Global Aggregate: Overlooked opportunities in the Emerging Markets
Institutional investors may assume that they are adequately capturing the opportunities in Emerging Market bonds by investing in the Bloomberg Global Aggregate Index. However, a closer look suggests otherwise. In his analysis, Enzo Puntillo explores solutions to this issue.
Key Takeaways
- While the Global Aggregate Index includes bonds from emerging markets (EM), this exposure is heavily concentrated in a limited number of regions, primarily Asia and China.
- As a result, there is limited exposure to bonds from other attractive growth regions such as Latin America, Eastern Europe, or the Middle East.
- Benchmarks like the J.P. Morgan EM 50-50 Blend Index, in our view, provide a more representative and diversified exposure to emerging markets. Additionally, an active country-level investment approach may be beneficial.
For bond investors, the Bloomberg Global Aggregate Index is what the MSCI World is for equity investors: one of the most widely used benchmarks for global fixed-income investments. A significant amount of assets are tied to this index.
However, the perceived global reach of the index proves misleading. While the Global Aggregate does include EM bonds (see chart below), this exposure is concentrated in a small number of countries. As a result, the index does not fully capture the depth and diversity of the EM sovereign bond universe. On closer inspection, several limitations become apparent.
Emerging Market exposure in the Bloomberg Global Aggregate Index (in %)
Significant regional concentration on Asia and China
One potential drawback of the EM exposure in the Global Aggregate Index is its pronounced regional concentration. A large portion of the exposure is dominated by Asian countries, particularly China (see chart below).
This results in limited exposure to other attractive growth regions such as Latin America, Eastern Europe, or the Middle East. This imbalance reduces diversification and risks missing out on the diverse economic opportunities offered by other emerging market regions.
The comparative chart below highlights the focus of the Global Aggregate on China and Asia. Specifically, China alone represents over 60%, and Asia accounts for over 80% of the EM exposure within the Global Aggregate. In contrast, the J.P. Morgan EM 50-50 Blend Index offers a more balanced regional mix, with China accounting for less than 7% and Asia comprising 30% of the index (see chart below).
Country weights of the different indices in comparison (in %)
An attractive alternative for dedicated Emerging Market bond allocations
In our view, the J.P. Morgan EM 50-50 Blend Index provides both a more representative and diversified EM exposure. This is achieved by equally blending hard-currency and local-currency sovereign bonds. The index thus captures the full breadth of the EM sovereign bond market, offering a wide range of investment opportunities with broad diversification.
Historically, the J.P. Morgan EM 50-50 Blend Index has significantly outperformed the Global Aggregate in terms of long-term performance, as shown in the table below. While the index exhibits higher volatility and a lower average rating compared to the Global Aggregate, it has historically delivered stronger risk-adjusted returns and similar maximum drawdowns. This makes it a compelling benchmark for a strategic, broadly diversified exposure to EM bonds.
Long-Term performance comparison of the indices
Active Management as a key component in emerging market investing
Within this broadly diversified investment universe, we believe an active country-level investment approach is essential. This allows for dynamic allocation between local-currency and hard-currency bonds, depending on the specific country outlook. A flexible approach offers more opportunities than a purely aggregated view of hard or local currencies (see asset-class approach below).
In our view, global fixed-income investors seeking strategic EM exposure should consider a dedicated allocation to indices like the J.P. Morgan EM 50-50 Blend Index. Such an approach provides a more comprehensive and diversified perspective on the asset class—beyond the narrow scope of the Global Aggregate Index.
An active approach can further enhance value for investors. For example, this could involve dynamic, country-specific allocations between hard and local currencies. This flexibility allows investors to capitalize on opportunities at the country level while managing risks effectively (see chart below).
It is also crucial to limit or exclude exposure to countries with elevated risks, rather than adhering rigidly to index weightings.
Flexibility in allocating between hard and local currencies at country level
The fruits of five years of active management
The fruits of five years of active management
For over five years, Enzo Puntillo and Alessandro Ghidini, experts in Swisscanto investment solutions in the EM bond segment, have been managing the 'Swisscanto (LU) Bond Fund Committed Emerging Markets Opportunities' in accordance with the approach described above. The net performance (below, in %) over the last five years shows that the approach has been able to take advantage of diverse opportunities in emerging markets during various market phases and significantly outperform passive hard currency or local currency solutions.
It should be noted that historical performance is not an indicator of current or future performance.
Conclusion
Although the Bloomberg Global Aggregate Index includes an EM bond allocation of approximately 16%, this exposure is heavily regionally concentrated. In contrast, a dedicated allocation to EM bonds, combined with active management, offers several advantages in our view. These include more diversified exposure, potentially attractive return prospects, and a stronger alignment with long-term investment goals.
For institutional investors seeking broad diversification and appealing return potential, a dedicated, strategic allocation to EM sovereign bonds is not only sensible but may also be a strategic necessity.
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