emerging markets local currency debt and foreign...

Emerging Markets Local

Currency Debt and

Foreign Investors

Recent Developments

Daniela Klingebiel

Pension & Endowments Departments

Nov. 20, 2014

Outline

Structural trends in emerging markets (EM) external and local

currency sovereign debt Development of size of EM debt market and composition

Inclusion of EM debt in fixed income benchmarks

Developments of foreign holdings in EM debt (local and hard currency) and their

effects

Why do foreign investors move into EM local currency bonds Strategic asset allocation and EM local currency bonds

Opportunistic investing in emerging market sovereign local bonds

How do institutional investors view local emerging markets bonds

How do foreign investors access local emerging market bonds Investing through external managers

Direct investing in markets

ETFs

1

Structural trends in EM hard and local

currency sovereign markets

Explosive growth of EM local currency debt

Source: Bloomberg.

The market capitalization of EM debt grew significantly during last 14 years. While sovereign debt

outstanding for 55 emerging markets, amounted to $1.3 trillion in 2000, 13 years later it had grown six-

fold to $6.3 trillion. With $6.3 trillion, EM debt outstanding now almost half of the size of the US

Treasury markets, the world biggest and most liquid market.

Growth in EM debt outstanding driven by local currency debt (EMDX). While EM external debt (EMFX)

almost doubled over this period from $576 billion to $1.0, EM local currency debt grew sevenfold from

$716 bn to $5.2 trillion.

3

-

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

EM DX debt vs. FX debt outstanding (US $ bn)

EM FX Debt EM DX Debt

-

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

16,000.00

Total EM debt outstanding (US $ bn)

Emerging Markets United States

EM external debt now presents only small portion of Total

market cap of EM debt

Source: Bloomberg

In 2000, local currency debt accounted for roughly 55% of outstanding tradeable debt in

EM.

By 2013, the share of EM local currency debt to 83% of total outstanding EM debt.

4

50.00%

55.00%

60.00%

65.00%

70.00%

75.00%

80.00%

85.00%

90.00%

-

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

US

$ b

n

EM DX debt as % of total EM debt

EM DX Debt EM DX Debt as % of Total EM Debt

Market highly concentrated with few issuers accounting for

bulk of outstanding EM local currency debt

EM local currency debt market is highly concentrated with the ten largest issuers

accounting for 81% of the local currency debt market and 74% of overall EM debt.

With $1.3 trillion, China’s market cap of outstanding local currency debt largest in EM

space.

5

80.00%

81.00%

82.00%

83.00%

84.00%

85.00%

-

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

4,500.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

US

$ b

n

Top 10 EM DX stock as % of total EM DX debt

Top 10 EM DX stock Top 10 as % of total EM DX debt

China, Brazil and India alone account for 50% of

outstanding market cap of EM local currency debt

China, Brazil, and India also have debt stock of local currency bonds that exceed $500 mn.

Also interesting to note that largest issuers of local currency debt also issue very little hard

currency debt.

6

Table 6. Top 10 Largest DX EMD Issuers Stock Comparison

Federal government debt, all maturities, amounts outstanding, by issuer

(In billions of US dollars)

Country Dec-00 Dec-13 Dec-00 Dec-13 Dec-13 Dec-00 Dec-13 Dec-00 Dec-13 Dec-13

China 133.89 1,361.82 11.17% 14.74% 26.29% 139.20 1,363.49 11.62% 14.76% 21.85%

Brazil 134.26 912.21 20.82% 40.62% 17.61% 216.13 986.88 33.52% 43.95% 15.82%

India 11.92 618.04 2.50% 32.93% 11.93% 11.92 618.04 2.50% 32.93% 9.91%

Mexico 59.64 306.68 8.72% 24.32% 5.92% 138.70 405.26 20.29% 32.14% 6.50%

Turkey 15.77 243.74 5.92% 29.72% 4.70% 42.63 299.78 15.99% 36.55% 4.80%

Poland 36.97 212.55 21.59% 41.07% 4.10% 50.58 299.88 29.53% 57.94% 4.81%

Malaysia 44.24 160.93 47.17% 51.51% 3.11% 49.08 164.78 52.33% 52.74% 2.64%

Russia 8.95 144.27 3.44% 6.88% 2.78% 98.51 237.71 37.93% 11.34% 3.81%

South Africa 71.35 126.68 53.69% 36.13% 2.45% 75.40 139.03 56.75% 39.65% 2.23%

Thailand 16.17 113.69 13.17% 29.36% 2.19% 18.13 113.79 14.77% 29.38% 1.82%

81.08% 74.19%

DX Stock (% of total

EM DX Debt)

