Emerging Country Debt Strategy

The GMO Emerging Country Debt Strategy is GMO’s flagship hard-currency benchmarked strategy, with the objective of total return in excess of the J.P. Morgan Emerging Markets Bond Index Global Diversified (EMBIG-D). Since its inception in 1994, the Strategy has employed a broad opportunity set, investing across all forms of emerging market debt, including securities, derivatives, and private instruments, in both hard and local currencies. The investable universe covers a wide range of issuer types (sovereigns, corporates, project finance) and credit qualities defined by credit rating agencies, ranging from high credit quality (e.g., AA) to default (e.g., D), though the portfolio’s overall duration, currency, country, and credit quality exposures are managed mindful of the EMBIG-D.

In achieving its objective, the Strategy emphasizes “arbitrage-like” opportunities over country, currency, or duration positions. We take an arbitrage-pricing approach to identifying mispriced instruments across a wide array of instruments in any given country: hard and local currency debt issues, quasi-sovereign corporate debt issues, credit default swaps,  linkers, interest rate swaps, and supranationals, among others. Given the wide range of credit qualities in the reference benchmark (AA to default), the team has developed expertise in managing performing, distressed, and defaulted issuers, including workout processes as needed. This enables the Strategy to opportunistically capture country-specific alpha from markets undergoing default or restructuring. In corporate debt, the focus is on quasi-sovereign entities, which offer a more attractive risk/reward profile than private corporates. 

The Strategy leverages deep expertise in global emerging and frontier local markets to selectively invest in currencies and local interest rates when valuations are compelling. However, due to its hard-currency benchmark, these positions are typically not a major source of excess return.