Top-Ranked in Emerging Bonds

06/25/2015 10:00 am EST

Focus: FUNDS

Todd Rosenbluth

Senior Director of ETF & Mutual Fund Research, CFRA Research

With US bonds still offering modest yields, investors are looking internationally to generate higher income at emerging market bond funds, argues Todd Rosenbluth, editor of S&P The Outlook.

T. Rowe Price Emerging Markets Bond Fund (PREMX) is a top-ranked emerging markets bond fund with a long-tenured manager and below-average costs.

The fund is lead-managed by Michael Cornelius, a 26-year veteran at T. Rowe Price who has run the fund since 1994.

On a larger emerging market fixed income team, he works with two additional portfolio managers, Andrew Keirle and Samy Muaddi, and 13 emerging market sovereign and corporate bond research analysts.

Across 65 countries, fund management conducts qualitative and quantitative assessments on an issuer’s creditworthiness resulting in the formulation of a proprietary credit rating.

From there, the analysts forecast return risk-adjusted expectations with a heavy emphasis on relative value across counties.

While a portfolio of 400-500 bonds is built based on bottom-up decisions, asset allocation across countries and regions is undertaken based on risk assessments.

The fund is diversified across emerging market sovereign, emerging market corporate, and frontier market bonds. Cornelius and team think emerging debt markets are inefficient, creating opportunities to spot undervalued credits.

However, the fund’s turnover rate, at 46%, is half that of the Lipper emerging markets hard currency debt funds, indicative of T. Rowe Price’s patience. As such, one of the fund’s largest country allocations is to Venezuela (6% of assets).

Jeff Kalinowski, the fund’s portfolio specialist, acknowledged that imprudent Venezuelan government policies as well as weakness in the price of oil hurt the country’s fiscal condition and created volatility, but T. Rowe Price thinks that a default within the next year is unlikely.

The fund’s largest exposures are to Brazil (14%) and Mexico (10%). Turkey, Indonesia, and Russia rounded out the top five.

Typically, the higher the yield, the greater the credit or interest rate risk. Yet we believe T. Rowe Price Emerging Markets Bond Fund—with its 6.1% 30-day SEC yield—offers a strong combination of performance, risk, and cost factor attributes.

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