The Dutch pension asset manager's Asia Pacific head of real estate says his team has just had one of its busiest years ever and that 2021 is looking similarly promising.
The DB Platinum Emlin Sovereign Bond Fund is linked to the bank's own index of local currency bonds issued by governments in the emerging markets, known as the Emlin Index, which comprises 32 bonds issued by 16 sovereigns in Central and Eastern Europe, Asia, the Middle East and Africa, and Latin America. Brazil, Poland and South Korea make up the biggest chunk of the portfolio, accounting for almost half the index's value.
The fund replicates the total return of the index using derivatives trades, which allows Deutsche to create a balanced emerging market portfolio without incurring the cost or suffering the inefficiency of buying and selling bonds in 16 different countries.
"It would be impractical for clients to build their own portfolio of emerging market local currency bonds given liquidity and access issues," says Takeshi Yoshida, Deutsche's head of emerging markets structuring for Asia ex-Japan. "In today's markets, a natural conclusion for many investors is to include these assets into their portfolio but until now there hasn't been a product to do that."
With the current turmoil in credit markets, investors may think twice before considering buying into a bond index, but because Emlin is purely invested in sovereign bonds it is not really a credit product. Instead, investors are buying the emerging market story, as reflected in the economic fundamentals driving growth in these countries.
The returns of the index, back-tested against historical data, support this idea. So far this year it has returned 12.5%, which means a projected 17.2% return by year-end, and since May 31, 2000 it has averaged 16.5% a year.
The Citigroup World Government Bond Index, a portfolio of bonds issued by first-world sovereigns, returned 4.1% during the same period û reflecting an out-performance of 12.3% for the Emlin Index. Significantly, however, the returns from the emerging market bonds were not nearly that much more volatile than those from the developed world bonds û the Citi index recorded volatility of 2.7% compared to 7.9% on Emlin, giving an excess return of 13.4%, as calculated by the Sharpe ratio, which measures the returns of an investment against its riskiness.
The index should also appeal to investors interested in diversification. Its correlation to returns from the world bond index is just 0.17, with one being absolute correlation and zero being no correlation.
The first product launched in Asia is an index-tracking fund that is rebalanced annually and uses a rules-based selection process to create the portfolio, which is managed by Deutsche. It is denominated in US dollars and is available in two classes, with a minimum investment of $2,500 for one and $1 million for the other. For the first class, investors pay up to 5% in subscription charges and a yearly 1.6% management fee. There is no subscription charge on the second class and the management fee is 0.85%. Both classes pay a fixed fee of 0.2%. Deutsche offers investors daily liquidity with no redemption charge.
Deutsche says it is targeting high net-worth, institutional and retail investors.
In Europe, where Deutsche launched the first Emlin products last year, investors prefer to take exposure to the index in certificate form or as principal-protected notes but Asian investors are much more comfortable with the fund format, says Yoshida.
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