EATON VANCE TOPIC PAPER • MARCH 2017 

For Professional Clients ONLY. Not To Be Used With the Public.

Emerging-market debt:
Navigating the allocation dilemma

Michael A. Cirami, CFA ■■ Positive fundamental changes in emerging markets over the past
Vice President
Co-Director 10-15 years, along with robust economic growth and the
Global Income Group
proliferation of emerging-market debt (EMD) indices, have helped
Matthew F. Murphy, Jr., CFA, CAIA transform EMD into a mainstream asset class.
Vice President
Institutional Portfolio Manager
Global Income Group ■■ rowing interest in EMD has led to increased resources dedicated
G
to these assets and expanded access for investors, which, in turn,
has added to the complexity of making allocation decisions relating
to this asset class.
■■ I nvestors’ endeavours to blend local currency sovereign debt,
corporate debt and off-benchmark country exposures with
traditional external (hard currency) sovereign debt investments
have, to date, had mixed success.
■■ he predominant allocation approach among investors looking for
T
broader access to the EMD opportunity set – a purely top-down
blend of the three main EMD indices (whether allowing for tactical
weighting variations or not) – seems to resonate with pension fund
boards, but is not without inherent flaws.
■■ aton Vance believes investors should adopt an active,
E
unconstrained approach to EMD that focuses on country-specific
and detailed risk factor-focused analysis across the entire
tradable universe.
■■ shift to a risk factor-focused approach requires, on the part of the
A
end investor, a new mindset. For the investment manager, a risk
factor-focused approach requires specialist investment expertise
and an extensive analytical capability.
EATON VANCE TOPIC PAPER • MARCH 2017 • EMERGING-MARKET DEBT INVESTING • 2

Introduction What many investors don’t know is that EMD investing

does not need to be as volatile as the benchmarks suggest.
Emerging-market (EM) economies and their capital
Sources of return within this asset class can be more
markets continue to have strategic significance for
diversified (e.g., liquidity, manager skill, administrative/
institutional investors.
operational), yield and returns can be relatively higher, and
EM economies today account for around 58% of global correlation with an existing portfolio can be lower.
GDP and their aggregate growth rate remains way ahead of
that for advanced economies.1 According to International Growing interest in EM debt markets
Monetary Fund (IMF) forecasts, EM economies will grow at
Over the past 15 years, interest in EM debt investing
more than double the pace of advanced economies in
among pension funds and other institutional investors has
2017 (4.6% versus 1.8%).2 Indicative of the growing
picked up considerably. Part of this change has had to do
importance of EM economies globally, the Chinese
with the launch of several EM debt indices since the early
renminbi last year joined the elite ranks of the US dollar,
1990s, as shown in the following abridged timeline...
euro, yen and UK pound as an IMF global reserve currency.
1991: JPMorgan Emerging Market Bond Index (EMBI) –
The fundamentals and credit quality of the EMD market
Government US dollar-denominated debt, originally
overall are considerably better today compared to what
composed only of Brady bonds; debt whose
was the case in the 1980s and 1990s. Improvements
principal was backed by the US.
have come by way of better fiscal management, more
effective central bank policies, a strengthened financial 1993: JPMorgan Emerging Market Bond Index+ (EMBI+) –
framework, robust economic growth, expanded local debt The first expansion of the index beyond Brady bonds.
markets (reducing countries’ vulnerability to external
1999: JPMorgan Emerging Market Bond Index – Global
shocks) and a shift away from currency pegs.
(EMBIG) – Government US dollar-denominated
Looking ahead, EM debt markets are expected to evolve debt, with relaxed criteria to include more issuers
and diversify further as EM nominal GDP increases, capital than in the EMBI+. Currently the most commonly
accounts gradually liberalise, local pension funds continue used EMBI benchmark.
to develop and new sub-asset classes emerge (e.g.,
2005: JPMorgan Government Bond Index-Emerging
China’s municipal bond market).
Markets (GBI-EM) – Local currency sovereign debt.
Today, institutional investors are well versed in the
2007: JPMorgan Corporate Emerging Markets Bond Index
arguments typically advanced for investing in emerging-
(CEMBI) – Hard currency corporate debt.
market debt (EMD); not least, arguments about
diversification and yield pickup. However, in reality, 2011: JPMorgan Next Generation Markets Index
interest in this asset class is often tempered by the (NEXGEM) – Hard currency debt of lower-rated
challenges institutional investors experience in deciding on sovereign issuers.
a correct allocation strategy and the perception that an
The proliferation in EMD benchmarks has made this asset
allocation to this asset class appears to demand a
class more accessible to investors. It has also encouraged
disproportionately large proportion of their risk budget for
interest in not only US dollar-denominated bonds issued by
what is usually a small allocation.
governments in developing economies, but local currency
With this in mind, in this paper we will endeavour to issues, too.
examine the pros and cons of different allocation
Positive trends in emerging economies have played a part.
approaches to this asset class.
These include better macroeconomic and public debt

