Emerging markets a 'reasonable' opportunity: Colchester

According to Colchester Management senior investment officer Martyn Simpson emerging markets have remained uncorrelated to other risk assets while providing reasonable returns to investors.

Speaking at the Financial Standard Advisers Big Day Out (ABDO) in Sydney, Simpson said the asset class has attractive valuations and has been a good income generator for underlying clients.

Simpson added the fund manager sees significant value in emerging market bonds when assessing real yields, which measure the returns earned after accounting for projected inflation.

According to Colchester, emerging market bonds prospective real yield came in at 2.85% at end of February.

"You look where it is now - it's not the cheapest it's ever been - but compared to history, it does to us, look relatively attractive," Simpson said.

He added while not all countries have shown resilience, select emerging markets have increasingly resilient economies that have not been fully repriced.

Colchester's investment opportunity set includes names like Taiwan and South Korean with AA credit rating; China and Malaysia with A credit rating; India and Mexico with BBB credit rating and countries like Brazil and Turkey with BB credit rating.

Simpson said these countries have been able to get good credit ratings on the back of decent economic policies such as inflation targeting and strong fiscal rules since the global financial crisis.

However, he also flagged event risks when looking at the asset class.

"Even though there has been things that have gone wrong you've got reasonable returns over time," he said.

"It doesn't mean you get a positive return all the time. I'm not promising that, but at real times, historically, it's tending to do okay."

Simpson, however, noted if the Strait of Hormuz stays shut for a long period of time, emerging markets probably aren't the place to be.

"But neither is any other risk asset that I could think of because it will be a really, really big problem," he said.

The Colchester Emerging Markets Bond Fund has provided an annual return of 5.66% on average since inception to end of January.