Local bond exposure also allows investors to access the fundamental appeal of emerging market currencies. The investment underpinnings of such exposure--favorable growth and inflation differentials and strong balance-of-payment dynamics--remain intact for most of the emerging world. In addition, despite having recovered meaningfully in 2009, valuations remain attractive relative to the long-term fair-value assessments to which currencies gravitate over time. Emerging currencies also afford investors a hedge against potential U.S. dollar weakness which PIMCO expects will facilitate the rebalancing of global economic activity.
Not only do the local bond markets represent the next frontier of emerging markets fixed income beyond U.S. dollar-denominated assets, but they are an increasingly liquid asset class owned by a highly diversified investor base. As emerging countries have increased debt issuance in their own currencies, pursuing liability management programs and developing their domestic capital markets, local yield curves have extended and local investment opportunities have increased. As a result, local bond markets have become quite liquid, in some cases more liquid than the external debt markets.
PIMCO’s Emerging Local Bond Strategy invests primarily in fixed income instruments denominated in the currencies of the emerging markets. PIMCO generally considers an emerging market to be any country that has not been classified by the World Bank as a high-income Organisation for Economic Co-operation and Development (OECD) economy for the past consecutive five years though we retain broad discretion to invest in countries which exhibit developmental characteristics consistent with emerging markets. The current per capita Gross National Income (GNI) cut off level is defined by the World Bank as $11,906).
PIMCO has been monitoring the development of emerging economies since the late 1980s as part of our economic forum process. We started investing tactically in this sector in the early 1990s. In 1997, we began to concentrate on emerging markets as a distinct asset class with the introduction of an institutional mutual fund and, subsequently, separately managed portfolios. PIMCO is one of the largest participants in the market for emerging market debt. Our size and breadth places us in the forefront of information flows from developing countries, thereby supplementing the robust and timely understanding of the market dynamics so crucial to investing in these markets. An additional benefit of PIMCO’s stature in the market is the access that it may provide to key policy makers from various countries, helping us, in an effort to maintain an in depth policy dialogue.
PIMCO’s traditional and successful team approach is evident in our emerging market efforts. With over 14 years of average industry experience, our team applies a great depth of knowledge to our emerging markets strategies. The team-oriented strategy also allows us to stay involved in the market while conducting valuable on-the-ground research in the countries that we follow. In addition, specialized resources are added to the team based on PIMCO’s secular views which anticipate where opportunities will likely emerge in this market.
The principal reasons for investing in emerging local bond markets are the potential for attractive risk-adjusted returns and diversification. Local currency denominated bonds in emerging markets countries typically have low correlations with other assets classes and investments in emerging local bond markets may also afford investors a hedge from a potential decline in the value of the U.S. dollar vis-à-vis other currencies.
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