1
Source: EconomyWatch.com, Economic Statistics database, 6 January 2017. 2Source: IMF World Economic Outlook, October 2016, page 2. GDP
forecasts are on a purchasing power parity basis.

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EATON VANCE TOPIC PAPER • MARCH 2017 • EMERGING-MARKET DEBT INVESTING • 3

management, improved inflation records, improved
protection for creditors, strong economic performance and
the growth of local institutional investors such as pension
funds and insurance companies.
For foreign investors, an additional attraction of holding
local currency EMD has been the potential for FX gains
over time. Governments of developing countries have also
warmed to local currency issuance: By shifting a greater
portion of their funding to local currency instruments they
have been able to reduce their vulnerability to external
economic and financial shocks.3
What should a benchmark be used for?
This rapid expansion in EMD benchmarks has been both
positive and challenging. On the one hand, it has
increased awareness among foreign investors of a larger
and more diverse opportunity set offering new risk factors:
currency exposure, local rates and corporate credit. On the
other hand, it has added to the complexity of decision-
making in terms of investment strategy, governance,
execution, operational issues and cost.
So, what should a benchmark be used for? In our view,
benchmarks can be useful from a fiduciary perspective
(e.g., to monitor manager performance), but should not be
used as a reference point for determining an investment
approach to this asset class.
There are a number of reasons why indices are a poor
starting point for allocation decisions. Indices, as
discussed in more detail later on, are a poor
representation of the true associated opportunity set. An
index-referenced allocation also undermines the presumed
goal of efficient capture of the best risk-adjusted return
opportunities because it typically includes exposure to
parts of the index that are relatively less attractive.
There are also considerable disparities in investment
opportunity within the EMD universe at any given point in
time; disparities that argue in favour of a much more
surgical approach to this asset class.
As an example, consider the year-over-year output growth
prospects among developing countries. Brazil (0.5%),
Nigeria (0.6%) and South Africa (0.8%) will lag far behind
India (7.6%) and China (6.2%) in 2017, according to the
IMF’s October 2016 World Economic Outlook report.4
Similarly, if one looks at EM bonds in terms of their
component risk factors – currency, interest rates,
sovereign credit spreads and corporate credit spreads –
you will see substantial differences across countries. An
example of this is shown in Exhibit A, which highlights
major differences in nominal interest rates across various
countries as at the end of 2016.

Exhibit A Major differences in five-year nominal interest rates.

25
20
PERCENT (%)

15
10
5
0
-5
Zambia
Ghana
Tanzania
Egypt
Uganda
Ukraine
Nigeria
Kenya
Sri Lanka
Rwanda
Turkey
Brazil

Lebanon
Philippines
Malaysia

UAE - Abu Dhabi

Singapore
South Korea
Hungary
Croatia
Bulgaria
Taiwan
Czech Republic
Dominican Republic
Honduras
Georgia
South Africa
Russia
Indonesia
Mexico

Senegal
Cape Verde
Serbia
Vietnam
Barbados
Bangladesh
Albania
Peru
Pakistan
Colombia
India
Costa Rica

Mauritius
Chile
Saudi Arabia
Jordan

Poland
Romania
China
Qatar
Macedonia
Morocco
Thailand

Source: Eaton Vance proprietary data and calculations, as of 31 December 2016. Data provided are for informational use only. Past performance is no
guarantee of future results.
3
Source: “The Evolution of Emerging Market Sovereign Debt: Dramatic Growth in Local Currency Sovereign Debt Is Reducing Emerging Market Financial
Vulnerabilities,” Moody’s Investors Services, published 2 September 2015. 4Source: IMF World Economic Outlook, October 2016, page 2. GDP forecasts
are on a purchasing power parity basis.