Total Debt (% of

total EM Debt)DX Stock (USD billions) DX Stock (% GDP) Total Debt (USD billions) Total Debt (% GDP)

Six of largest 10 issuers have investment grade rating and

all are at least part of one index

7

Country Dec-00 Dec-13 GBI-EM EMLCTRUU LEGATRUU LCEMTRUU EMGBI WGBI

China BBB AA- * *

Brazil BB A- * * * *

India BBB BBB- * *

Mexico BBB+ A * * * * * *

Turkey B+ BBB * * * * *

Poland A+ A * * * * * *

Malaysia A A * * * * * *

Russia B- BBB+ * * * * *

South Africa A- BBB+ * * * * * *

Thailand A- A- * * * * *

Notes:

1. Local currency long-term debt

2. GBI-EM = JPMorgan Government Bond Index Emerging Markets, EMLCTRUU = Barclays Emerging Markets Local Currency

Government Bond Index, LEGATRUU = Barclays Global Aggregate Index, LCEMTRUU = Barclays Emerging Markets Local Currency

Government Universal Bond Index, EMGBI = Citi Emerging Markets Global Bond Index, WGBI = Citi World Government Bond Index

S&P Credit Rating1 Local Currency Index Membership2

From a regional perspective, Total EM sovereign debt

outstanding concentrated in Asia and LATAM

With 31.3% LATAM region highest share of total sovereign emerging market debt

outstanding, followed by with 30.5%.

8

3.03%

3.10%

30.45%

20.73%

31.37%

11.32%

Total sovereign EM debt breakdown, FY13

Sub-Saharan Africa

Middle East & North Africa

East Asia Pacific

Europe & Central Asia

Latin America & Caribbean

South Asia

From a regional perspective, local currency debt

outstanding concentrated in Asia

Asia dominates the EM tradeable local currency debt market.

While LatAm and European emerging market countries dominate the EM external debt

market.

9

3.33%

2.90%

35.31% 16.66%

28.41%

13.40%

Total EM local currency debt breakdown, FY13

Sub-Saharan Africa

Middle East & NorthAfrica

East Asia Pacific


Latin America &Caribbean

South Asia

1.55%

4.10%

6.67%

40.63%

45.86%

1.18%

Total EM hard currency debt breakdown, FY13

Sub-Saharan Africa

Middle East & NorthAfrica

East Asia Pacific


Latin America &Caribbean

South Asia

Foreign ownership of EM local currency debt has increased

significantly over last 6 years

For a number of

countries foreigners

constitute an

important part of the

investor base.

In 10 of 21 countries

for which information

was available,

foreign investors

hold at least 20% of

outstanding local

currency holding.

In 6 countries,

foreigners hold at

least 30%.

10

Foreign Ownership of Emerging Markets Local Currency Sovereign Debt

Federal government debt, all maturities, amounts outstanding, by issuer

(In billions of US dollars)

