Like most corners of the bond market, emerging-markets bonds
have experienced a fine run in recent years as income investors
have flocked to anything and everything that yields more than
Treasuries. But John Carlson, who manages Fidelity New Markets
), a member of the
that specializes in emerging-markets debt, says he's still finding
Carlson describes his investment process as a "mosaic approach,"
meaning he'll gather a lot of information from a variety of sources
to build an investment thesis. Sometimes that means conducting
conventional research trips, such as visiting with a country's bank
executives and government officials, says Carlson, who fielded a
phone call from me during a stop on a six-hour bus ride across
Ghana. But he has also gone to such lengths as trying to open a
personal bank account and buying a car in particular countries to
get a feel for the local economy.
To hold down risk, Carlson generally keeps about two-thirds of
his fund's assets in debt that's issued by emerging-markets
governments and denominated in U.S. dollars. He uses the other
third to try to juice returns, and he has the leeway to invest in
corporate bonds, distressed debt, bonds issued in foreign
currencies and even a bit in stocks. However, he never holds more
than 20% of New Market Income's assets in non-dollar investments,
corporate bonds or stocks.
That said, investors ought to recognize that emerging-markets
bonds aren't the high-octane investments they once were. "When you
bought emerging-markets bonds 20 years ago they were highly
speculative, and you got paid for that risk," Carlson says. Today,
many developing nations look more financially stable than some
developed markets, but the yields are lower, too, he says. New
Markets Income currently yields 4.0%.
Today, Carlson likes the debt of some western African frontier
markets, meaning countries that aren't yet developed enough to
count as emerging markets. He favors Ghana, Nigeria and the Ivory
Coast, where he says favorable demographic trends, large commodity
resources and the availability of cheap credit have the potential
to drive economic growth. "West Africa is a bit undiscovered
still," he says.
He also favors government bonds issued by Turkey and denominated
in Turkish lira. He says the country has improved its trade deficit
in recent years and reduced the volatility of its currency. Plus,
short-term Turkish bonds yield an attractive 6%, he says.
Over the past ten years through March 18, New Markets Income
returned 11.7% annualized, beating 90% of funds that invest in
emerging-markets bonds (Carlson has been at the helm since 1995).
Although the fund has lost 1.4% so far this year, that beat the
2.1% loss for its benchmark, the JPMorgan Emerging Markets Bond
Index Global. Carlson says those drops were driven by the rise in
interest rates this year on long-term U.S. Treasuries (bond prices
move inversely with interest rates). Investors typically use
Treasuries as a yardstick in determining emerging-markets bond
prices, which means that if Treasury bond yields rise, yields will
generally rise in developing markets.
Carlson says those strong long-term returns aren't indicative of
a bubble in emerging-markets bonds, but rather show how much
progress has been made in the underlying economies. "We've come a
very long way on the back of a very good story, which is the
improvement in these countries' creditworthiness," Carlson says. He
says about two-thirds of the countries in his investment universe
are now rated investment grade, meaning triple-B or higher.