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Press Release

Single manager model failing emerging market debt investors

Investments
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October 7, 2019

Willis Towers Watson has today released research highlighting the increased importance of emerging market debt (EMD) with ever larger allocations from asset owners and continuing attractive return potential.
  • Emerging market debt is growing in strategic importance in global markets and investor portfolios
  • The asset class can offer strong returns and diversification benefits, however effective implementation has proven chal-lenging
  • Specialist implementation offers the potential to ‘master’ every area of the market and build a superior solution

Global, 8 October 2019 – Willis Towers Watson has released research highlighting the increased importance of emerging market debt (EMD) with ever larger allocations from asset owners and continuing attractive return potential. They believe that now is the time to take another look at this asset class but through a different implementation lens.

The emerging world is a large and growing part of the global economy that presents an excellent opportunity to asset owners. However, with less than 50% of the universe achieving positive returns above benchmark even before fees are taken, the majority of investors have historically been disappointed by active investment approaches in emerging market debt. Willis Towers Watson argues that this is due to the challenges of any single manager seeking to cover this broad asset class.

Most investors have previously treated EMD as a single asset class; however, Willis Towers Watson argues that it is at least three distinct asset classes:

  • Local currency sovereign debt
  • Hard currency sovereign debt
  • Hard currency corporate debt

These different asset classes all require particular skill sets along with the ability to manage the distinct characteristics of different regions - Latin America, Emerging Europe, Asia, Africa, Frontier Markets and the Middle East. This challenges the traditional implementation favoured by many of appointing a single manager based in London or New York.

Willis Towers Watson argues that investors buying simple, benchmark focused EMD managers often fail to justify the investment management fees charged and often struggle to access the most interesting corners of the opportunity set. As a solution, Willis Towers Watson proposes the specialist implementation approach. Building a portfolio by selecting the best manager in each asset class and region, with specific knowledge and skills has seen clear improvements in downside protection, a notably higher Sharpe ratio and stronger overall returns.

Chris Redmond, Global Head of Manager Research, Willis Towers Watson said: “The emerging world is a large and growing part of the global economy, just take China’s increasing importance, through global trade and economic growth in the last few years. EMD is consequently an ever more important asset class with even larger allocations from asset owners and continuing attractive return potential and diversification benefits.


1 Analysis is based on annualised alpha of USD denominated strategies in the eVestment. 50% of all Emerging Market Fixed Income’s universe, excluding strategies where the benchmark is not available or not appropriately comparable to portfolio holdings or is cash based.

EMD is not a single opportunity so it cannot be captured by a single, broad mandate. We believe investors need to consider a shift in focus is needed towards specialist implementation, building a portfolio comprised of a ‘master’ in each area of the market.”

- ENDS –

About Willis Towers Watson Investments

Willis Towers Watson’s Investments business is focused on creating financial value for institutional investors through its expertise in risk assessment, strategic asset allocation, fiduciary management and investment manager selection. It has over 900 colleagues worldwide, assets under advisory of over US$2.6 trillion and over US$130 billion of assets under management.

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.

Please note that investment returns can fall as well as rise and that past performance is not a guide to future investment returns.

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