The managers, who co-run several mixed asset funds at AllianceBernstein, including the AB Developed Markets Multi-Asset Income Portfolio, said inefficiencies in emerging markets can now be effectively exploited by multi-asset investors.
‘These inefficiencies can be especially useful for managers who look across asset classes. Instead of investing in equities and bonds as distinct markets, managed against two separate benchmarks, an integrated multi-asset approach with a single objective provides more levers to improve risk-adjusted returns,’ the managers wrote in an investment update.
Harting and Loewy added that investors needed to look for securities, as the better ones remained relatively unknown. They advised against holding benchmark stocks, which consist of Chinese state-owned companies and firms which are growing slower than average.
‘Stocks are generally less widely covered and information flows more slowly, providing research-based active managers with more of an edge. What’s more, the relevant benchmarks are poorly constructed and hardly representative of the fast growth and dynamic companies investors think they’re getting when they buy emerging securities.’
‘Similarly, the standard emerging bond index is hardly appealing; more than 22% of its yield spread comes from four C-rated credits - Venezuela, Ukraine, Mozambique and Belize. In our view, this reflects a high degree of concentration in the riskiest issuers that many investors may not be aware of,’ the managers said.
Brazil versus Korea
In terms of holdings, Harting has 9.62% of the AB Emerging Markets Multi-Asset Portfolio exposed to Brazil and South Korea, which is the second largest overall country allocation at 11.40%. This is while Taiwan at 11.97% is the single largest country exposure. The biggest security holding in the fund is Brazilian government bonds at 2.38%.
‘Brazilian local government bonds yield 12% today. In today’s environment, we think that’s a very attractive equity-like return, which comes with far lower volatility than Brazilian stocks,’ the managers said.
‘By contrast, local rates in Korea of 1.4% make bonds quite unattractive from a return perspective. On the other hand, capital costs are extremely low for companies there, setting a low hurdle for profitability in order for the average stock to be attractive.’