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EATON VANCE TOPIC PAPER • MARCH 2017 • EMERGING-MARKET DEBT INVESTING • 4
Allocating to EM debt: The status quo
Currently, pension fund boards that allocate to EM debt
typically do so with reference to the composition of one or
more indices. Mandates are usually either passive, or a
variant on passive (e.g., rebalancing index exposures
according to an a priori allocation decision), or “constrained
active,” where an active investment manager’s ability to
deviate from a benchmark is limited. Constraints could, for
example, take the form of narrow tracking error limits and
limited flexibility to allocate to off-benchmark issues.
The prevalence of index-like or index-constrained strategies
appears to reflect both the complexity of the asset class
and pension fund governance practice. Asset studies that
precede portfolio recommendations to the board of
directors of a pension fund tend to start with analyses of
different indices. Analysis of the return and risk behaviour
of an index or indices becomes, almost imperceptibly, the
reference point for allocation decisions and, in turn, a
benchmark for the management of that allocation. The
conflation of an index (or indices) and a benchmark then
defines, to a considerable degree, the investment universe
for that allocation. EM fixed-income indices afford ready
understanding and peace of mind for boards seeking
proper execution of their fiduciary duties. Despite flaws in
EM debt indices (discussed later on), it is very seldom that
pension fund boards approve a mandate with a fully
unconstrained benchmark.
A further explanation for the preponderance of index-based
strategies could be difficulties pension funds have
experienced in finding a sufficient lineup of active
investment managers having the expertise and capability
to undertake detailed country-by-country analysis and to
trade off-benchmark exposures in a cost-efficient manner.
Exhibit B The tradable EM debt universe is much larger than EM indices suggest.
Local Sovereign External Sovereign
JPM GBI EM Broad JPM EMBI
Global Diversified Universe Global Diversified
Countries 15 80 65
Market Value $715 bn $2 + tn $420 bn
Sources: Eaton Vance and JP Morgan as of 31 December 2016.
For Professional Clients ONLY. Not To Be Used With the Public.
Admittedly, successful management of the underlying risk
factors in this asset class demands rather unique skills.
Nonetheless, asset owners who adopt an index-based
approach should bear in mind that what they are
effectively doing is turning over investment decisions to an
index provider, typically an investment bank, which has its
own interests at heart. Typically, index providers cater to
the largest common denominator; they want the largest
investment managers to be able to replicate the index and
focus essentially on those countries in which they have
business operations. There is often no compelling
investment reason why certain countries are excluded
from an index. EM local currency indices such as the JP
Morgan GBI-EM Global Diversified Index are an example.
Local currency markets, which are operationally more
difficult to trade than hard currency EM bonds, are poorly
covered in the GBI-EM GD Index. Exclusion affects not
only smaller markets. Larger markets are not necessarily
less volatile, easier to analyse or easier to trade.
Flaws in the index-based allocation
approach
As mentioned previously, we believe index-constrained
approaches are not the best choice. As can be seen in
Exhibit B, the EM tradable debt universe remains much
larger than what is implied by the main indices in this
asset class.
Limiting the investment scope of a portfolio manager to
the constituents of a benchmark index, or a small
deviation from those constituents, can hamper portfolio
returns over time. The portfolio will be unable, or less able,
to capture attractive off-benchmark opportunities and may
also be at risk of having to hold meaningful positions in
Corporate Loans
Broad JPM CEMBI Broad Broad
N/A
Universe Broad Diversified Universe Universe
80 51 80 N/A 40
$1 + tn $377 bn $700+ bn N/A $400+ bn
EATON VANCE TOPIC PAPER • MARCH 2017 • EMERGING-MARKET DEBT INVESTING • 5

