Emerging Market (EM) debt has slipped down the agenda for many private clients in Asia, crowded out by developed-market credit and private markets. At a Hubbis-hosted luncheon in Hong Kong, senior representatives of Ashmore Group (Ashmore) argued that the frontier end of the asset class now offers something increasingly scarce in client portfolios: a double-digit yield with short duration, contained volatility, and returns that move largely independently of what investors already own.
Key Takeaways
- A Specialist, Not a Generalist: Ashmore invests solely in emerging markets across public and private debt and equity, managing USD54 billion, and positions itself as a permanent allocator rather than a tactical visitor to the asset class.
- Frontier Is the High-Yield End of EM: Frontier debt is broadly the high-yield portion of hard and local currency EM debt, concentrated in smaller, less liquid and materially less crowded markets, spanning roughly 50 investible countries.
- Yield Without Duration: The blended strategy yields just over 10 percent with a duration of three years, drawing 8 to 9 percent from dollar paper and 12 to 15 percent from local currency positions.
- Volatility Lower Than Perception: Because many frontier currencies are pegged, crawling or managed, the fund has run at 4.3 percent annualised volatility since inception against returns of approximately 16 percent.
- An Improving Credit Cycle: Over the past three years, 80 percent of sovereign rating actions in the universe have been upgrades, reflecting tighter fiscal management across EM since the pandemic.
- The Allocation Question Remains: Participants were broadly constructive but candid that fully invested portfolios leave little obvious room, with Ashmore suggesting the funding source is expensive, duration-sensitive investment grade credit.
A Specialist Manager in a Broad Universe
Ashmore’s pitch begins with what it does not do. “As some of you know, we are a specialist asset manager in that the only thing that we do is emerging markets; nothing else,” said Robert Noordhoek Hegt, Chief Executive Officer and Head of Distribution, Asia Pacific ex-Japan. “That makes us quite unique because if you have a strategic asset allocation to emerging markets, as you should at 60 percent of the global economy, you should be invested in it. Then we are a good partner because we’re always there. We’re not in and out.”
The firm manages USD54 billion, is listed on the London Stock Exchange and remains predominantly employee-owned. Its work spans public equities and debt as well as private equity and private debt, though the discussion in Hong Kong focused squarely on the debt side, and specifically on the segment Noordhoek Hegt cheerfully described as burdened by a difficult label.
“It’s called frontier debt,” he said. “It scares a lot of people, but it’s a very good strategy. In equities, index providers make a difference between emerging markets and frontiers. In debt, that’s not really the case. But it does actually behave very, very differently. And it’s that different behaviour that makes the asset class so interesting.”
Defining the Frontier
Alexis de Mones, Portfolio Manager at Ashmore, offered a working definition. “Frontier debt is the higher part of emerging market debt,” he said. “If you take all of your emerging market debt exposure in hard and local currency, just look at the high yield, and you’re going to have a pretty good approximation. But it’s called frontier because the emphasis is on usually the smaller markets with maybe a little bit less market capitalisation, less liquidity, and frankly quite less crowded investment positions.”
That absence of crowding is central to the argument. “This is the part of the market that fewer people will own, and that’s the part of the market that will thus offer you a little bit more premium,” de Mones said. The investible universe covers roughly 50 countries, with a maximum country allocation of 10 percent.
The boundary is not fixed by any single index. Large, well-owned high-yield markets are excluded, while smaller markets outside the main local currency benchmarks qualify. Turkey sits on the line and is held in small size, de Mones noted, because although it was once a deep local market, it is now managed in a recognisably frontier fashion: inflation near 31 percent, a one-year yield around 40 percent, and a currency used as the nominal anchor.
Where the Yield Comes From
The strategy blends hard and local currency exposure, currently split at 52 percent local. “The two markets are really quite different,” de Mones said. The dollar leg behaves as a credit product, with returns driven by the spread cycle, and yields 8 to 9 percent. The local leg spans roughly 25 yield curves and yields 12 to 15 percent, compensating investors for domestic inflation and policy rates.
Much of that local exposure is expressed through rolling foreign exchange (FX) forwards rather than long-dated bonds, keeping strategy duration at three years. “You don’t have an interest rate volatility component. You have an implied yield that’s very juicy,” de Mones said, citing positions in Nigeria, Uzbekistan and Kazakhstan, where local rates were recently raised to 18 percent.
The counterintuitive point concerns volatility. Fully floating EM currencies can be turbulent, but frontier currencies are more often pegged, crawling or managed, with central banks supplying dollar liquidity at controlled rates. “You’d be surprised, but the local currency part of frontier is not volatile at all,” de Mones said. “If you get exposure to a diversified set of them, volatility is going to be about 4 percent annualised.” The fund’s realised volatility since inception is 4.3 percent, against returns of approximately 16 percent.
Improving Credit, Broadening Opportunity
De Mones pointed to a supportive ratings cycle. “There has been 80 percent of the sovereign credit rating changes have been upgrades, and only 20 percent have been downgrades,” he said of the past three years. “Emerging market economies have been well managed since COVID. They know that they don’t have really a lot of flexibility in terms of funding. They have to run a very, very tight shop.”
The opportunity set is also widening as governments build local debt markets and investment banks staff dedicated frontier trading desks. Sovereign restructurings, meanwhile, have historically delivered recoveries of 55 to 60 percent of claim value, and the cycles are widely spaced.
On politics, de Mones was unsentimental. “We don’t care who is in power as long as the policies are orthodox,” he said. “Political risk is another word for policies. It’s no bigger in EM than anywhere else.”
The View Around the Table
Participants were candid about the asset class having fallen out of view. “It’s sort of an overlooked or forgotten asset class, unfortunately, for our private clients,” said one fund and mandate specialist at an international private bank. A counterpart at another private bank agreed: “With the volatility in the developed markets, we are relooking at emerging market debt again.”
A fund analyst at a European private bank noted that his firm had moved overweight EM debt and local currency earlier in the year. “Our whole view is that the whole fixed income sector, credit spreads, are kind of tight. We are trying to look for something where yields are attractive.”
Reservations centred on positioning rather than conviction. A representative of a digital wealth platform said internal reviews flagged the strategy as niche, adding: “It seems like the EM market is always ever evolving. It takes quite a lot of on-the-ground knowledge and an adaptable team.” A head of investments at a single-family office put the practical obstacle plainly: “It’s very difficult to go from zero allocation to just even a little bit.”
Finding the Funding Source
Asked where the allocation should come from in a fully invested portfolio, de Mones was specific. “In the private wealth space, people are going to have a big chunk in fixed income, a big chunk in investment grade credit. That’s really what I would sell to go into another source of yield and income.”
He drew a comparison with private credit, which attracts capital for similar reasons of high yield, low duration and limited correlation to the interest rate cycle. “It behaves a little bit like a private credit product, and you can sell it tomorrow if you want.”
The vehicle itself is a daily dealing fund under a Luxembourg umbrella, subject to standard European investor protection and diversification rules. Noordhoek Hegt closed on the strategic point. “If you look at International Monetary Fund (IMF) growth projections for the world, 80 percent of the global growth comes out of emerging markets. This is not an asset class that should be treated as niche. It should be treated as core, considering the size of it.”