MAB-Quarterly-Review-Q2-2025-Cautious - Flipbook - Page 13
Facts behind the fund
The Morgan Stanley Emerging Markets Local Income Strategy is designed to help investors bene昀椀t from the
income and growth potential of bonds issued by emerging market governments, such as Brazil, Mexico, or
Indonesia. These countries are often growing faster than developed markets, and their bonds tend to offer
higher interest rates. What makes this strategy different is that it invests in bonds denominated in local
currencies, rather than in US dollars. This Fund has outperformed since our initial investment in 2019 and
has delivered excellent performance of +12% for the year to date given the pronounced US dollar weakness
ignited by President Trump’s trade policies. We think this dynamic could have the potential to run very far
indeed.
The strategy makes money in two ways:
1. Bond income – the interest payments from government bonds.
2. Currency movement – if the local currency strengthens against the US dollar, investors earn an
additional return.
The strategy began in 2007, originally run by Eaton Vance, and has since become part of Morgan Stanley
Investment Management. It has a long and proven track record, navigating through years of market ups and
downs across global emerging economies.
A standout feature of this strategy is the team’s deep trading expertise. They are supported by a dedicated
team of 8 global traders and 8 trading assistants, all with specialist knowledge of emerging markets. This
matters because trading bonds in these countries can be tricky – markets are less liquid, prices can move
quickly, and local conditions change rapidly. Thanks to its skilled team, the strategy is often able to 昀椀nd better
prices and execute trades even when others can’t, giving it a real edge.
In fact, about one-third of the fund’s outperformance over time has come from this ef昀椀cient trading, not just
from picking the right countries or currencies. It’s a rare advantage in a space where many managers struggle
to add consistent value.
The strategy is well-diversi昀椀ed, typically spread across 20–30 countries at a time, with active decisions made
on both bond selection and currency positioning. Risk management is central to the process, with a focus
on avoiding overexposure to any one country or currency. Given the depth of their research and trading
capabilities, the team take the unique approach of allocating moderate amounts of risk to less established, but
often higher-returning “frontier” emerging markets. These might include countries such as Egypt, Uzbekistan,
Kazakhstan and Serbia. This has been a source of signi昀椀cant, diversi昀椀ed outperformance down the years.
In short, while this strategy has
been out of favour for periods
of our investment journey,
sticking with the allocation
has paid off nicely and could
continue to do so if the value
of the US dollar continues
to be challenged by current
government policies.
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