Funds

Spotlighting PIMCO Emerging Markets Bond Fund, our recommended EM bond fund

Here’s why the PIMCO Emerging Markets Bond Fund is our recommended fund for EM bonds in 2023/24.

Colin Low
|
Published on 03 Oct 2023

Spotlighting PIMCO Emerging Markets Bond Fund, our recommended EM bond fund | Open a FREE FSMOne account and manage all your investments conveniently in ONE place

The PIMCO Emerging Markets Bond Fund is our recommended fund for EM bonds.

The fund places great emphasis on a multi-layered investment process combining top-down, bottom-up, fundamental, quantitative and thematic analysis.

Scale is one of PIMCO’s strongest assets. It allows the team to comprehensively cover the entire EM debt universe and affords a strong negotiating stance for debt issues.

The fund has a disciplined risk management process, reflected by its relatively lower maximum drawdowns and downside volatility.

The fund has consistently outperformed other EM bond strategies, especially on its downside management.

Demystifying the emerging market bond universe

EM debt is a fast-growing, large market with periodic bouts of volatility. As the market grows, the universe has become more complex with close to 80 countries represented in EM benchmarks, including many more less liquid markets. Unlike many other areas in the fixed income universe, EM debt exhibits greater inefficiencies. This is often driven by factors like (1) the complex relationship between a country’s fundamental and external conditions, (2) inadequate risk controls for low-probability but high-impact events, and (3) a diversified investor base with varying motivations.

Within the EM debt universe, both local and external debt comprise a significant share of the total market value (Chart 1). The external debt market (gauged by the JPMorgan Emerging Markets Bond Index (EMBI) are bonds issued by EM sovereign and quasi-sovereign entities in non-local currencies. These are often government bonds issued in major currencies, such as the USD or Euros, which tend to be seen as less volatile than the local currencies.

While EM local currency debt still makes up most of the EM debt market (by market value), EM external debt has been a fast-growing space in recent years. Emerging economies across Asia, Latin America as well as Europe, Middle East, and Africa have been increasingly issuing USD-denominated debt. As a result, the benchmark index reflects a diverse exposure to 74 countries and a multi-regional, top-five country exposure – Mexico, Indonesia, Saudi Arabia, China, and UAE.

Chart 1: The differences between EM external and local debt market

Introducing the PIMCO Emerging Markets Bond Fund

The PIMCO Emerging Markets Bond Fund Cl E Acc SGD-H is our recommended fund for EM bonds this year. The fund offers exposure to emerging markets, the potential for attractive risk-adjusted returns and low correlations to other asset classes. It primarily comprises fixed income securities from issuers in, or economically tied to, emerging or developing countries. Assets may be denominated in US dollars or local currencies.

The fund also employs active management of EM bonds with tactical investments in non-benchmark local currencies and instruments. It is benchmark-aware and its benchmark is the JPMorgan Emerging Markets Bond Index (EMBI) which tracks total returns for USD-denominated debt instruments issued by EM sovereign and quasi-sovereign entities.

The fund managers’ investment philosophy is guided by several anchoring principles. First, the belief that there is no single best approach. The portfolio’s analysis and research are thoughtfully carried out through multiple, complementary approaches such as a combination of top-down and bottom-up research, as well as a mix of fundamental and quantitative analyses. Second, an emphasis on respecting hidden risks in EMs, which often stem from uncertainties that which market cannot reasonably price. As such, the fund places great significance on scaling and structuring positions so that no single country or risk factor dominates performance. Last, the belief to not follow the crowd. The fund focuses on finding active opportunities that are uncorrelated with the overall market and off the radar screens of the passive index replicators.

Based on a duration-weighted exposure, the fund’s largest country allocations are Mexico (8.9%), Saudi Arabia (7.9%), Indonesia (5.8%), Turkey (4.3%), and the state of Qatar (4.1%). The remaining country exposures each has a duration-weighted exposure of below 4% (Chart 2, as of 31 August).

Chart 2: PIMCO EM bond fund top 5 country exposure

Multi-layered investment process

The PIMCO Emerging Markets Bond Fund places great emphasis on a multi-layered investment process. The top-down research is driven by robust discussion within the global investment committee which formulates strategic macro themes that drive portfolio positioning. At the same time, robust bottom-up research is carried out by way of careful issue selection which comprises deep country and non-sovereign research. A quantitative and risk analysis is also incorporated into the investment process to assess the fair values, hidden risks and correlations of the underlying issues. This would affect the way portfolio managers scale and structure their positions.

Currently, some of the major themes preferred by the fund manager are (1) higher quality and investment grade (Israel), (2) credible reform stories and IMF backstop (Cote d’Ivoire, Jordan, Nigeria), (3) strong commodity price beneficiaries (Angola, Morocco). On the contrary, the fund manager is cautious on themes like (1) high exposure to sanction and trade risks (China), (2) oil-reliant names (Oman, Bahrain), (3) fundamentally weak credits (Bolivia, Turkey, Kenya) (Chart 3).

