Analysis examines performance of international fixed-income fund exposures during different parts of business cycle
For many fixed-income investors, a bit of exposure to emerging market debt may make sense given the higher yields that they offer. And as suggested by a new analysis, that advantage may be amplified as the U.S. economic recovery takes hold.
In a blog post published by the CFA Institute, Derek Horstmeyer, leading a team of researchers from George Mason University, examined the monthly returns of all US dollar-denominated mutual funds across multiple fixed-income asset classes – including emerging market corporates, emerging market sovereign debt, U.S. long-term debt, U.S. short-term debt, and U.S. corporates, among others – going back to 1990.
Based on a classification of business cycles set out by the National Bureau of Economic Research (NBER), Mason and his team isolated four recessions within that sample period: July 1990 to March 1991, March 2001 to November 2001, December 2007 to June 2009, and February 2020 to the present.
They then examined how the average fixed-income mutual fund in each group performed during those recessions, the two years subsequent to those recessions, and “normal times.”
“We found that emerging market debt does better in the first two years after a US recession than any other time period,” Mason said, noting that the average emerging market debt fund exhibited 18.78% in annualized returns on average during U.S. recoveries, compared to just 9.45% during U.S. recessions.
Emerging-market debt funds, he added, trumped all U.S.-focused fixed income funds during recoveries. Even the riskiest U.S. long-term debt funds, he said, only achieved 10.74% returns, lagging their emerging-market peers by 8.04 percentage points on an annualized basis during U.S. economic expansions.
The trend holds for funds focused on EM sovereign debt, he said. During recessions, he said such funds showed an average annual return of 3.15%, lagging the in-recession performance all other fixed-income asset class categories studied.
“In periods when the United States is recovering, however, the same mutual funds have delivered an average return of 15.45% per annum — higher than any other asset class during these expansions,” Horstmeyer said.