markets and securities whose fundamentals or relative
valuations are deteriorating.
Another drawback is the tendency of index-based
approaches to diminish the often touted diversification
benefits of investing in EMD. This assertion has its basis in
Eaton Vance research conducted in February 2017. It
shows that investors seeking exposure to local currency
debt would likely experience higher correlations between
local currencies if they used the JPM GBI EM Global
Diversified Index as the basis of their local debt allocation
rather than an index-unconstrained approach.
This research looked at rolling 36-month median cross
correlation figures over a 10-year period to 30 November
2016 for all local currencies in the EMD universe. It
focused specifically on the following currency pairs:
■ Currencies in the JPM GBI EM Global Diversified Index
benchmark.
■ Currencies outside of the benchmark (109 currencies).
■ Currencies inside the benchmark versus those outside
the benchmark.
The findings of this research are shown in Exhibit C. They
highlight the point that while, as one might expect,
correlations change over time, the power of diversification can
be far more pronounced when index constraints are removed.
The shift to blended allocations
As awareness about the breadth of opportunities in the EM
debt universe has grown, so, too, has awareness about the
potential benefits of a more inclusive approach
(i.e., complementing hard currency sovereign exposures
with positions in local currency, corporate and frontier-
market debt). In principle, a broader, more inclusive
approach would likely deliver diversification benefits and
relatively better risk-adjusted returns over time.
Blended allocations take a number of forms. One of these
entails an allocation at the board level to separately
managed individual “sleeves,” with each sleeve treated as
either a strategic or opportunistic exposure. Another entails
delegation to a single investment manager operating within
an agreed blended allocation framework.
Among large US public pension plans, those that allocate
to EM debt (usually below 5% of total plan assets) have
sought to incorporate local currency debt in different
ways.5 Some plans treat it as an opportunistic exposure,
some leave currency exposures unhedged as part of their
policy on foreign investments, some fully hedge back to US
dollars and some will partially hedge subject to an upper
US dollar exposure limit for their overall
fixed-income portfolio.
Current blended approaches: A big-picture,
top-down theme
Notwithstanding the above-mentioned variations, the
common feature of most blended approaches currently is
their embodiment of a big-picture, top-down
allocation approach.

Exhibit C Local currency benchmark offers less currency diversification.

Benchmark Off Benchmark Benchmark versus off-benchmark
0.8
0.7
0.6
CORRELATION

0.5
0.4
0.3
0.2
0.1
0.0
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Source: Eaton Vance as of 30 November 2016. The chart shows median rolling 36-month cross correlations for (1) currency pairs within the JPM GBI
EM Global Diversified Index; (2) currency pairs outside this index and: (3) index and nonindex currency pairs. The median figures in this analysis closely
approximate the averages.
5
Source: World Bank Treasury Report, Emerging Markets Local Currency Debt and Foreign Investors, November 2014.

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EATON VANCE TOPIC PAPER • MARCH 2017 • EMERGING-MARKET DEBT INVESTING • 6

A top-down blended approach, in our view, can represent
a step forward for investors who want to capture a much
broader opportunity set. According to research by Danish
investment consulting firm Kirstein A/S, a static,
equally weighted allocation to the three key subasset
classes (hard currency sovereigns, as represented by the
JP Morgan EMBI Global Diversified Index; local currency
sovereigns, as represented by the JP Morgan GBI-EM
Global Diversified Index and hard currency corporates, as
represented by the JP Morgan CEMBI Broad Diversified
Index) has the potential to deliver around 60% of the total
annualised return that could be achieved if an investor
were able to pick the best-performing subasset class in
each calendar year.6
■■ he allocation is usually reviewed only once a year by
T
the board. In reality, decisions made annually at a board
level do not match the speed at which investment
conditions and relative valuations change within this
asset class. For example, allocation decisions made at
the beginning of 2016 – save in instances where the
investment manager had been afforded meaningful
discretion – were unlikely to have been revisited
immediately following Donald Trump’s November US
presidential election victory, even though his win raised
the prospect of a stronger US dollar, upward pressure
on Treasury yields and the possibility that the US
Federal Reserve may raise US overnight interest rates at
a pace faster than previously envisaged.

The Kirstein A/S research is illustrated in Exhibit D. The

three bars on the far right show annualised returns for the
best calendar-year performances (January 2015 to July
2016), the worst calendar-year performances and a static,
equally weighted blend of the three key subasset classes
class over this period.
Potentially, a purely top-down, index-based blend
represents a conservative approach from a fiduciary
standpoint. However, from an investment standpoint, it is
not a defensive approach. It also has several drawbacks:
■■
lending key EM debt asset classes via a big-picture,
B
top-down approach typically entails a focus on key
indices (i.e., EMBI GD, GBI-EM GD and CEMBI BD)
with the result that, even allowing for tactical
overweights or underweights, underlying allocations
share the limitations inherent in these indices.
Allocating across index-like exposures also raises other
issues. Consider the following:
■■ ountry risk factors are major drivers of asset
C
performance, particularly for emerging-market
countries.7 Unfortunately, country representation across

Exhibit D Static, index-based blend: A potentially conservative allocation approach.

