New research points to benefits of emerging market debt

Most pension funds are underweight emerging market debt and could benefit from a higher allocation, according to new research from the Sloan School of Management at Massachusetts Institute of Technology (MIT).

The research found that the optimal allocation to emerging market debt is 8% to 35% of a fixed income allocation in a rising rate environment. However, most investors currently have a 2% to 6% weighting to the asset class. The research was conducted by students at the Sloan School of Management at MIT, supervised by NN Investment Partners. The students found that investors with a higher appetite for drawdown risk should allocate more to emerging market debt.

Commenting on the asset class, NN Investment Partners, head of emerging market debt, Marcelo Assalin, commented: “EMD is a fairly under-appreciated asset class. We encourage investors to look beyond the undue concerns and take a closer look at the data. The historical risk and return characteristics of EMD are very compelling, especially when the extra yield can act as a cushion against the headwinds created by rising rates. The market tends to overestimate the risks associated with EMD sovereign bonds which has created a more favourable risk and return trade-off than other fixed income asset classes for the patient investor.”