TCW Emerging Markets Local Currency Income Fund Class

Approach

A combination of flexibility and caution, as well as a thoughtful approach to country and currency analysis, continue to support a High Process Pillar rating. This strategy’s approach combines fundamental analysis and top-down research with an aim to manage downside risk. Analysts are responsible for setting three-, six-, and 12-month targets for local rates positions, and the team actively trades around currency positions. There is evaluation of interest rates and currencies on a country-by-country basis, and its higher-conviction positions aren’t usually more than a few percentage points off the JPMorgan GBI-Emerging Markets Global Diversified Index’s, a sensible guardrail given the exchange-rate volatility inherent here.

In addition, it isn’t typically, complete avoid an index constituent, either taking a small position in that country’s rates or currency, which makes sense given the small number of names (roughly 20) in the sovereign bond benchmark. The strategy also allows up to 20% in U.S.-dollar-denominated debt and cash. Still, the process allows plenty of room to manoeuvre. When it’s found that emerging-markets currencies are extremely undervalued, it can take that exposure up to 125%, and when they are expensive it can hedge it to 75%. The portfolio is further diversified by off-index plays, which have included frontier markets (Egypt) and developed markets (Greece).

Portfolio

The process allows for ample movement in the strategy’s overall emerging-markets currency exposure, which has been dialled up and down in a tactical fashion based on valuations and its market outlook. The portfolio’s overall emerging-markets currency exposure was light (around 75% of assets) following 2012’s big market runup, which served the strategy well when things got tough in 2013. The managers brought that exposure up to the 90% range at the end of the sell-off in 2015 and then let it run in the 110%-120% range as it rallied in 2016 and 2017. Since the pandemic-riled markets in February 2020, the team has kept the portfolio’s overall emerging-markets currency exposure between 93% and 100%, given it has been concerned about U.S. dollar strength. The strategy sticks close to the benchmark, but at times its high-conviction and tactical nature is on full display. In 2020, the team was overweight in longer Brazilian debt based on valuations and favorable real rates, which hurt early on during that year. But off-benchmark moves have helped combat the concentration risk associated with this bogy. The portfolio’s positioning in Egypt was a prime example in 2020: That stake sat at 5% to start the year, and the team cut it completely by the end of March to redeploy to more attractively priced opportunities before building it back to 4% at the end of September. As of September 2021, the team continued to hold a 4% stake in local Egyptian debt given its attractive yield and pending inclusion into the JPMorgan GBI-Emerging Markets Global Diversified Index.

People

This remains one of the more-experienced teams that works well together, but its size hasn’t kept pace with some larger peers. This underpins its People Pillar downgrade to Above Average from High.

Emerging-markets bond veterans Penny Foley and David Robbins took over here in December 2009. Foley cofounded an institutional emerging-markets debt and equity strategy in 1987; Robbins joined her there in 2000 after running emerging-markets trading at Lehman Brothers and Morgan Stanley. Alex Stanojevic, a trader with the team since 2005, was named comanager in mid-2017, helping build ample transition time for when Foley eventually retires.

The managers’ supporting cast is experienced and works together well, but it’s half the size of some peers, which can leave the team stretched in an ever-expanding investment universe. The managers are supported by five sovereign analysts led by Blaise Antin, who joined TCW in 2000. Longtime team member Javier Segovia leads a group of three emerging-markets corporate analysts including Stephen Keck, who has focused on this sector for TCW since 2003, and two more experienced analysts who joined in 2011 and 2015. This corporate cast, while experienced, is much leaner than some peers. Additionally, their relative inexperience with Asian corporate credit was partly to blame for 2021’s disappointing performance. As the emerging-markets debt market grows, this midsized team will need to stick to what it knows best to maintain its edge.

Performance

This strategy’s Institutional share class gained 0.6% annualized from its mid-December 2010 inception through December 2021, ranking third out of 14 distinct strategies in the emerging-markets local-currency bond Morningstar Category. It also outpaced the JPMorgan GBI-Emerging Markets Global Diversified Index by roughly 10 basis points annualized. Though the strategy isn’t likely to reach the heights of its more aggressive competitors in strong rallies, it’s been no slouch. It edged out its typical peer and benchmark in 2016 and 2017, for example, through smart positioning with larger index constituents such as Brazil and Russia, as well as picking out-of-benchmark winners such as the Indian rupee and Egyptian pound. The strategy has held up better than peers and the index in some tough markets thanks to the team’s valuation discipline and smart allocation moves. Taking emerging-markets currency exposure down to 75% of assets and raising cash to around 11% helped going into 2013’s taper tantrum, as did some better performing off-index investments in China and Uruguay. Still, lately there have been a few bumps in the road. The strategy’s 9.3% loss in

2021 lagged its typical rival by 110 basis points and its benchmark by 90 basis points. Much of this underperformance owed to the team’s overweighting in emerging-markets local-currency exposure, as the U.S. dollar outperformed for most of the year. From a country perspective, an overweighting and long-duration positioning in Mexico and Columbia were painful.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.