Fastest-Growing Emerging Bond Fund Manager Doesn’t Fear Your ETF

  • Pictet’s Lue-Fong says active, passive funds can coexist
  • Global emerging debt fund has grown by $2.6 billion in 2016

Simon Lue-Fong, head of emerging-market debt at Pictet Asset Management SA, isn’t as concerned as some of his counterparts about the rise of passive investing, which has underscored the $55.3 billion deluge of money flowing into developing-nation debt and equity funds since January.

Some of his confidence might come from the $2.6 billion in inflows since January to the global emerging debt fund he manages, the biggest increase among peers, according to data compiled by Bloomberg. Passive ETFs accounted for roughly one-third of inflows into developing-nation bond funds this year, according to EPFR Global data.

“It’s healthy for investors to have choices,” Lue-Fong said in an interview at Bloomberg’s New York headquarters. “We can have a choice for guys who want to pay for an ETF and have maybe a lower total fee, but then have some unknown as to what’s in that, and less transparency. Then you have the active guys, where people will pay for that and hope that the active manager outperforms, but also have a high degree of transparency -- they can all coexist together.”

A JPMorgan index of local-currency bonds in developing nations has advanced 17 percent this year, while a measure of hard-currency bond returns has gained 14 percent, the most since 2012. The advance comes as investors seek yield amid low interest rates in the developed world while oil prices climb and China’s economy shows signs of stabilizing.

Of the $43.5 billion that has flowed into emerging-market bond funds this year through Oct. 7, just 34 percent has gone into exchange-traded funds, according to EPFR Global. That dynamic is reversed for emerging-market equities, where $22 billion have been pushed into ETFs, compared with $10 billion that have been pulled from actively managed funds.

While lower-cost index funds have long been a choice for investors in advanced economies, their rise in emerging markets is more surprising. In theory, it’s easier for savvy money managers to find hidden gems and deliver outsize returns in less-developed markets. In reality, active managers have struggled to beat benchmarks, and those who manage to outperform markets can see that advantage trimmed as higher fees are compounded over time.

‘Challenging’ World

London-based Lue-Fong’s global emerging debt fund has returned 12 percent this year, beating 50 percent of its peers. He currently prefers investments in Brazil and Argentina, where government reforms and stabilization have buoyed the political risk and economic outlooks.

Indiscriminate passive buying of emerging-market securities can pose a risk to active fund managers like Lue-Fong. A selloff may gather pace if a sudden shift in sentiment causes a reversal of the billions that have flowed into passive emerging-market funds.

BlackRock Inc. warned investors last month to be more selective because a change in developed-world monetary policy could spark such a reversal. Earlier this month, ETFs dedicated to developing countries grew at the slowest pace since 2014. The extra spread investors demand to hold emerging-market bonds compared to Treasuries has climbed to 332 basis points, compared to 175 basis points earlier in the year.

For Lue-Fong at Geneva-based Pictet, it comes down to managing risks.

“You can really lose a lot of money in EM if your manager’s not so risk-controlled,” he said. “The world is very challenging in the new normal that we’re in, so active management has to be the way to go,” he said in an interview on Bloomberg radio.

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