Emerging Market Debt: Indexing on the Rise

Emerging Market Debt (EMD) is one of the most rapidly evolving asset classes in investment markets. New developments are challenging some of the traditional perceptions around how to access it.

In the past, adopting an active management approach was perceived to be the best way to invest in EMD based on the following assumptions:

  • An indexed exposure is too expensive to be implemented effectively in emerging markets.
  • EMD is an inefficient market and detailed fundamental knowledge should enable active managers to identify and extract value.
  • There are some obvious ‘weak’ segments of the universe that could drag performance down; active managers can avoid these, an option not open to those applying an index approach.

The reality is, however, very different. EMD now offers much greater liquidity and diversity, while the majority of active managers fail to outperform their benchmarks over the longer term. In this paper, we illustrate how the EMD universe has evolved and why an indexed approach is becoming accepted as a practical solution for this more complex exposure.

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