Chart 3: Current portfolio positioning

Scale, one of PIMCO’s strongest assets

As outlined above, the EM debt market is a large and resource-intensive asset class that is complex and inefficient. As such, having the largest teams in the industry has afforded PIMCO several advantages in this market.

First, PIMCO has a large and geographically diverse research team comprising nearly 30 portfolio managers and research strategists. In addition, over 35 credit analysts contribute to the formation of `country and issue selection views from the bottom-up. The EM portfolio management team has doubled in size over the last ten years. A large team allows PIMCO the scope to cover a vast majority of the EM debt market on a deeper level, which includes country visits, dialogues with policymakers, and meetings with issuers. This also enables PIMCO to build a deep network of local contacts and policymakers.

Second, PIMCO’s large presence strengthens its strong negotiating stance and bargaining power. This has enabled the team to seek beneficial pricing on EM debt from sovereigns and corporate issuers. As an example, PIMCO participated in an $800mm lending facility to a country’s Ministry of Finance recently, giving PIMCO the opportunity to take on the country’s sovereign bonds at attractive spreads to the secondary market. These opportunities benefit investors but often require local relationships to access which PIMCO can provide.

Disciplined risk management – Avoiding ‘black holes’ and more

Risk management is an important aspect of the PIMCO Emerging Markets Bond Fund. For a more volatile asset class like EM debt, the fund managers see it as appropriate to potentially forgo some upside in a rising market, if the fund can strongly outperform on the downside. As such, one of the core objectives of the fund is to maintain a high success rate in avoiding “black holes” in EM.

These are what the fund considers as episodes of defaults, currency devaluations, surges in policy rates, or the implementation of capital controls. In terms of portfolio positioning, the fund managers will often void or underweight a country with significantly higher yields due to the heightened potential of credit events. One example is in the case of Lebanon in 2019, where sovereign yields spiked in anticipation of a credit event. The country eventually defaulted in 2020 after the pandemic broke out.

The fund’s disciplined approach to risk management can be reflected by its lower maximum drawdown and downside volatility compared to its peers. Over a 5-year period, the fund has exhibited a maximum drawdown of 24.9%, as compared to the peer average of 31.7%. The fund also had lower downside volatility of 3.9% and 3.0% over the past five and three years respectively, lower than the peer average of 5.1% and 3.9% respectively (chart 4).

Chart 4: Lower max drawdown and downside volatility reflect discipline risk management from the team

Consistent, long-term outperformance against peers

Since the PIMCO Emerging Markets Bond Fund’s inception in 2006, it has delivered a total return of 54.7% (as of 31 August). Against some of our popular EM bond strategies, the PIMCO Emerging Markets Bond Fund has been a strong performer, with a good track record of outperformance.

While the year-to-date return of the fund has marginally lagged the peer average, the fund has managed to beat its peer every calendar year since 2017, demonstrating considerable consistency over the years (chart 5). We note that the fund has generally outperformed peers more strongly on the downside as well, likely due to its disciplined risk management.

Chart 5: The fund has greatly outperformed the peer average consistently

Final thoughts

With the rapid growth of the EM debt market, rising sovereign and corporate issuances, and mounting investor inflows, opportunities within this space are getting increasingly hard to ignore. For investors seeking exposure to for EM bond market, we recommend the PIMCO Emerging Markets Bond Fund Cl E Acc SGD-H. We like the fund for its disciplined risk management, consistent outperformance against peer funds and the scale of PIMCO’s EM research team which gives the fund a unique network of contacts within the EM debt space . Together, these attributes make the fund an excellent choice amidst the complex, volatile yet opportunistic EM debt market.

The Research Team is part of iFAST Financial Pte Ltd

All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.

Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).

iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.

Ways to Invest with FSMOne

Why FSM

Don't have an account with us?

Open an account here

Need Financial Advice?

Make an appointment

Latest Articles More

The Iran deal is done, but oil isn't going back to USD 65. Here’s why.
views: 347 uploaded.on: 15 Jun 2026
Still expanding: What Singapore's ten-month PMI streak says about the road ahead
views: 138 uploaded.on: 15 Jun 2026
Prospect of further ECB rate hikes reinforces our downgrade of European equities
views: 158 uploaded.on: 12 Jun 2026
The three pillars behind China's export boom: AI, EVs and rare earths
views: 245 uploaded.on: 12 Jun 2026
Europe downgraded to unattractive: The energy shock is not over, and earnings are likely to show it
views: 1720 uploaded.on: 12 Jun 2026

more.articles More