Fund Spotlight: two reasons to size up this specialist area

Developed markets (especially the US) are the dominant allocation in many global equity indices. While the bias is less extreme, this is certainly still true of fixed income (bond) indices also.

However, a sector of fixed income that has performed particularly well throughout 2025 is emerging market debt (EMD).

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EMD refers to bonds of issuers within emerging economies and it forms a growing portion of global bond indices.

EMD is typically split between “hard currency” - debt is issued in stable currencies (e.g. the US dollar or the euro) and “local currency” - debt issued in a country’s domestic currency. Generally hard-currency issuance is more prolific across the Middle East and North Africa and Latin America, while local currency indices typically bias more towards Asia.

Attempting to forecast the trajectory of global economics or the US dollar and how this affects asset classes is difficult, but EMD is an allocation that adventurous investors may consider for two reasons.

One reason is to add a diversifying element to a portfolio. There have been indications of a potential shift (arguably a transitory one) away from US assets and the dollar. This has been induced by factors such as changing trade policy, US credit downgrades and moderating developed market (DM) growth expectations, making EMD look more attractive.

Another reason is to achieve yields in excess of equivalent DM bonds. While the difference in yields between EMD and DM credit are narrower than in years gone by, the prospect of further US rate cuts may motivate investors to look beyond US-issued bonds for yield.

While EMD is not necessarily of low quality (more than half of hard currency EMD issuance is rated investment grade, the highest-quality rating), it’s an area where an active manager may well be able to add value above a passive index.

Unlike stock market passive funds - index funds and exchange-traded funds (ETFs) - that tend to buy more of companies as they grow larger (and more successful), bond funds have their biggest positions in companies or countries with the most debt.

On the other hand, active funds can cherry-pick the best bond opportunities, as well as avoiding over-indebted or deteriorating issuers. One such fund offering this exposure is the PIMCO GIS Emerging Markets Bond fund Instl GBPH Inc.

What does the fund invest in?

The fund invests predominantly in hard-currency sovereign bonds issued within emerging economies. Pimco itself is one of the largest fixed-income asset managers in the world and manages more than $2 trillion (£1.5 trillion) in assets.

The fund is managed by Pramol Dhawan, Yacov Arnopolin and Javier Romo, with support from a large number of portfolio managers and research strategists.

The fund’s philosophy in part centres on the idea that conservative management and focusing on downside protection is the best path to outperformance when navigating emerging market bonds. Accordingly, the managers focus on diversifying the portfolio and avoiding excessive country concentration.

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Duration, the measure of sensitivity to interest rates, of around 6.7 years is also just marginally above benchmark. The largest emerging market country allocations are to Mexico (10%), Saudi Arabia (6.6%), Chile (4.4%) and Indonesia (4.3%), while there’s also exposure to US government-related bonds. Just over half the portfolio is held across government bonds, with corporates and cash comprising the balance.

The portfolio allocates across a range of credit ratings, but just over two-thirds of the portfolio is in investment-grade debt and the allocation to the risk area of high-yield bonds is selective as they avoid the temptation of seeking outperformance at the expense of the quality of bonds or by investing in riskier countries.

The aim is to achieve outperformance through a diversified means, the predominant source being via assessing the fundamentals of bond issuers, followed by country allocation decisions and (to a smaller degree still) by examining the bond yield curve. The yield curve is a chart that plots the relationship between yields and maturity dates. Bond yields typically “curve” up with increasing contract length.

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The managers anticipate an environment of credit upgrades across the EMD asset class and don’t anticipate that tariff uncertainties will lead to any sovereign debt defaults in the imminent future.

A focus is on countries with potential and believable reform stories, or the support of the International Monetary Fund (IMF) backstop, such as Ivory Coast, Ecuador and Egypt. Select opportunities to pick up yield are currently found in off-benchmark, high-yield euro issuances across emerging Europe, such as Bulgaria, Romania and Serbia.

How has the fund performed?

The fund has generated strong performance over the past one, three, five and 10 years versus both benchmark and peer group.

This solid long-term track record comes in spite of slight underperformance in 2022, where one factor that detracted from returns was a relative overweight to Ukrainian debt as spreads widened in the wake of conflict.

Performance in 2023, 2024 and so far in 2025 has been impressive both versus benchmark and the hard-currency EMD peer group of funds.

Source: Morningstar Total Return (GBP).  Past performance is not a guide to future performance.

The fund’s yield of around 6.7% is solidly placed within its peer group, especially when considering the preference towards higher credit quality and relatively conservative management approach.

Why do we recommend this fund?

EMD is a fast-growing and varied sector to which more adventurous investors should allocate with a degree of caution.

Our view is that hard-currency EMD funds offer exposure to generally higher-quality credit and issuances in what are typically more stable currencies than local-currency options – but risks are still inherent within the sector including political/economic instability, currency volatility, liquidity constraints, and the potential for default or restructuring.

Pimco are a specialist and hugely renowned name within fixed-income investing and the team are well supported by the firm’s substantial bottom-up and top-down resources. The risk-aware selection process may forgo some higher-risk opportunities but the thesis of outperforming while protecting against downside risk is prudent given the riskier nature of the EMD sector.

The impressive track record is testament to the productive team and process, and the fund is available for a yearly cost of 0.79%.

The latest factsheet can be viewed here.