Asset Owners and Managers in Copenhagen: EMD Controversies

    Stockholm (NordSIP) – On 6 September, Global Fund Search (GFS) gathered an impressive number of asset owners and asset managers in Denmark’s beautiful capital for its inaugural Investment & Networking Symposium. Joining the lively mix of CIOs, CEOs, portfolio managers, asset allocators, manager selectors, analysts, and other investment experts in Copenhagen, NordSIP delights in the thought-provoking and spirited roundtable discussions. The event’s format ensures an open and collegial atmosphere, a prerequisite for constructive dialogue between investors on both sides of the divide: asset owners in need of innovative investment solutions and the managers eager to provide them.

    In the name of interactivity and an attempt to cover as broad an array of themes as possible, the organisers have decided to skip the plenary sessions altogether. Rather than nodding off to general talk, participants are encouraged to select a series of round tables to freely debate specific topics with a few similarly inclined peers. The themes are organised by asset class, ranging from megatrends and global growth opportunities in equities to sustainable fixed income, real assets, active ownership, and everything in between.

    Applying an improvised red-thread approach, NordSIP attends three discussions examining different angles of emerging market debt (EMD), an asset class that seems to accentuate the multiple dilemmas of responsible investing these days. Here are some of the key takeaways from the sessions.

    EMD anxiety

    At one of the tables, the experts have hardly had a proper chance to extol the compelling risk-return profile of EMD or delve into the distinct characteristics of local currency vs hard currency strategies before the discussion takes a different turn. There is a tangible sense of anxiety about investing in the region at all. No wonder we have seen substantial outflows from the asset class; scepticism is ripe. “A couple of years ago, EMD managers didn’t hesitate to invest in Russia,” says one of the participants. “How about China today?”

    The asset managers are not unphased by this setback. “The outflows have had a cleansing effect,” says one expert. “EMD is not overcrowded anymore. At the same time, the opportunity set for an active investor has grown bigger. Finally, things are becoming clearer and fundamental work can pay off.”

    Around the tables, various approaches to investing in EMD are represented. One asset owner admits to having pulled out from the asset class, even though it is still part of his strategic benchmark. “Following some bad experiences, we are trying to figure out how to deal with this exposure, staying out in the meanwhile,” he says. Another institutional investor has chosen to invest in EMD through a passive vehicle following a customised benchmark, which allows him to exclude Eastern European countries and China, for instance. Yet another takes a more traditional approach, combining several actively managed funds in a diversified portfolio. None of them appears to be entirely comfortable with investing in EMD.

    Dilemmas and paradoxes

    Reluctant as they are to run the risk of sponsoring undemocratic regimes or investing in highly volatile parts of the world, participants in the roundtable discussions nevertheless must admit that it is precisely in these low- or middle-income countries that investments are most sorely needed and can make a real difference. “We cannot afford to let these countries fail,” says one expert.

    “The energy demand in emerging markets is enormous, and we need to step up and fill in the gap by providing capital to build up affordable and clean energy infrastructure,” urges another investor. He hints at some of the geopolitical implications if we fail to do so. “Russia is getting a hold in Asia and Africa.”

    Several ways to mitigate the risks for investors when venturing into EMD projects are mentioned. Local presence is key. Co-investing alongside multilateral development banks can help. Applying a solid ESG analysis and defining exclusion lists based on minimum democracy requirements are crucial. Exclusions, however, mean deviating from the benchmark and running an excessive tracking error. But the advice of the experts is unequivocal: think outside of the benchmark; don’t chain yourself to it.

    The good, the bad and the ugly

    Are there good and bad countries, asks one of the moderators, eliciting a number of interesting responses. There are certainly undemocratic regimes and countries where human rights violations are ripe. “Yet, the local population did not choose to live in a totalitarian regime,” reminds one of the asset managers. Should they suffer for it?

    The real point of contention, however, seems to be who should decide which countries and regimes are acceptable to invest in and which are not. Asset managers seem to agree that the onus is on asset owners. Institutional investors, on the other hand, appear to seek guidance from the experts, especially in this complex asset class.

    Kudos to GFS for organising an event where both parties can meet and discuss the issues.

    Image courtesy of DAVID KAHR for Global Fund Search
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

    Latest Posts

    Partner content


    NordSIP Insights Handbook

    What else is new?