Country Dec-06 Dec-13 Dec-13 % of GDP Dec-06 Dec-13 Dec-06 Dec-13

China 448.09 1,340.27 14.50% 0.09 22.54 0.02% 1.68%

Brazil 511.84 859.48 38.27% 14.75 138.39 2.88% 16.10%

India 337.46 680.49 36.26% 0.89 8.36 0.26% 1.23%

Mexico 157.08 379.80 30.12% 11.90 140.04 7.57% 36.87%

Poland 120.55 191.17 36.94% 25.61 66.76 21.25% 34.92%

Turkey 153.15 189.78 23.14% 21.20 40.86 13.84% 21.53%

Malaysia 56.20 146.27 46.82% 4.72 43.00 8.40% 29.40%

Russia 39.05 120.57 5.75% 0.99 29.84 2.55% 24.75%

South Africa 63.89 114.34 32.61% 5.49 43.28 8.59% 37.85%

Thailand 48.78 104.04 26.87% 1.33 18.11 2.73% 17.41%

Philippines 43.48 84.08 30.91% - 12.14 0.00% 14.44%

Colombia 37.87 82.35 21.78% - 5.30 0.00% 6.43%

Indonesia 46.55 77.22 8.89% 6.11 23.17 13.12% 30.01%

Egypt 18.62 65.43 24.06% 3.46 0.14 18.57% 0.21%

Hungary 53.52 57.61 44.32% 15.42 23.25 28.81% 40.36%

Argentina 32.74 37.20 6.10% 5.50 1.19 16.80% 3.20%

Ukraine - 30.06 16.94% - 1.45 0.00% 4.83%

Romania - 27.12 14.30% - 6.05 0.00% 22.30%

Peru 3.70 12.81 6.33% 1.01 6.55 27.21% 51.08%

Lithuania 1.42 3.30 7.19% 0.02 0.53 1.26% 16.09%

Bulgaria 1.44 3.16 5.95% - 0.03 0.00% 0.98%

Sources: IMF Sovereign Investor Base Dataset for Emerging Markets, Arslanalp and Tsuda (2014)

DX Stock (USD billions) Foreign Holdings (USD billions) Foreign Holdings (% of DX stock)

Foreigners are an important investor base for a number

of EM countries issuing local currency bonds

Universe covered by IMF study included 21 countries accounting for roughly 89%

of the EM universe covered in our analysis.

For these 21 countries, foreigners hold 13% of total debt outstanding.

In 16 countries, foreigner account for a significant higher share of local currency

bonds.

Also interesting to note that two largest issuers of domestic currency bonds,

China and India, have little foreign ownership.

A couple of countries, Egypt and Argentina saw a significant drop in foreigners

holding local currency bonds, each for different regions.

11

Foreign non-banks (retail and institutional investors) important

and large investors in EM debt

Foreign Central Banks and non-bank holders are largest holders of EM debt.

12


Notes: This data series covers general government debt, both local and hard currency. This chart is not

comparable to previous tables on foreign ownership of local currency federal government debt securities.

Foreign Ownership of Emerging Markets Sovereign Debt 2013

General government debt, all maturities, all currencies, by issuer

2013 Total Debt (USD billions) Foreign Official Foreign Bank Foreign Nonbank Domestic Central Bank Domestic Bank Domestic Nonbank Total Foreign Total Domestic

