suggests that lower rates could result in a decent capital gain¹.

How has it performed?

The sharp increase in interest rates in 2022 undermined the value of many fixed income securities and because of this, the fund’s 5-year annualised return is a modest 3.2%. However, the prospect of lower interest rates has helped the market to recover some of the lost ground, with M&G Emerging Markets Bond posting a 12-month gain of 11.4%². Please remember past performance is not a reliable indicator of future returns.

What are the manager’s latest views?

Writing in the interim report at the end of December, the managers said that the base case macroeconomic scenario for 2024 is favourable, as inflation has receded in most economies and central banks are likely to soon ease monetary policy.

“While the double-digit returns we saw in 2023 may not be replicated, emerging market debt still offers compelling opportunities, especially for investors facing reinvestment risk from short-dated bonds.”

What is the income?

M&G Emerging Markets Bond pays income twice a year in February and August. Its I class income units currently have an attractive distribution yield of 7.31%.³ Please note this is not guaranteed.

How do the costs stack up?

The ongoing charges are 1.08%. This is higher than for a sterling government or corporate bond fund, but understandable for an emerging market equivalent.

Who would it be suitable for?

M&G Emerging Markets Bond is classified as medium risk. The fund would be suitable for anyone comfortable with this level of volatility who is looking for a compensatory return, predominantly in the form of income.

More on M&G Emerging Market Bond Fund

Past performance is not a reliable indicator of future returns.
Source: Morningstar from 31.3.19 to 31.3.24. Basis: bid to bid with income reinvested in GBP. Excludes initial charge.

Source:
¹ M&G Investments, data as at 31 March 2024
² Data to 8 May 2024, I income share class, source: Morningstar 
³ Fidelity International, 16 May 2024

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.