Firm tells WP why emerging market debt is such a compelling asset class for investors
Building Canadian solutions for Canadians drove two of the latest products from one of the country’s leading ETF providers.
Last month, Mackenzie Investments launched the second of two emerging debt products, the Mackenzie Emerging Markets Local Currency Bond Index ETF. It followed the July unveiling of the Mackenzie Emerging Markets Bond Index ETF (QEBH), which is hard currency.
The latest ETF, as the name suggests, reflects the price of many of the same issuing sovereign entities but issued in the local currencies.
Michael Cooke, senior VP and head of ETFs, Mackenzie Investment, told WP: “They are discrete asset classes with different risk-return profiles and drivers. There are certainly overlap in terms of the countries and entities at issue, both emerging market local and hard currency debt, but they do have different profiles for investors.”
The ETFs are designed to address the much-debated home bias among Canadian investors, including institutional, especially given the backdrop of historically low interest rates in Canada and in many other developed markets.
Cooke believes that if you are an income-oriented investor and you’ve got all your eggs in one basket when it comes to your retirement savings based in Canada, now is a good time to think about diversifying. He told WP that the two ETFs address how to do that efficiently, with an eye on managing cost and the complexity of investing in other markets around the world.
He credited the outsized yield as a major reason why emerging market debt is a compelling asset class. QEBH has yield to maturity of about 6%, while the local currency produces a yield of about 5.1%, which is in excess of the prevailing government and corporate bond yields in almost any developed markets around the world.
Cooke said: “The question is, are you being adequately compensated for the additional risk of investing in these higher yielding asset classes? And the answer is a definitive ‘yes’ based on past performance and on the improving economic fundamentals we see in many emerging market countries that have instituted pretty sweeping economic reforms.
“They've become much more fiscally responsible, they're experiencing above-average economic growth rates and their debt to GDP ratios are actually only about 50%-60% of those in more developed countries.
“The markets also continue to mature as more international investors, including institutional investors, allocate capital to these markets, which results in improved corporate governance.”
Canadian institutional investors are allocating to these asset classes and using ETFs to do so, Cooke said, who added that Mackenzie actually had a request to build these products. This was in part predicated on the increased efficiency of having Canadian listings as opposed to US listings.
He said: “All things being equal, many institutional and retail investors are better served buying from a Canadian exchange. [There are] withholding taxes and you've got both currency risk and currency conversion costs, and for certain retail investor segments, you've also got considerations like estate taxes.
“So, having something Canadian listed that still affords you international or global exposure is probably the best combination. And that's increasingly what we're mindful of in building the best solutions made by Canadians and for Canadians. We think that's quite evident with the two emerging market bond index ETFs that we launched.”