South Africa 151.37 1.59% 3.69% 33.52% 0.55% 22.28% 38.37% 38.80% 61.20%

Egypt 238.59 9.78% 0.06% 2.57% 24.48% 43.10% 20.02% 12.40% 87.60%

China 4,630.49 1.17% 0.02% 0.07% 5.45% 91.72% 1.57% 1.26% 98.74%

Indonesia 194.53 30.43% 4.93% 23.29% 14.94% 13.15% 13.26% 58.65% 41.35%

Malaysia 167.60 6.96% 3.34% 20.33% 0.00% 23.89% 45.48% 30.62% 69.38%

Philippines 99.53 15.95% 4.84% 20.40% 6.73% 32.08% 20.01% 41.18% 58.82%

Thailand 116.66 1.80% 3.11% 12.43% 6.34% 21.72% 54.60% 17.34% 82.66%

Bulgaria 10.40 19.72% 2.57% 10.28% 0.00% 41.45% 25.98% 32.57% 67.43%

Hungary 107.40 14.08% 5.88% 38.29% 0.60% 21.52% 19.64% 58.24% 41.76%

Lithuania 18.83 11.23% 2.07% 58.41% 0.39% 18.44% 9.45% 71.71% 28.29%

Poland 310.38 9.77% 4.49% 33.82% 0.00% 25.11% 26.81% 48.08% 51.92%

Romania 74.39 27.65% 5.28% 21.13% 0.00% 33.23% 12.70% 54.07% 45.93%

Russia 263.37 1.66% 3.93% 17.96% 4.21% 40.74% 31.49% 23.56% 76.44%

Turkey 266.68 12.13% 8.43% 20.77% 2.15% 46.43% 10.10% 41.32% 58.68%

Ukraine 59.61 14.06% 1.81% 29.74% 30.36% 19.31% 4.71% 45.61% 54.39%

Argentina 178.56 10.90% 1.69% 20.78% 42.95% 19.18% 4.49% 33.37% 66.63%

Brazil 1,346.51 2.28% 3.84% 8.87% 30.00% 22.55% 32.47% 14.98% 85.02%

Colombia 135.73 11.09% 2.68% 16.38% 0.06% 20.23% 49.57% 30.14% 69.86%

Mexico 419.58 8.45% 6.78% 34.23% 0.00% 8.17% 42.37% 49.46% 50.54%

Peru 37.51 20.31% 9.35% 30.00% 1.49% 9.72% 29.12% 59.66% 40.34%

India 1,196.95 5.11% 0.14% 0.56% 9.14% 29.76% 55.29% 5.81% 94.19%

Effects of foreign ownership on local currency bond

markets

13


Notes: This data series covers general government debt, both local and hard currency. This chart is not

comparable to previous tables on foreign ownership of local currency federal government debt securities.

In a study for 10 emerging market countries, Peiris (2010) shows

that greater foreign participation significantly reduce long-term

government yield. Results were confirmed by Ebeke and Lu (2014).

Peiris also found that increase in foreign participation does not

necessarily result in increased bond yield volatility, but, could, in fact

dampen volatility in some instances. In their paper, Ebeke and Lu’s

findings suggest that countries with strong macroeconomic

fundamentals should experience less volatility.

During the “Taper tantrum”, i. e. concerns about the end of QE in the

US and the rise in US rates in middle of 2013, foreign ownership of

local bonds remained relatively stable in most countries. Roughly

1/3 of countries actually saw increases in foreign ownership.

Inclusion in bond index positive for country as it increases

liquidity in local market and demand for local bonds

In response to an increase in investor appetite, local currency debt indices were developed: “the Government Bond Index-Emerging Markets (GBI-EM) series; index exists in three variations - the GBI-EM, GBI-EM Global and GBI-EM Broad - which cater to different investment objectives and inclusion criteria; the indices span over 15 countries and are also available in diversified weighting versions.

4 EM countries (Malaysia, Mexico, Poland and South Africa) are also part of the Citi World Government Bond Index that tracks the performance of local government investment grade bonds. And finally, the Barclays Agg Index now has a small portion of the index dedicated to a number of EMS. The weight of these indices, however, is below 3%.

14

Index Name Ticker Inception Market Cap

(USD billions) Number of

Constituents Country Criteria Liquidity Criteria Instrument Criteria

J.P.Morgan Government Bond Index - Emerging Markets Broad/Diversified

GBI-EM Jun-05 1,594 18 GNI per capita below the Index Income Ceiling (IIC) for 3 consecutive years.

i. Daily pricing available ii. Regularly traded in size at acceptable bid-offer spreads; readily redeemable for cash. iii. Low index replication costs.

i. Fixed coupon or zero coupon. ii. Bonds with option features are excluded. iii. At rebalance date, maturity > 13 months. iv. No explicit face value minimum.

J.P.Morgan Government Bond Index - Emerging Markets Global/Diversified

GBI-EM Jan-06 993 16

i. GNI per capita below the Index Income Ceiling (IIC) for 3 consecutive years. ii. Accessible to majority of foreign investors. Does not include markets with capital controls.



J.P.Morgan Government Bond Index - Emerging Markets Diversified

GBI-EM Jan-06 873 14

i. GNI per capita below the Index Income Ceiling (IIC) for 3 consecutive years. ii. Directly accessible. No impediments for foreign investors.



Citi World Government Bond Index WGBI Dec-84 20,361 23 i. Minimum A- by S&P, A3 by Moody's for entry. Below BBB- by S&P; below Baa3 by Moody's for exit. ii. Fully accessible to foreign investors.

No explicit liquidity criteria but minimum market size of at least USD 50 billion, EUR 40 billion, JPY 5 trillion for entry; below USD 25 billion, EUR 20 billion, JPY 2.5 trillion for exit.

i. Fixed coupon ii. Investment grade iv. Minimum maturity of 1 year. v. Minimum issue size varies by market.

Citi Emerging Markets Government Bond Index

EMGBI Dec-07 918 14 i. Minimum C by either S&P or Moody's. ii. Fully accessible to foreign investors.

i. Minimum market size of at least USD 10 billion for entry; below USD 5 billion for exit. ii. Low index replication costs.

i. Fixed coupon ii. Minimum C by either S&P or Moody's. iv. Minimum maturity of 1 year. v. Minimum issue size varies by market.