40
ANNUAL RETURN (%)

30
20
11%
10 7%
2%
0
-10
-20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Average
YTD
Top performing Worst Performing Blend

Source: Kirstein A/S as of 31 July 2016. Exhibit shows the best and worst returns among the three sleeves (hard, local and corporate bonds) over the past
decade, as well as the returns for a blended approach consisting of an equal-weighted allocation to each sleeve. Return figures for each sleeve are based on
commonly used indices: the JP Morgan EMBI Global Diversified (hard currency sovereign debt), the JP Morgan GBI-EM Global Diversified (local currency
government debt) and the JP Morgan CEMBI Broad Diversified (corporate debt).
6
Source: “Emerging-market debt investing: A Nordic perspective,” Kirstein A/S and Eaton Vance, November 2016. 7Sources: Baldacci, Gupta, & Mati,
2008; Beck, 2001; Eaton Vance, 2015; Heston & Rouwenhorst,1995; Rowland & Torres, 2004; Serra, 2000; Stocker, in press.

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EATON VANCE TOPIC PAPER • MARCH 2017 • EMERGING-MARKET DEBT INVESTING • 7

the popular indices varies greatly. For example, India is
in the CEMBI, but not in the local index. Allocation
across asset types impacts country allocations.
■■ witching index-like exposures entails a meaningful shift
S outstanding in the broader universe – could be an option.
in duration. GBI–EM GD has a duration of around 4.5
years, while EMBI-GD has a duration of around seven
years. Switches between external sovereigns and
external corporates (assuming index-like exposures) will
result in a change in US duration. Few investors are
fully aware of the extent of developed-market risk within
EM indices. (A bottom-up risk factor approach, however,
would be very mindful of this.)
■■ hen a country (e.g., Russia) is prominent in all three
W Unconstrained investing offers access to a much broader
indices, the absolute level of risk concentration may be
greater than optimal in the combined weightings of the
three indices. Institutional investors also run the risk
that submanagers may all overweight the same country.
Further, there are often also important relative value
distinctions between local currency and dollar-
denominated debt, and between sovereign and
corporate issues. Such distinctions fall outside the scope
of purely top-down asset allocation.
Admittedly, as a matter of practicality, many pension fund
guidelines call for the inclusion of a benchmark. In such
cases, where investors want a blended approach, using a
blended benchmark of something like 50% GBI-EM, 25%
EMBI and 25% CEMBI – which reflects the debt
However, we believe a benchmark should function largely
as a reference for portfolio performance. Allocation
strategies based principally on overweighting and
underweighting common EM indices are, in our view, not
optimal for investing in this sector.
The future of blended: Active,
unconstrained, risk factor-based
range of investment opportunities, as shown in Exhibit E.
At Eaton Vance, we prefer an index-unconstrained
approach that focuses on country-level macroeconomic
and political research across the entire investment
opportunity set along with bottom-up analysis of specific
risk factors. Bonds are instruments that can be broken
down into their component risk factors: currency, interest
rates, sovereign credit spreads and corporate credit
spreads. Disaggregating and evaluating such idiosyncratic
risk factors at the country level is, we believe, an
approach that can be a consistent source of alpha.

Exhibit E EM economic and demographic potential outside of the GBI-EM.

GDP Population

1.2 billion
$8.6 trillion

$20.4 trillion 4.9 billion

GBI-EM ex-GBI-EM

Source: International Monetary Fund, World Economic Outlook Database, October 2016. GDP and population data are for 2015.

