If a manager’s opportunity set is constrained by their benchmark, potential alpha opportunities may be de-emphasized, or even ignored completely.(A blended benchmark is somewhere “in between” from a beta standpoint, with lower durations than EMBIG-D, and EMFX exposure determined by the extent of GBI-EMGD’s presence in the blended benchmark.) It is often the case that an investor already has plenty of USD duration from other bond portfolios and EMFX exposure from emerging market equities, yet simply accepts these characteristics as part of an emerging debt investment because they are embedded in the benchmark. While EMFX exposure is a major component of a local currency strategy, typically managed relative to the GBI-EMGD. , typically managed relative to the EMBIG-D, In particular, there is significant USD duration exposure associated with a hard currency strategy There are embedded characteristics, or betas, that may not necessarily be desirable.There are two major flaws in being overly wedded to an off-the-shelf benchmark:

We strongly believe that the traditional benchmark-led approach to investing in emerging market debt can be far from optimal. In terms of expected return, a typical target would be 150-200 bps of net alpha relative to standard benchmarks, including blended ones, or cash + 7-9% for total return solutions. duration and EMFX, while a blended solution can be tailored to capture only the amount of those beta exposures that is considered desirable. A total return solution can eliminate systemic exposure to U.S. dollar (USD) continuing to pose challenges to holding long-only emerging markets currency (EMFX) exposure, now could be the appropriate time to consider a new approach to emerging debt investment. Our skills are deep in sovereign and quasi-sovereign credit (in hard and local currency) as well as in managing local currency and interest rate exposures.

As an alpha manager with a global opportunity set, GMO is well equipped to create variations across the spectrum from single-benchmark, through blended-benchmark, and right across to total return solutions.

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