Executive Summary

Emerging market sovereign debt in U.S. dollars can offer strong returns for investors who can ride out periodic bouts of volatility caused by concurrent crises in one or more countries. Crises, though real and frequent, are not typically as destructive to a country’s fundamentals as observers imagine. When crises drive valuations to over-discount changes to long-term country fundamentals, it can be an attractive time to buy emerging sovereign debt. We believe today, following the recent 100-bps widening in sovereign spreads, is one of those times. Further, we believe that our low-turnover, value-oriented strategy can generate alpha above the base case.

Introduction

Crises happen, especially in the emerging world. Commodity swings, political upheaval, less developed institutions, economies levered to global growth – it seems something is always “going wrong” in one or more of the 85+ countries in the investable emerging debt universe. When we assess the severity and impact of the crises, we often see opportunity.

Definitions of what constitutes a ‘crisis’ vary. Emerging debt practitioners count the “biggies” as the Tequila crisis of 1994, the Asia/Russia/Long Term Capital crisis of 1997-1998, and the Lehman crisis of 2008. In each of these crises, spreads widened by hundreds of basis points, resulting in substantial, temporary declines. As the asset class has matured and the investor base broadened, such massive spread widenings have become more rare.