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EATON VANCE TOPIC PAPER • MARCH 2017 • EMERGING-MARKET DEBT INVESTING • 8
Exhibit F provides a very simplified example of how
country-specific risk factor analysis can be used to shape
portfolio positioning.
Unconstrained blended – don’t try this
at home
Investment management of an unconstrained, blended
mandate is a demanding undertaking. It requires extensive
investment research resources, a robust operational
infrastructure, a dedicated EMD trading capability and
strong risk management.
Research. The value add of research in emerging markets
is significant. Fewer analysts cover this universe compared
to say, the S&P 500 Index universe. Fundamental
research, particularly at the country level, is important in
order to identify both the most attractive opportunities
available and assess downside risk.
An example of the latter is Mozambique. At the time of
this writing (February 2017), the country, once considered
one of Africa’s potential success stories given its large
natural gas reserves, was seeking a new IMF funding
programme after missing a coupon payment in January
2017 on about US$727 million worth of eurobonds
issued in April 2016. For private creditors, the response
by the IMF is significant: The country must first secure
new private credit arrangements so that its debt would no
longer be deemed “distressed.” Increasingly, the IMF is
becoming reluctant to bail out private creditors of
sovereign debt. For investment managers, this means
there is now an even greater onus on them to undertake
Exhibit F Relative value among various risk factors.
Country-specific outlook: Russia (January 2017)
Low Conviction
Currency
Local Interest Rates
Sovereign Credit
Corporate Credit
Source: Eaton Vance Management as of 31 January 2017. This outlook is provided for informational use only. It should not be considered investment
advice.
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in-depth, fundamental research and due diligence before
committing capital to a particular country.
Part of this research needs to focus on continually assessing
governance standards and government credibility. Ghana is
a case in point. The country is currently under an IMF
programme with a stipulation for no buildup of arrears.
Notwithstanding this stipulation, in January 2017,
previously undisclosed spending arrears totalling US$1.6
billion came to light. These arrears could double the size of
the country’s budget deficit, more or less.
Custody, account and trading infrastructure. A very
strong operational infrastructure is essential in order to
access the full range of local markets. Investment
managers need a well-developed, sophisticated trading
infrastructure and the ability to manage different accounts
across more than 100 countries.
Recordkeeping and document-processing functions, in
particular, need to be well-resourced in order to cope with
the sheer volume of documentation that needs to be
created, tracked and kept up-to-date. Failure to keep
documentation up-to-date can be costly. An example here
is the losses some EMD investors in Nigeria have
encountered as a result of not keeping their Certificate of
Capital Importation (CCI) disclosures up-to-date and
clearly aligned with activity in their banking and
trading accounts.
To get money into or out of Nigeria, investors need to be
able to reconcile every trade with their CCI statement
showing how much was initially brought into the country.
This may sound straightforward, but because investors are
Neutral High Conviction
EATON VANCE TOPIC PAPER • MARCH 2017 • EMERGING-MARKET DEBT INVESTING • 9
not required to repatriate the proceeds when they exit one
investment and enter another, this often proves difficult to
do. In our experience, few investors make the effort to
ensure that their CCIs are fully up-to-date at all times.
Trading expertise. Trading over-the-counter instruments in
emerging markets can be very challenging. It requires a
well-resourced, experienced trading capability focused
solely on trading EMD. Without a sufficiently resourced
and experienced trading team, the investment manager
can end up with money “stuck” in countries like India or
Nigeria, suffer poor FX rates on “restricted currencies” left
with a custodian to trade or be forced to pay taxes that
could have been avoided. These losses can be substantial,
easily exceeding the circa 40-70 basis points paid to a
suitably skilled third-party investment manager.
Risk management. Investment managers need to be fully
abreast of the legal framework in which they invest.
Unlike in many other asset classes, regulations relating to
market access, taxation and trading restrictions change
frequently and often suddenly. Managers also need to be
fully apprised of relevant trading conventions (e.g.,
International Swaps and Derivatives Association protocols)
and know where the sources of liquidity are. They need to
understand and proactively manage implicit
developed-market risk within their EMD portfolio. They
also need continually to be on the lookout for potential
fraud in enterprises in which they have invested.
Cognisant of these resource demands, Eaton Vance’s
global income team employs 30 investment professionals,
six EM debt traders and five trading assistants across
Boston, London and Singapore. We trade our own FX. The
advantage of this is that we avoid the risk of expensive FX
trades that can arise when trades are left in the hands of a
custodian. Our trading capability also affords us the ability
to structure trades advantageously. For example, in
Colombia, we put our trades on a payment system that
avoids transaction taxes.
Other considerations
Investors considering moving to internal management of
their EM debt allocation might want to be aware of the
fact that the pool of EM debt trading expertise is relatively
For Professional Clients ONLY. Not To Be Used With the Public.
small. Being able to attract sufficient trading talent
dedicated to a particular pension fund may prove to
be a challenge.
Internal management also potentially raises
governance challenges around transparency and
investment performance.
Traditional approaches to management of local currency
debt have, to date, disappointed a number of investors.
Matching or surpassing the performance of the local
currency indices has proved difficult, particularly in up
markets. The JPMorgan GBI-EM Global Diversified Index
is a gross index – it doesn’t reflect the drag on returns of
taxes paid by real-world investors who want to track its
performance. These taxes will be different for different
investors depending on factors such as how the fund is
structured, which instruments are used to execute a trade
and where the fund is domiciled. Investors might want to
re-evaluate the cost benefit of how they have traditionally
approached local currency debt versus an “optimised”
unconstrained approach.
Can an unconstrained, blended approach
deliver added value?
Clearly, pension funds will need to do their own due
diligence on this question. That said, we believe Eaton
Vance’s track record in blended unconstrained mandates
points to the viability of such an approach. Our Emerging
Market Debt Opportunities Strategy, which has been
running for more than three years, has been able to
generate alpha and excess return with lower-than-
benchmark volatility. Counterintuitive as it may sound, a
more flexible approach has the potential to offer both
better returns and lower volatility.
Conclusion
EM debt offers a unique source of income and, for
portfolios comprising mainly developed-market fixed
income, diversification. However, successful investment in
this complex asset class requires specialist expertise and a
keen awareness of its many idiosyncrasies and potential
pitfalls. This is particularly true for investors seeking to
move to a blended approach. At Eaton Vance, we believe
EATON VANCE TOPIC PAPER • MARCH 2017 • EMERGING-MARKET DEBT INVESTING • 10