Barclays Emerging Markets Local Currency Government Bond Index

EMLCTRUU Jul-08 - 22

i. World Bank Income group classifications of low/middle income OR International Monetary Fund (IMF) classification as a non-advanced country. Additional countries that bond investors classify as EM. Ii. Market investability

Minimum market size of at least USD5bn equivalent.

i. Fixed coupon Treasuries. Inflation-linked bonds excluded. Private placements ineligible. ii. Investment grade, high yield, and unrated securities permitted. iii. Minimum maturity of 1 year. iv. Minimum issue size varies by market.

Barclays Emerging Markets Local Currency Government Universal Bond

Index LCEMTRUU Jul-08 - 25

i. World Bank Income group classifications of low/middle income OR International Monetary Fund (IMF) classification as a non-advanced country. Additional countries that bond investors classify as EM. Ii. Market investability

Minimum market size of at least USD5bn equivalent.

i. Fixed coupon Treasuries. Inflation-linked bonds excluded. Private placements ineligible. ii. Investment grade, high yield, and unrated securities permitted. iii. Minimum maturity of 1 year. iv. Minimum issue size varies by market.

AUM benchmarked against the JP Morgan sovereign

indices amounts to $554 bn or 9% of outstanding debt

Now $554 bn managed against various JP EM sovereign bond indices. Market cap of bond indices together account for

roughly $3 trillion in EM market cap or roughly 50% of EM total outstanding debt.

External debt still dominates. Despite its significantly smaller size, assets managed against hard currency index amount

to $310 bn in 2014 up from $178 bn in 2007. Market cap of debt of countries allocated to index amount to roughly $830

mn, indicating that more than a third of outstanding debt is managed against the index.

But assets managed against the EM local currency market index has increased ten fold from $21 bn to $221 in

September 2014.

15

Why do foreign investors move into emerging

market local bonds

Moving into EM local currency bonds involves

Investing in EM local currency bonds entails two sets of decisions:

Rate/Credit view reflecting a view of future monetary policy/ and development of fiscal

balance.

Currency view reflecting what extent home market currency may appreciate or

depreciate vs currency of country.

Easier for investors to express their view if they can separate decision:

In order to do that need functioning interest rate swap market that allows investor to

take exposure to market without taking on currency risk (to create synthetic exposure).

Ability to hedge currency including through liquid fwd markets.

17

Why have foreigners increased exposure

to EM local currency debt

Anecdotal evidence and investor surveys suggests that increase in EM allocation

since 2008 driven by search for yield given low level of interest rates in the US,

Europe, and Japan after financial crisis.

Inflows occurred against backdrop of significant improvements in economic

fundamentals and policymaking from 2000-2008 in EM. Improvements in

fundamentals reflected in fact that now a large number of universe is rated

investment grade.

Inflows further supported by better liquidity in local markets and an overall

improvement in debt issuance (larger market size).

Up to 2013, Inflows also supported by view that EM currencies will strengthen

given EM’s growth differential with developed markets and their lower levels of

debt.

18

Strategic asset allocation and

emerging market local bonds

Investors often use strategic asset allocation exercises to determine the

optimal allocation to asset classes with a given desired risk spectrum.

Typically the following considerations determine whether an asset class will

be included in the exercise:

Does an asset offer attractive risk and return characteristics. All else equal, a higher Sharpe ratio

is more desirable as it indicates better rewards per unit of risk.

Are the returns of the asset class normally distributed and risks thoroughly understood?

Does the asset class capture any risk premium, if any. Is there any economic rationale for the

risk premium and if any is this stable over time. Can it be captured through a passive exposure or

does it require skill.

Does asset have any diversification benefit vs main risk exposures of plan. Are diversification

benefits stable.

Liquidity. Is asset liquid and can it be easily traded.

Is market for asset large enough that Plan’s exposure not meaningful to overall market (to

preserve liquidity)

Is benchmark available to either allow for replication or for performance monitoring.

19

Institutional investors and their allocations to EM bonds

No survey available that provides information on allocation to EM local

bonds for institutional investors.

Table on next slide reveals information of 16 US public pension plan with

their allocation to EM local currency bonds. Plans are among 200 largest

pension plans world wide according to a Tower Watson survey.

Of 16 plans, 9 have allocation to EM local bonds. 8 of these allocations

were part of the SAA.

