Returns set to go slow after influx of investors

Practitioners play down crash worrries and claim risks are still manageable. Emerging market debt has undoubtedly been the place to be during the past nine months, but whether an investment in this asset class remains wise is questionable. If there is not a crash on the horizon there is at least a strong chance that gains will slow significantly. Emerging bonds have been generating stellar returns thanks to low interest rates worldwide, which towards the end of 2002 began attracting investors in droves to this riskier, higher returning area of fixed income. But the influx of investors has caused credit spreads to condense, which in turn has knocked performance. Christian Kopf, vice president of international fixed income at DWS, remains positive: “There may be a period of consolidation, but increased numbers of investors is not a negative thing.” He denied that more investors could mean more volatility. “The new investors are not hedge funds. They are long term investors who have taken a strategic decision to be in the asset class and are not going to step away a the sight of a small hiccup.” One good sign is that flows into emerging market bonds are showing some signs of slowing. Massachusetts-based Emerging Portfolio Research tracks 188 dedicated emerging market bond funds with $12.5bn (E10.6bn) in assets. The funds had inflows of $52.1m during the first week of June, with year-to-date inflows of $2.07bn. Jerome Booth, head of research of Ashmore Investments, said another appealing factor about emerging bonds was the lack of inter-correlation between different emerging markets. This lowers risk by reducing the possibility of a worldwide crash. He said: “People think Russia is risky, but right now its less risky than any single stock in the FTSE 100.” Mr Booth recommended that high net worth investors allocate at least five per cent of their portfolios to emerging debt. He recommended diversifying risk by investing through a fund rather than buying individual bonds.