Emerging Markets Debt Total Return Strategy

The GMO Emerging Markets Debt Total Return Strategy integrates all of GMO’s hard and local debt capabilities and seeks annualized returns of 3% (net of fees) above the Secured Overnight Financing Rate (SOFR) over a complete market cycle. Like other GMO emerging debt strategies, it employs 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 spans a wide range of issuer types (sovereigns, corporates, project finance) and credit qualities defined by credit rating agencies, ranging from high-quality credit (e.g., AA) to default (e.g., D). A SOFR+3% objective signals a lower portfolio duration and a focus on higher spread issues than in our debt-benchmarked relative strategies (blended currency, hard currency, or local currency). GMO does not seek to maintain a specified interest rate duration for the Strategy.

In achieving its objective, the Strategy emphasizes instrument selection opportunities over country, currency, or duration positions. Given the wide range of credit qualities in the investment universe (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 the absence of a benchmark, the Strategy makes greater use of shorting bonds and purchasing credit protection to preserve returns through default. In corporate debt, the focus is on fundamental analytical techniques, which offer a more attractive risk/reward profile than private corporates.

In local markets, the team employs disciplined, risk-controlled quantitative techniques to actively manage exposures in emerging local currency and interest rate markets. In addition, the Strategy employs a robust framework for investing in frontier local markets, many of which are not included in standard benchmarks.