Notwithstanding in most cases, allocation quite small, ie below 5% of Plan

assets.

20

U.S. pension fund exposure to local currency EM debt

21

No. Fund Name AUM ($ billions)

Exposure to DX EMD?

Type of DX exposure (SAA or opportunistic) Exposure to FX EMD?

Type of FX exposure (SAA or opportunistic) Allocation hedged? In % AUM

1 Federal Retirement Thrift 325.7 No N/A None N/A N/A N/A

2 California Public Employees’ Retirement

System 262 Yes Opportunistic No N/A

No, but by policy currency must be convertible.

0.05%

3 New York State and Local Retirement

System (NY State Common) 176.8 No N/A None N/A N/A N/A

4 California State Teachers 166 Yes Opportunistic No N/A No 0.10%

5 New York City Retirement Systems 143.9 No N/A None N/A N/A N/A

6 Florida State Board 132.4 No N/A None N/A N/A N/A

7 Teacher Retirement System of Texas 117.1 No N/A None N/A N/A N/A

8 New York State Teachers 95.4 Yes SAA Yes SAA - Global Fixed Income Securities Yes, by policy unclear

9 Ohio Public Employees Retirement System 88.5 Yes SAA - Emerging Markets Debt Yes SAA - Emerging Markets Debt Not completely - Non-U.S. dollar based

securities are limited to 25% of the total Fixed Income assets.

Target allocation of 3% (0-5% range) for the Defined Benefit Portfolio; 5% (2-10% range) for the Health Care

Portfolio

10 Wisconsin Investment Board 83.9 Yes SAA Yes SAA Permitted but not required as per

investment guidelines. 0.36%, cannot exceed 10% of global bond portfolio

11 North Carolina Retirement Systems 80 No N/A No N/A N/A N/A

12 Washington State Investment Board 79.3 Yes Opportunistic Yes Yes No, no formal policy across funds. 1.30%

13 New Jersey Public Employee's Retirement

System 74.4 No N/A No N/A N/A N/A

14 Oregon Public Employees 70 No N/A No N/A N/A N/A

15 Ohio State Teachers 68 Yes Opportunistic Yes (majority) SAA No 0.38%

16 Virginia Retirement System 66 Yes Opportunistic Yes SAA - Credit Strategies Not required 0.71%

17 Massachusetts Pension Reserves Investment

Management 53.2 Yes SAA - Value-Added Fixed Income Yes SAA - Value-Added Fixed Income

No - by policy foreign investments are unhedged

Target allocation of 2%. 21% of Value Added Fixed Income Portfolio invested in EM DX debt. 16% in hard

currency. VAFI is 8.9% of total fund.

18 Iowa Public Employees’ Retirement System 24.8 No N/A Yes SAA - Credit Opportunities N/A N/A

Informal surveys indicate that Plans either contemplate

or have allocations to EMs

Some of these allocations part of SAA.

Others use EM local bond opportunistically by broadening the fixed income

mandate and then measure returns vs a hedged fixed income index.

Many investors surveyed quote search for yield as important component in

their decision to move into asset class.

22

How do foreign investors access local

emerging bond markets

Accessing local sovereign debt markets

Investors can access local emerging sovereign in mainly three ways: Through managers

o Many institutional with smaller AUM (often below $20 bn) do not manage assets in-

house but rather hire external managers to manage the assets for them.

o Even institutions with larger asset bases may decide to hire external managers if the

allocation is relatively small and/or it is difficult to hire talent to manage assets in-

house.

o Institutions then typically hire managers (either long-only or hedge fund managers).

If they hire long-only managers they will decide against which benchmark the assets

will be managed and whether the manager is supposed to just replicate the index

(passive mandate) or aims to achieve an excess return vs the index through active

management

Through internal management o Institution may decide to manage assets in-house. Even in such case, in-house

managers typically will be given a benchmark and they will either be asked to

replicate the index or allowed to take positions away from the index within a certain

risk budget to achieve excess returns.

24

Accessing local sovereign debt markets

Investors can access local emerging sovereign in mainly three ways: Through ETFs

o In 2011, Blackrock created an ETF that aims to replicate the Barclays EM index.

o The AUM of the ETF now amounts to $35bn.

25

emerging markets local currency debt and foreign...

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