The National Employment Savings Trust (NEST) is to invest in emerging market (EM) debt for the first time through a mandate awarded to Amundi Asset Management.
The master trust, which believes the asset class is becoming undervalued, will eventually look to have an EM debt position within a range of 0-10%.
The mandate will be added to the existing ‘building block' funds that underpin the master trust's default NEST Retirement Date Funds and some of its alternative fund choices. The Amundi fund is actively managed and blends bonds denominated in both local and hard currencies, predominantly US dollars.
Taking an active approach to invest was part of NEST's philosophy, according to chief investment officer Mark Fawcett (pictured above): "We believe it is right to take investment risk. Risk is generally rewarded and we have chosen an actively-managed portfolio this time. There is a bit of a myth that NEST only uses passive investments but this is not true.
"We have our active managers but we think particularly in the credit space active management is very important and is part of our investment beliefs to choose active in this asset class."
He said the fund could move across EM debt in both hard and local currency, sovereign debt, corporates and foreign exchange. "We think giving the manager the freedom to invest in all the aspects of the asset class allows them to exploit the best opportunities that are available," Fawcett added.
Amundi Asset Management has been investing in EM debt since 1999.
Chief executive Laurent Guillet who leads its London branch said: "There is a lot to do and the only way to do it is to do it in an active way. Passive is meaningless in my opinion as far as emerging debt is concerned. So to be good at this sport what people need is experience," he said.
While it was true EMs were experiencing difficulties during the market turmoil and China's economic slowdown, Amundi head of EM debt management Sergei Strigo argued that debt was different. "From the bond side perspective in terms of the probability of default, the situation is much better [compared to the Asian crisis]," he said.
"That is why we are very positive on EM debt even though China is slowing down, commodities are pretty much at their lowest and growth overall is very slow. But from the debt perspective we are still very bullish."
Last June NEST revealed its plans to deliver in-scheme drawdown and deferred annuities in response to the freedom and choice reforms.
Fawcett said EM debt could potentially generate part of the income for the drawdown element of this product. "We will be looking for income generating assets. EM debt could be part of that but not necessarily. Credit is clearly one of those when government bonds are so low. But it is too early to say."
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