TCW Emerging Markets Income Fund: Big Gains With Exotic Bonds
The past ten years may have been a lost decade for investors in U.S. stocks, but those who owned bonds issued in developing markets had plenty to cheer about. Now, however, many are worried that rising inflation in emerging markets is a threat to these assets.
But David Robbins, manager of TCW Emerging Markets Income (symbol TGINX) since late 2009, isn’t overly concerned about the inflation threat. “Inflation is primarily a short-term issue dealing with food prices,” says Robbins. “It’s not getting out of hand in emerging markets.”
Food is a much bigger portion of consumer costs in emerging nations than it is in the developed world. It accounts for 30% to 40% of consumer price indexes in emerging markets, compared with 10% to 15% in established nations. But even if overall inflation rises to 6% or so annually, says Robbins, that’s a far cry from the early 1990s, when inflation hit 600% in places such as Brazil, Russia, India and China.
Plus, he says, central banks in emerging nations are raising interest rates, a move that could hurt bondholders in the short term but help them over the long term by containing inflationary pressures. “It’s hard to see inflation coming back in emerging markets in a big way,” says Robbins. “Now they’ve adopted policies to target specific levels of inflation,” and they manage their fiscal policies better. He says he thinks inflation in emerging markets will peak sometime in the second or third quarter.
And while emerging markets may be grappling with inflation, they’re growing faster than developed nations and they’re not mired in as much debt. In emerging nations, the ratio of debt to gross domestic product (a measure of how much debt a country carries in relation to the size of its economy) is 33% to 35%, while the comparable figure for most developed countries ranges from 80% to 120%.
What separates TCW from most rivals is its willingness to hold large slugs of corporate bonds; it recently had 60% of its assets in that category. Similar funds typically hold only 15% to 20% of their assets in emerging-markets corporate bonds. TCW has about 20% of its assets in emerging-markets currencies, such as the Malaysian ringgit, Indian rupee and Chinese yuan, and the rest in bonds.
Before Robbins buys a bond -- corporate or government -- he looks at a country’s big economic picture. He examines the amount of debt a country is carrying, the outlook for its currency, interest-rate trends and the stability of the political system. Political risk is a particularly important consideration in emerging markets, many of which have a history of using bullets, rather than ballots, to effect regime change. On a more peaceful note, markets cheered when India in 2009 elected a government that investors felt would be more business friendly than its predecessor.
In choosing corporate bonds, Robbins looks for growing companies that operate in attractive industries, have a strong competitive edge, are run by smart executives and are paying down debt. “We don’t focus on where credit ratings are now,” says Robbins. “We focus on where they will be 12 to18 months from now.”
Since Robbins and his team took the helm in December 2009, the fund has performed well. Over the past year through April 4, the fund returned 14.7%, beating the average fund in its category by more than 5 percentage points.
Robbins now favors bonds from commodity-exporting countries, such as Russia and Brazil. Within Russia he favors government bonds and bonds of Russian government-owned companies, such as Gazprom, a natural gas firm, and Alrosa, the Russian diamond-mining monopoly. Eastern European countries took longer to recover from the global recession than Asian countries did because they took on more debt. “This year may be the year that you see significant growth out of Russia and Ukraine,” says Robbins.
In Brazil, he favors bonds issued by meat exporter Minerva Overseas; GOL, a low-cost airline; and banks with high credit ratings. “The banks are one of the best ways to play increasing wealth in emerging markets,” says Robbins, because those consumers have the capacity and the will to borrow more.