Unquestionably, many of the more traditional core government bond markets, and currencies, of the developed world have become less attractive, due to historically low interest rates, falling bond yields, and downgrades from the leading credit rating agencies.

That said, US treasuries, UK gilts and German bunds have managed to uphold their investment popularity – and safe haven status – due to central bank policies such as quantitative easing.

Three of a kind

Nevertheless, emerging market debt should be considered as a possible mainstream asset class. However, some thought must be given to the different types of investable emerging market debt.

Essentially, there are three asset classes to consider: US dollar-denominated sovereign debt; US dollar-denominated corporate debt; and local currency government debt.

While all three have provided strong investment returns in different time periods, each asset class will react differently under changing economic environments.

For example, if you believe the global economy will grow strongly during the coming years, then local currency government debt could be considered, as any bond performance might be improved by a foreign exchange element.

However, if you believe the global economy might suffer, it is likely that hard currency sovereign debt would do better than local, due to its lower beta or less risky attributes.

Emerging market corporate debt, on the other hand, can offer investors a more direct route into the emerging markets of Asia than the two government debt categories.

Blended approach

Clearly, there are high risks attached to all three asset classes. Therefore, it is important to consider using an experienced fund management house, and fund manager, such as Investec.

It can offer clients a blended approach to this conundrum, through the Investec Emerging Markets Local Currency Debt fund, managed by Peter Eerdmans, who is a highly skilled portfolio manager.

This approach allows an investor to participate in all three asset class variables and, in addition, allows the use of derivatives – including currency, interest rate and credit default swaps – and forward transactions to assist in the efficiencies of managing the portfolio. Also, this fund has an attractive yield for those investors seeking income.

Looking ahead

A typical medium-risk model might have an allocation of approximately 5 per cent. However, further exposure to the asset class could be captured through positions held in strategic or global bond funds such as the JP Morgan Strategic Bond fund, or the Franklin Templeton Global Total Return fund.

Alternatively, another option that could be considered is an exchange-traded fund. Looking ahead for the emerging market debt asset class, the demographic changes that are apparent in today’s world could lead to an increased weighting over time from investors, as traction in this asset class gains further momentum in the coming years.

Peter Lowman is chief investment officer at Investment Quorum