Emerging market corporate debt: Nature or nurture?
The question of nature or nurture is one of the false dichotomies that confront us in our attempts to make sense of the world around us.
In people, is it genetics and circumstances at birth or environment socialization? In countries, is it location and climate (as Jeffrey Sachs has argued) or culture and history? In investments, is it business fundamentals and cashflows or markets and behavioural finance? In emerging market debt, is it the company whose debt we buy because we think the rate is attractive and they will pay it back or the country it is located in?
The answers always defy simplistic arguments and force us to think about how inherent qualities interrelate with externalities. With his usual ability to put complex thoughts into memorable phrases, Charlie Munger has framed the issue for us as investors: Micro is what we do, macro is what we put up with.
We have quoted Charlie’s phrase repeatedly because the issue as at the core of our investment approach. The external environment sometimes has a substantial influence on our investment returns. Yet as portfolio managers we have very limited control over it. Our probability of achieving our targeted investment returns over the long term is increased by our disciplined approach to picking high quality companies whose ability to deliver their expected returns is supported by their strong fundamentals.
This is particularly true of emerging market corporate bonds. Over the short-term, local economic environment and geopolitical developments can have a disproportionate impact on bond prices. Over the long-term, understanding this ‘macro’ dynamic and how it interacts with ‘micro’ fundamental analysis presents investors with the prospect of generating attractive returns.
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