a blended, index-based approach represents a defensive,
straightforward option that boards may find reasonably
easy to approve and oversee. Nonetheless, the inherent
flaws in indices point to the potential advantage of a more
sophisticated flexible approach – one seeking to evaluate
risk factors in each country across the entire tradable
universe. For investors, adopting such an approach
requires a new mindset and becoming comfortable with a
portfolio exhibiting a substantial tracking error to a
performance benchmark. It presupposes extensive due
diligence, but also recognition of how much money
traditional approaches currently leave “on the table.”

For Professional Clients ONLY. Not To Be Used With the Public.

EATON VANCE TOPIC PAPER • MARCH 2017 • EMERGING-MARKET DEBT INVESTING • 11

Index Definitions
The JP Morgan Emerging Markets Bond Index Global Diversified (EMBI GD) is a broad index of hard currency sovereign bonds issued by a
selection of emerging-market countries. Like the EMBI Global Index, it includes US dollar-denominated Brady bonds, eurobonds, traded loans
and local market debt instruments issued by sovereign and quasi-sovereign entities. However, it differs from EMBI Global in that it limits the
weights of countries with larger debt stocks.

The JP Morgan Government Bond Index-Emerging Markets Global Diversified Index (GBI-EM GD) is an unmanaged index of local currency
bonds with maturities of more than one year issued by emerging-markets governments. Like the GBI-EM Global Index, it includes only those
countries that are directly accessible by most of the international investor base. Unlike GBI-EM Global, GBI-EM Global Diversified limits the
weights of index countries with larger debt stocks.

The JP Morgan Corporate Emerging Markets Bond Index Broad Diversified (CEMBI BD) is a market capitalisation-weighted index that tracks
hard currency (US$­-denominated) corporate bonds issued by emerging-markets entities.

The JP Morgan Emerging Markets Bond Index Plus (EMBI+) Index is a market cap-weighted index that measures US dollar-denominated
Brady Bonds, eurobonds and traded loans issued by sovereign entities.

Unless otherwise stated, index returns do not reflect the effect of any applicable sales charges, commissions, expenses, taxes or leverage, as
applicable. It is not possible to invest directly in an index. Historical performance of the index illustrates market trends and does not represent
the past or future performance.

For Professional Clients ONLY. Not To Be Used With the Public.

EATON VANCE TOPIC PAPER • MARCH 2017 • EMERGING-MARKET DEBT INVESTING • 12

About Eaton Vance

Eaton Vance is a leading global asset manager whose history dates to 1924. With offices in North America, Europe, Asia and Australia, Eaton Vance and
its affiliates offer individuals and institutions a broad array of investment strategies and wealth management solutions. The Company’s long record of
providing exemplary service, timely innovation and attractive returns through a variety of market conditions has made Eaton Vance the investment manager
of choice for many of today’s most discerning investors. For more information about Eaton Vance, visit eatonvance.com.

About EVMI
Eaton Vance Management (International) Limited (EVMI) is a subsidiary of Eaton Vance Management, a leading U.S. asset management organisation, and
markets internationally the investment capabilities of Eaton Vance Management and its affiliates, including Parametric. EVMI has been based in London
since 2001.

