Contrarian Koreans Start Emerging Debt Funds in Midst of Turmoil

  • Developing nation high-yield debt off to worst start since '99
  • Mirae says `not a great time to invest' so buying selectively

South Korean fund managers are boosting investments in emerging-market bonds during the worst start to a year for such debt since 1999.

Mirae Asset Global Investments Co. this month opened a fund for developing nation U.S. currency corporate debt with target returns of about 5 percent. That’s more than double the near record low 2.04 percent yield on 10-year local sovereign notes. Korea Investment Management Co., which started a fund for dollar debt from China last year, is looking for opportunities in Asian emerging nations.

“Domestic yields are way too low,” said Ee Hyeok Ze, the Seoul-based head of global investment strategy at Mirae Asset, which manages 79 trillion won ($66 billion) of assets. “Now’s not a great time to invest in emerging markets overall, with the global rout that may persist for a while, but if we selectively buy, the fund could outperform local bonds or stocks.”

Goldman Sachs Group Inc. and Schroder Investment Management called a bottom in emerging markets late last year only to see riskier assets plunge. High-yield corporate dollar bonds from emerging markets have lost 1.9 percent this month, according to a Bank of America Merrill Lynch index. Overseas bond investments by yield-hungry Korean institutional investors increased 37.5 percent to a record $46.4 billion as of Sept. 30 from a year earlier, Bank of Korea data show.

Developing Appeal 

The central bank cut its forecasts for economic growth and inflation for 2016 this month and held its key interest rate at a record low as instability from China reverberates in global financial markets. Monetary authorities in most of the world are loosening policy to boost faltering economies even after the Federal Reserve raised rates. 

Mirae’s Ee favors Mexico and India among developing countries and the fund’s main focus will be BBB rated state-owned enterprise bonds, he said. Its holdings in China, India and Mexico are proportionally higher than in other countries, according to Ee.

“Mexico has close ties to the U.S., the largest importer of Mexican goods, and is poised to benefit from the recovery of the U.S. economy,” he said. “India has high potential for economic growth with Prime Minister Narendra Modi’s push for expansion and given the country’s large population of younger people.”

Polarized Markets

The average yield for investment-grade dollar debt in emerging nations is 4.2 percent, compared with 2.3 percent for a similar Korean measure, Bank of America Merrill Lynch indexes show.

Korea Investment Management also sees opportunities in investment-grade dollar debt from emerging Asia, particularly in Thailand and India, said Yunjin Kim, its Seoul-based head of global fixed-income management team.

“Debt markets are polarized among regions, ratings and sectors,” as investors are increasingly discerning about risk, said Kim. “We can still make money from emerging dollar debt through selective investments,” she said.

Korea’s economy grew 2.6 percent in 2015, the slowest pace since 2012, the central bank said on Tuesday, as a slump in exports persisted. That’s adding to downward pressure on yields and burnishing the appeal of investing overseas.

National Pension Service, the nation’s biggest investor with 507 trillion won of assets, said in June it will increase overseas investments to more than 30 percent of total assets by 2020, in a bid to boost returns, from about 22 percent in 2014. It is targeting a 5.5 percent annual return from 2016 to 2020.

“We need to move towards investing overseas from a long-term point of view,” said Mirae’s Ee. “If prices reflect the turmoil well, we can turn the current crisis into opportunity. Where there’s risk, there’s opportunity.”

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