An emerging market bond fund with the best performance versus its peer group avoids Russia, China, and Saudi Arabia, Bloomberg reported. In the opinion of Candriam’s fund management, the ESG ratings of these countries, i.e. the assessment of the factors environment, social and governance, are not sufficient to include them in the Candriam SRI Bond Emerging Markets Fund.
According to Bloomberg, the Candriam SRI Bond Emerging Markets Fund, with a market capitalization of $1.5 billion, has outperformed almost 90 percent of its competitors over the past three years: In 2019, its performance was 16 percent. While the loss in value in the first quarter of 2020 was -9.6 percent, the fund turned positive in the second quarter with 10.1 percent and achieved a further growth of 2.0 percent in the third quarter.
The fund, launched in November 2016, aims to enable investors to benefit from the performance of bonds and other debt instruments, mainly denominated in developed currencies such as the US dollar, euro, pound sterling, Japanese yen and in addition local currencies, issued by public and private sector issuers in emerging markets. In order to outperform the Fund’s benchmark indices, government and corporate bonds are selected at the discretion of the portfolio management team based on security characteristics, growth prospects and internal analysis of ESG criteria. Candriam’s management blacklists the worst performing 25 percent of countries from the entire investment universe, regardless of their role in the bond world.
Read more about the Candriam SRI Bond Emerging Markets Fund and find the latest business headlines with the born2invest mobile app.
The pricing of government bonds has so far left ESG criteria out
This approach gives a first impression of the new challenges that emerging markets whose governments and companies are dependent on foreign capital are likely to face. At present, the cost of borrowing in this group of countries generally does not take into account factors such as the commitment to reduce carbon emissions or curb corruption. However, these factors could play an important role in the future.
“ESG investment is becoming increasingly important in the context of emerging market bonds,” observed Magda Branet, Emerging Markets Bond Strategist at Candriam, “and it is likely that investors will become increasingly concerned about the extent to which they are compensated for ESG risks in emerging markets. They will demand higher risk premiums from countries that perform poorly on the criteria or avoid some issuers altogether,” Branet predicted.
33 emerging markets are considered non-investable for Candriam
Valuation models developed by Candriam examine how countries use their raw materials, resources and human capital. Countries that are considered undemocratic or repressive are blacklisted, as are countries and companies with a credit rating below B or six levels below investment grade.
“Currently, the model excludes 33 emerging markets, or about 40 percent of the JPMorgan EMBI Global Diversified Index, which is the benchmark for most emerging market sovereign bond funds,” Branet said. Candriam, a subsidiary of New York Life, one of the world’s largest asset managers with more than €500 billion in assets under management, regularly reviews the countries using its proprietary model, so that emerging markets and companies that have been poorly rated up to now are given the chance to join the group of investable countries and companies, provided they introduce improvements.
The fund’s largest country holdings include government bonds from Mexico, Uruguay, Serbia, Hungary, Uruguay and Namibia. The chemical group Sociedad Química y Minera de Chile (1.67 percent of the fund volume) and the Export-Import Bank of India (1.66 percent) also made it into the top 10.
“An improved willingness to perform in the area of ESG strategies, especially in the environmental sector, can help a country make the leap onto the investment list,” promises Branet, pointing out that there are currently no standards for the application of ESG to government bonds. Therefore, most fund managers who want to include ESG would have to resort to internal analysis. However, Branet observes that, unlike Candriam, very few funds ultimately exclude large emerging markets on the basis of low scores.
Inflow of funds becomes a means of pressure
According to the Bloomberg report, Bram Bos, senior portfolio manager at NN Investment Partners, also confirmed changing investor needs and demands on emerging markets and emerging market companies. He said it is likely that the adoption of ESG criteria in emerging markets will have a positive impact on the cost of borrowing. Governments and companies that issue bonds that take environmental and social considerations into account will find it much easier to attract capital than countries and companies that neglect them. As emissions have already reached record highs this year, players in the emerging market universe can already see where the journey will take them: Improvements in ESG ranking will pay off.
“In the past, a government used to invite people to roadshows when it wanted to issue a bond, and it was all about macroeconomic fundamentals,” says Bos. “Nowadays, green and social bonds are being used to discuss other issues, and this gives investors another tool to put pressure on governments.
For investors who want returns based on ESG criteria while being diversified in emerging markets, funds like the Candriam SRI Bond Emerging Markets Fund offer an alternative to simply selecting bonds and stocks available from the emerging markets universe. The help of experienced fund managers should not be inconvenient, especially in the current difficult and confusing market situation: In view of the pandemic that continues to affect a large part of the world, the question for investors is which countries and which companies will emerge from the crisis with the least losses, or will even come out stronger than ever through targeted strategic adjustments.
DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.
First published in DASINVESTMENT, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
Although we made reasonable efforts to provide accurate translations, some parts may be incorrect. Born2Invest assumes no responsibility for errors, omissions or ambiguities in the translations provided on this website. Any person or entity relying on translated content does so at their own risk. Born2Invest is not responsible for losses caused by such reliance on the accuracy or reliability of translated information. If you wish to report an error or inaccuracy in the translation, we encourage you to contact us.
Web 3.0 Changes Nothing: AR and VR Technology Does
We’re hearing a lot about Web 3.0 technology. However, if we look a little deeper, the chances of it changing...
Ardian Signs an Agreement to Buy Biofarma Group for €1.1 Billion
White Bridge Investments currently holds 70% of the shares of Biofarma Group, while the remaining 30% belongs to Germano Scarpa...
Primer on the Bear’s Eye View
I’m waiting for markets daily volatility’s 200-day moving averages to increase to something above 1.00%, which for gold would be...
Inflation and Fear of Interest Rate Hikes Subdued the Stock Market this Past Week
This past week we received the inflation reports for the U.S. and they weren't pretty. CPI up 7%, the highest...
Ripple Enables the Creation of NFTs on the XRP Blockchain
Ripple has also launched the XRPL Grants program. The company plans to use this program to support its community of...
Cannabis2 weeks ago
Pfizer Invests $6.7 Billion in Medical Cannabis
Crypto2 weeks ago
The First Crypto ETF Was Launched in Russia
Best of Born2Invest2 weeks ago
Ubisoft’s Quartz Gaming NFTs Don’t Leave Much Room for Good Gaming
Cannabis2 weeks ago
Colorado Cannabis Sales Peak with Record $2.2 Billion in 2020