The key benefit of an emerging markets (EM) blended strategy is the potential for alpha generation through active allocation across hard and local currency sovereign debt and hard currency corporate debt, based on relative value considerations. For investors seeking consistent alpha over time, the blended strategy offers an attractive investment opportunity.
Because hard and local currency sovereign debt and hard currency corporate debt are driven by different risk factors, and therefore subject to different economic and business cycles, tactical allocation aims to capitalize on rotating opportunities and capture positive return patterns of each asset class. Sector opportunities may arise from country-specific changes (e.g., credit quality, monetary policy direction), changes in macro factors (e.g., commodity prices, global growth expectations), or changes in the general level of risk aversion.
At Stone Harbor, we endeavor to understand the cause of the mispricing and likely impact on forward looking expectations for returns across scenarios, and to position the portfolio to capture the upside potential. We believe market volatility, driven by technical factors and global macro-induced market dislocations, creates opportunities for relative value trades among securities in our market. We believe that in normal market conditions, as well as during periods of market dislocation, there are ample opportunities for these trades.
Stone Harbor has been managing EM blended debt since 2007.