This material does not constitute an offer or solicitation to invest in any Eaton Vance fund and/or products. Forecasts may not be attained. Past
performance is no guarantee of future results. This material is communicated by Eaton Vance Management (International) Limited, which is authorised
and regulated in the United Kingdom by the Financial Conduct Authority and located at 125 Old Broad Street, London, EC2N 1AR, United Kingdom,
Tel. +44 (0)203.207.1900.
EVMI is a wholly owned subsidiary of Eaton Vance Management (EVM). EVM is an investment advisor registered with the United States Securities and
Exchange Commission (SEC) and is a wholly owned subsidiary of Eaton Vance Corp. (EVC). The nonvoting common stock of EVC, parent company of EVM,
is publicly traded on the NYSE under the symbol “EV.” For purposes of this material, “Eaton Vance” or the “Company” is defined as all three entities
operating under the Eaton Vance brand.
EVMI markets the services of the following strategic affiliates: Parametric Portfolio Associates LLC (Parametric) is an investment advisor registered with the
SEC and is a majority-owned subsidiary of EVC and Hexavest, which is an investment advisor based in Montreal, Canada, registered with the SEC in the
United States and which has a strategic partnership with Eaton Vance, who owns 49% of the stock of Hexavest Inc.
In Singapore, EVMI has a wholly owned subsidiary, namely Eaton Vance Management International (Asia) Pte. Ltd. (EVMIA), 8 Marina View, Asia Square
Tower 1, #07–05, Singapore 018960, which holds a Capital Markets License under the Securities and Futures Act of Singapore (CMS100185-1), is an
exempt Financial Adviser pursuant to the Financial Adviser Act Section 23(1)(d) and is regulated by the Monetary Authority of Singapore. This document
is to be distributed to Accredited Investors ONLY (as defined in the Securities and Futures Act, Chapter 289 of Singapore).
In Australia, EVMI is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of the provision of
financial services to wholesale clients as defined in the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission’s Class
Order 03/1099.
EVMI is registered as a Discretionary Investment Manager in South Korea pursuant to Article 18 of Financial Investment Services and Capital Markets Act
of South Korea.
Eaton Vance Management (International) Limited utilises a third-party organisation in the Middle East, Wise Capital (Middle East) Limited (Wise Capital),
to promote the investment capabilities of Eaton Vance to institutional investors. For these services, Wise Capital is paid a fee based upon the assets that
Eaton Vance provides investment advice to following these introductions.
This document does not constitute an offer to sell or the solicitation of an offer to buy any Securities/Notes/Fund Units/Services referred to expressly or
impliedly in this document in the People’s Republic of China (excluding Hong Kong, Macau and Taiwan, the “PRC”) to any person to whom it is unlawful
to make the offer or solicitation in the PRC.
The document may not be provided, sold, distributed or delivered, or provided or sold or distributed or delivered to any person for forwarding or resale or
redelivery, in any such case directly or indirectly, in the People’s Republic of China (the PRC, excluding Hong Kong, Macau and Taiwan) in contravention of
any applicable laws.
Eaton Vance Management (International) Limited is licensed by the United Kingdom Financial Conduct Authority to engage in the investment management
business and hereby operates in Japan under Article 58-2, and Article 61, Paragraph 1 of the Financial Instruments and Exchange Act of Japan. Accordingly,
services provided by Eaton Vance Management (International) Limited are available to Japanese investors only to the extent permitted under Article 58-2
and Article 61, Paragraph 1.
The views expressed in this material are those of the authors and are current only through the date stated at the top of this page. These views are subject
to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be
relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication
of trading intent on behalf of any Eaton Vance fund.
This material may contain statements that are not historical facts, referred to as forward-looking statements. A fund’s future results may differ significantly
from those stated in forward-looking statements, depending on factors such as changes in securities or financial markets or general economic conditions,
the volume of sales and purchases of fund shares, the continuation of advisory, administrative and service contracts, and other risks. This material is for
professional clients only.

©2017 Eaton Vance Management (International) Limited

125 Old Broad Street, London, EC2N 1AR, United Kingdom
Telephone: +44 (0)203.207.1900
E-mail: internationalenquiries@eatonvance.com
25011 3.15.17

For Professional Clients ONLY. Not To Be Used With the Public.