As the search continues for reliable and sustainable sources of uncorrelated investment returns, financial planners have been urged to consider an allocation to emerging-market bonds as part of portfolios backing retirees’ income goals.
Ramin Toloui, co-head of emerging markets at fund manager Pimco, says it’s a well-established fact that an allocation to bonds can reduce the overall volatility of a portfolio, but the case for including emerging-market bonds is less well understood.
“And here, it’s very important to say that ‘emerging market’ has a very different connotation than it had when we were discussing this 15 years ago,” Toloui says.
“In the 1990s, emerging markets had much higher levels of debt and were borrowing from developed countries. Now the situation is entirely the reverse: it is emerging-market governments that are the creditors in the global economy, have built up war chests of foreign currency reserves that provide plenty of resources for servicing that debt.
“So one important reason for thinking about emerging-market bonds for retirement income is because of this income component. The other component is just this volatility component. Retires should be particularly concerned about the volatility profile of their investments and, so again, emerging-market bonds have more volatility than traditional bonds, but substantially less volatility than equities.
“And so, from a portfolio-construction point of view, you can optimise a position on the efficient frontier by using emerging-market bonds as one of the tools in the toolkit.”
Ramin Toloui was a panellist at last week’s Portfolio Construction Forum Conference in Sydney.
