Pimco Joins $163 Billion Club in Emerging-Market Bond Shift

  • Twelve of biggest global bond funds raise EM bets: Morningstar
  • Templeton Global Bond fund increases allocation above 50%

Investors managing $163 billion are throwing their weight behind what BlackRock Inc. dubbed the "great migration" to emerging-market debt in search of antidotes to the near-zero yields offered by their staple assets.

Pacific Investment Management Co. more than doubled allocations in its $14.9 billion global fund since March and Chief Investment Officer Mark Kiesel says it’s building positions in Brazil, Mexico and Russia. Amundi Asset Management, Europe’s largest money manager, Jupiter Asset Management Ltd. and AllianceBernstein LP have also boosted bets on developing countries this year.

Emerging markets are coming back into favor with global bond managers trying to meet return targets as monetary stimulus in the developed world leaves them with dwindling options among the assets that typically form the bulk of their portfolios. Developing nations offer sovereign yields on average 10 times higher than advanced countries, their economies are growing twice as fast and now the political risks that often keep investors away look less forbidding amid turmoil in Europe and with unpredictable U.S. elections ahead.

"It’s a no brainer when you look at the low yields and poor fundamentals in the developed world versus high yields and really great fundamentals in places like India," said Ariel Bezalel, who oversees Jupiter’s $7 billion Dynamic Bond fund as a money manager in London. It now has more money in emerging markets than ever before having doubled holdings since March, he said. "It seems that emerging markets are where the growth is."

Twelve of the 18 biggest global bond funds tracked by Morningstar Inc. have raised allocations to the developing world this year. U.S.-based world bond funds increased holdings by an average of 2.4 percentage points to 15 percent, according to the data. Franklin Templeton’s $47.2 billion Global Bond Fund, the largest in its peer group, has boosted investments in the asset class by 5 percentage points since March to about 51 percent in June, Morningstar data show.

‘Net Beneficiaries’

Emerging-market debt yields on average 4.4 percent, compared with 0.46 percent for developed countries, according to Bloomberg indexes. That difference is unlikely to narrow soon, according to Newport Beach, CA-based Kiesel at Pimco, the world’s second-biggest bond manager. He cited Britain’s shock vote in June to leave the European Union among the reasons preventing policy makers in advanced economies from reducing monetary stimulus.

“We added emerging-market credit risk right after Brexit on the view that global central banks would turn more dovish and ultimately support the global economy,” he said. “Emerging markets will be net beneficiaries.”

The prospect of further stimulus has also lured Amundi. Myles Bradshaw, who manages the $7.5 billion Amundi Bond Global Aggregate fund in London, is buying local-currency bonds. He said he moved to an overweight position in emerging-market assets earlier this year. Matt Sheridan, a money manager who helps oversee the $5.7 billion AllianceBernstein Global Bond Fund in London, also increased his holdings in developing-nation debt earlier this year and is waiting for dips in the rally to add more.

Buying by global investors adds to money pouring in to the asset class via funds dedicated to emerging-market bonds, which saw a record $14 billion of inflows last month, according to EPFR Global data.

Short Supply

As investors pile in, some are struggling to find bonds to buy. Jupiter’s Bezalel says there isn’t enough Russian corporate debt to meet demand as sanctions keep many of the country’s companies out of the market, while Aberdeen Asset Management Plc said last month it had trouble finding sellers of African debt.

Demand will keep rising in the second half of the year as more investors seek refuge from negative- and low-yielding bonds, BlackRock money managers said in a report last month. Emerging-market bonds have returned 13 percent this year, on course for the best annual performance since 2012, according to Bloomberg indexes.

“A lot of global investors who lagged the rally are seeing now that rates are negative elsewhere so they have to be in emerging markets,” said Regis Chatellier, a strategist at Societe Generale SA in London. “It’s becoming a bit of a consensus trade.”

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