BlackRock Says Passive Emerging Market Trade Coming Full Circle

  • Money manager recommends corporate debt, local-currency bonds
  • Largest emerging bond ETF suffers worst outflow since 2014

BlackRock Inc. is recommending investors switch to actively-managed bond funds if they want the best returns in emerging markets after a rally this year that was driven by inflows into passive portfolios falters.

The world’s biggest investment firm said money managers should consider becoming “more active and selective” after yields rose from a three-year low that followed a headlong rush into riskier assets. Corporate and local-currency bonds offer the best opportunities, as well as debt of countries with strong fiscal positions, investors at the firm said.

“It is time to be selective again with the asset class,” BlackRock fund managers Pablo Goldberg and Sergio Trigo Paz said in an emailed research note on Tuesday. “We believe active, bottom-up driven positioning may be a strong component to delivering excess returns going forward.”

BlackRock managers are advising the switch after exchange-traded funds that passively track index benchmarks mopped up the biggest share of inflows to emerging markets this year. As the rally slows, only selecting bonds with sound fundamentals will deliver returns rather than blanket buying to offset negative yields, the money managers said.

Already there are signs the trend is reversing. The largest emerging-market bond ETF suffered its biggest weekly outflow since 2014 in the five days through Sept. 16 as uncertainty about the future path of U.S. monetary policy fueled market volatility. The iShares JPMorgan USD Emerging Markets Bond ETF, which is owned by BlackRock, has doubled in size this year, eclipsing the largest mutual fund to become the biggest emerging-market focused debt portfolio.

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