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Typically, emerging markets (EM) investing conjures up visions of very high risk, but potentially rewarding, equity investments. But we often forget about the fixed-income markets of these developing nations, which have grown substantially over the past decade as fiscal fundamentals improve.
EM debt has a very attractive correlation profile to other asset classes, making it a strong diversifier in a portfolio. But given the complexity of the broader EM debt market, this is certainly an asset class you’ll want to leave up to the experts.
The RBC Emerging Markets Bond Fund, under lead manager David Nava, who took over the reins in December 2018, is one of the more attractive options. The fund debuted in August 2010 and invests in a mix of government and corporate bonds of companies in developing economies. At the end of May, it held 63% in government debt and 36% in corporate credit. It’s no slouch in the performance department either. It has won the FundGrade A+ Award every year since 2015, signalling consistent top quartile performance.
Credit quality currently skews more to non-investment grade, with more than half rated BB or lower. Yield to maturity is attractive, at a recent 5.5%, well above the yield offered by Canadian investment-grade issues.
The portfolio is very well diversified, with more than 159 individual bonds. The top 10 holdings represent approximately 19% of the assets. The geographic mix is also very well diversified. The largest weighting as of May 31 is to Latin America at 30% of holdings, followed by Africa and the Middle East at 23%, Asia at 18%, Europe at 17%, and North America at 11%.
Despite the slump in March, which hit most funds to some degree, performance has been solid, particularly over the longer term. The 5-year average annual compounded rate of return to May 31 is 4.51%, for a first-quartile ranking. Even year-to-date to May 31, the fund is down a marginal 0.6% having rallied considerably in since the March meltdown, and far outpacing the category average of -4.2 for the same period. Volatility can be a factor with this fund, but as of May 31, the 3-year average annualized standard deviation was 8.3, compared with 9.5 for the category median.
Emerging market bonds are typically vulnerable to a pullback in the face of macro headwinds (the COVID-19 pandemic, the continuing trade war, and so on). Longer-term, though, with the higher yield and strong diversification benefits offered, EM bonds could be a piece of an otherwise well-diversified portfolio. Note though, that this is not a core bond holding.
Given its higher volatility and overall risk, it is more appropriate as a smaller piece of a diversified fixed-income allocation.
RBC Emerging Markets Bond Fund
Fund company: RBC Global Asset Management
Fund type: Emerging Market Fixed Income
FundGrade: B (May)
FundGrade A+ Awards: 2015-2019
Style: Top-down macro; bottom-up security selection
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Fair
Manager: David Nava since Dec. 2018
MER: 1.73%
Fund codes: RBF797 (Front-end load), RBF497 (Series A)
Minimum investment: $500
Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products
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Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently, and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice. Dave Paterson is employed as an advising representative (portfolio manager) by Empire Life Investments Inc. (ELII), a subsidiary of Empire Life Insurance Company. ELII is the investment fund manager and portfolio manager of the Empire Life Mutual Funds and the portfolio manager of the Empire Life Segregated Funds (collectively, the Empire Funds). As such, his employment and his compensation may be connected to the success of ELII and the Empire Funds. From time to time, the Empire Funds may buy, sell, hold, or otherwise have an interest in securities that may be discussed in this report.
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