Active management remains crucial (round table 'Emerging Market Debt' – part 3)

June 10, 2026

^{This report was originally written in Dutch. This is an English translation.}

In part 3 of the round-table report on Emerging Market Debt, the experts discuss the role of ETFs, liquidity, active management and local-currency strategies within EMD. The report also examines the evolving significance of ESG and impact investing in emerging markets.

By Manno van den Berg

There has been an increase in the use of ETFs. Does that have an impact on investing in EM?

Nartey: ‘If ETFs attract more investors to the EMD segment, that is positive. Passive ETFs can also create opportunities for active managers. For instance, participating in a new issue at an early stage can generate value for active managers: once that bond is subsequently included in the benchmark, the ensuing demand from passive investors can support the valuation when the bond is included in the index.’
 

Emerging markets no longer merely provide the ‘picks and shovels’ for the AI gold rush, but are gradually moving up the value chain.

 
Benson: ‘ETFs are fairly broad in their selection, which can present opportunities. They can create demand for credits that do not fundamentally justify it, or conversely sell good credits without a convincing underlying story. This leads to misalignments that can be exploited through country or security selection.’

Ceva: ‘ETFs have not performed particularly well in EM. Active managers have generally been able to outperform, partly because transaction costs in EMD are high.’

Are there legitimate concerns about liquidity in EMD?

Thevakarrunai: ‘Broadly speaking, liquidity has improved as there are more issues in sovereign, corporate and local markets. However, in high-yield frontier segments, liquidity can still evaporate quickly during periods of stress. Egypt is a recent example where policy changes caused a sharp market move and made it difficult for investors to reduce their positions. Therefore, choose managers who can manage such liquidity risks.’
 

Even in the event of major geopolitical events, securities are usually priced in within a few weeks.

 
Ceva: ‘The least liquid part of the market usually consists of smaller, single-B corporate issues. But overall, liquidity in EMD is better than in many alternative asset classes, such as private markets.’

Glavan: ‘Liquidity is relative. The EM universe is larger and often features larger issues than US high yield. With government bonds, you see that ETFs actually improve liquidity, although they can also add volatility. That is one of the reasons why government bonds are generally more liquid: there are fewer ETFs active in corporate bonds.’

Spreads are historically quite tight. To what extent is active management then still actually based on active credit selection? Shouldn’t you focus more on beta?

Drijkoningen: ‘The question is how you define beta: as leveraged market exposure, or as the result of active country selection. If a manager can deploy beta dynamically, in both rising and falling markets, that can contribute to alpha generation. A higher beta can be justified on the basis of improving fundamentals in many higher-yielding countries.’

Anne: ‘Broadly speaking, I agree with that, but we generally prefer high quality and a lower beta. That still offers sufficient scope for active positioning.’
 

Markets are increasingly news-driven, whilst underlying changes take years to filter through. That creates a gap between perception and reality.

 
Nartey: ‘We too have that quality bias. If you compare issuers from developed and emerging markets with the same credit rating, the default rates from AAA down to single-B are roughly comparable. The differences arise in the triple-C bucket and below, where defaults occur more frequently in emerging markets than in developed markets. That is why we are very selective in this segment. In benchmark-conscious portfolios, we also keep the beta within a range, typically between 0.9 and 1.1.’

Ceva: ‘The key driver of returns remains making the right country selections. Look beyond the benchmark and focus on where fundamentals are improving.’

Benson: ‘We are a bottom-up, fundamentally driven firm. Ultimately, you want to own the bonds you genuinely want to own. Our trading team, our analysts and our portfolio managers work closely together to determine whether market movements are driven by positioning, sentiment or structural factors. It is important to act quickly when opportunities arise.’

Elmi: ‘With a robust risk budgeting framework, you can manage volatility. For frontier or higher-yielding names, where alpha is often found, strict controls are needed on position size, stop losses and risk metrics. In EM, where trading volumes can shift rapidly, that discipline is essential.’

Glavan: ‘A good starting point is to measure risk correctly, not only through spread-duration metrics but also by looking at the volatility of specific bonds, sectors and countries. With limits for segments, regions and sectors, you can avoid excessive concentration. Diversification remains your most important protection.’

What role should a local-currency EMD portfolio play within a broader investment portfolio?

Thevakarrunai: ‘Many investors opt for blended mandates with the flexibility to invest in both hard currency and local currency. The question is whether you should always hold local currency or only when valuations are attractive. The segment is highly volatile, and the period after 2010 was challenging due to the strong dollar. Investing in local currency means you have to be able to accept that volatility.’

Anne: ‘Local currency EMD is indeed a separate category. Whilst EMD as a whole justifies a strategic allocation, local currency often requires a more tactical approach due to the influence of the dollar cycle. We are bearish on the US dollar, which supports the outlook for local debt, despite the current volatility in the segment. However, it is not a one-way asset class. You need to separate the interest rate view from the currency view, and ideally you want both views to be supportive. At present, parts of Latin America offer that combination.’
 

A market pullback, driven by geopolitical tensions, could present a tactical opportunity to rebuild positions, as entry levels become more attractive.

 
Drijkoningen: ‘Don’t view local currency solely from a dollar perspective, but take a broader view. From a euro perspective, volatility is significantly lower and the Sharpe ratio higher. Local currency bonds offer significant diversification benefits. The Chinese segment, in particular, has provided investors with strong diversification at crucial moments.’

Lin: ‘Local currency essentially fulfils three roles. Firstly, as a source of returns thanks to attractive real interest rates in markets such as Brazil and Indonesia. Secondly, as a diversifier thanks to local interest rate cycles that move structurally differently from developed markets. Thirdly, local currency provides currency diversification, with potential for appreciation in the long term. This combination of returns, risk diversification and currency exposure is not easy to replicate.’

Is there still significant interest in ESG or impact within EMD?

Lin: ‘ESG does not determine how much we allocate to emerging markets. Once EMD is part of the portfolio, we expect far-reaching ESG integration. On the impact side, we focus on contribution and additionality, among other things. With bonds in public markets, that effect is usually limited, for example with oversubscribed government green bonds. Interest in impact in EM is often still limited, although the potential impact per euro invested is generally higher than in developed markets.’

Thevakarrunai: ‘A sensible ESG approach is to take a country’s stage of development into account. Poorer countries need more leeway, whilst ESG requirements rightly become stricter as countries develop further.’
 

Without good governance, it is unlikely that environmental and social outcomes will improve.

 
Glavan: ‘Interest in ESG and impact waned slightly last year, but is now picking up again, particularly among continental European investors. This is partly driven by regulatory developments. At the same time, investors are becoming more selective about what qualifies as a truly sustainable or impact-oriented approach.’

Elmi: ‘An approach based purely on exclusion quickly limits the universe. That is why we prefer a more active ESG framework, with governance as the starting point. Without good governance, it is unlikely that environmental and social outcomes will improve. If the G is moving in the right direction, you can then assess the E and S. This ensures a fairer approach, particularly for countries with lower income levels.’

Read the full article in Financial Investigator magazine