Principal Asset Management 2025 EN

Inside the emerging markets goldmine

Discovering hidden riches in emerging market debt

March 2025

Source and Copyright: Citywire. Damien Buchet is A rated by Citywire for his rolling three-year risk-adjusted performance across all funds the manager is managing to end of December 2024. Citywire Portfolio Manager Ratings and Citywire Rankings are proprietary to Citywire Financial Publishers Ltd (“Citywire”) and © Citywire 2025. All rights reserved."

Welcome to another edition of SOURCE, the publication that shines a spotlight on selected strategies and their managers. This time, we look at the Finisterre Unconstrained Emerging Markets Fixed Income and Finisterre Emerging Markets Debt Euro Income strategies. Discover more in our profile and Q&A with Citywire A-rated Damien Buchet, chief investment officer at Principal Finisterre, an emerging markets fixed income investment expertise within Principal Asset Management, plus supporting analysis from Citywire.

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investment profile

sector overview

fund manager q&a

investment profile

sector overview

fund manager q&a

investment profile

sector overview

fund manager q&a

investment profile

Performance overview

fund manager q&a

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After their 2022 exodus, global asset allocators have yet to resume mining the rich veins of emerging market debt. While many have abandoned the search, Principal Finisterre has been busily extracting value.

Meet the EMD pioneers

A toxic blend of rising US yields, a strong dollar and a series of small but headline-grabbing default risks – from Zambia, Ghana and Sri Lanka to the Ukraine debt moratorium – triggered an exodus from the asset class in 2022. Outflows totalled $120bn that year, according to an EPFR sample of 3,500 global EMD mutual funds, followed by $30bn in 2023 and another $30bn in 2024. The ownership of local bond markets by foreign investors is now lower than it was in dollar terms in 2002. Yet despite recent geopolitical noise and negative headlines, notably surrounding China and the Middle East, emerging countries have remained remarkably resilient. ‘The naysayers got it wrong again in 2024 – the asset class didn’t behave badly at all,’ says Damien Buchet, chief investment officer at Principal Finisterre. ‘By and large, you could describe 2024 as a Goldilocks fundamental environment for emerging countries. ‘Against all odds, they were incredibly resilient from a growth standpoint, having been the first to credibly address the inflation as early as 2021. And commodity prices, which are so important to the stability of many of these countries, have remained broadly stable in the past two years.’ Economic growth ex-China came in at 3.5% for 2024 and Principal Finisterre is pencilling in 3.2% for 2025. Having returned 8-12% from its active, unconstrained approach to EMD in 2024 and 12% in 2023, Buchet can imagine a scenario where double-digit returns in 2025 are possible.

‘We’re convinced the right EMD investment approach for 2025 could deliver close to 10% returns, largely wrapped around a still generous current yield stream of 7-8%, to which we potentially add 2% from active management,’ says Buchet. So, why the reluctance to invest in EMD? Buchet reckons the asset class is ‘often last in, first out for the wrong reasons’ – investors seeing it as an alternative to B-rated US or European high yield, despite half of the EMD universe being investment grade. ‘The reality of risk versus the perception of risk is massively different,’ he says. ‘It’s a true hybrid asset class between investment grade and high yield, and you’re still paid substantially more than the reality of that risk. ‘In local debt, real yields ex-Asia and the expectation that inflation will continue to drop in many emerging countries should make you think again. For hard currency credits, even a slight increase in existing allocations would have a huge impact on the price potential. In a world where global credit spreads are close to all-time lows, there’s still significant value for money to be realised in EMD.’

While 2024 – a peak year for EM elections – is now behind us and proved overall more benign than expected for EMD, 2025 will be dominated mainly by the aftermath of one election: the US one. Principal Finisterre has long looked to factor in the impact of Trumponomics on the rest of the world in terms of trade, growth and geopolitical risks. Its 2025 EMD outlook expects populism to continue to rule in both developed and emerging markets, ‘often bringing erratic decision-making, aggressive rhetoric, disinformation and institutional challenges for democracies, as well as macro-decisions that sometimes run against the economics textbook logic’. This is against a backdrop where politicians may try to spend their way out of any potential growth slowdown, which will require market vigilantes to step in from time to time. But while investors can certainly expect more political economy disruptions this year, Trump’s impact on EMD might be less damaging than people fear. ‘Investors will need a solid political economy toolkit to make sense of all those moving parts,’ says Buchet. ‘But there are probably fewer Trump-related risks than people think because so much of the true value potential of our EMD universe is not in the first line of fire when it comes to a Trump presidency and tariff risks.’ As far as US imports are concerned, China is expected to be the main target for trade tariffs, followed by Southeast Asia and Mexico, but the relevance of China and Southeast Asia as key drivers of EMD returns has reduced significantly in recent years. ‘The bulk of the potential for returns in EM debt is not in Asia,’ says Buchet. ‘It’s in sub-Saharan Africa, Latin America and, to a degree, Eastern Europe and the Middle East. Except for Mexico, countries in these regions are unlikely to be the first targets for tariffs. ‘That stands in sharp contrast to EM equities, which are China- and Asia-centric. Investors don’t always realise how low Asia’s significance has become for the EMD opportunity set.’

The Trumponomics effect

Investment profile

Chief investment officer, Principal Finisterre

Damien Buchet

‘The bulk of the potential for returns in EM debt is not in Asia.’

Where, then, is the team finding the best opportunities? It believes Asian local and external debt markets hold few attractions and instead sees value for money, whether through external or local debt and FX, in several frontier markets – Argentina, Egypt, Ecuador, Nigeria, as well as Turkey – which are being rerated. ‘Although these stories have come a long way from an absolute price and yield standpoint,’ says Buchet. ‘The visibility we have on fundamentals compared with a year ago has improved tremendously. For the true risk you’re taking in these countries, there is still value for money.’ In hard currency credit, whether sovereign or corporates, the investment case is less about value and more about income. Clipping a diversified coupon stream from a basket of corporate situations, or short-dated sovereign credits in USD at attractive yields is one anticipated opportunity. ‘There will also likely be opportunities to go long duration in 2025. The key argument that runs for both dollar credits and local currency government bonds, is that if US 10-year yield comes anywhere close to 5%, it should be bought because we don’t believe in a resurgence of inflation in the US, even adjusted for Trumponomics. In that context we will have a bias to buy duration on any yield spike, especially in those countries that exhibit very high real yields.’ Additionally, some countries such as South Africa, Peru and Brazil offer the opportunity to fully hedge the currency risk and still make US risk-free yields plus 300 basis points ‘as a placeholder until you think the dollar can start to weaken’, says Buchet. On the currency front, the team sees idiosyncratic opportunities in high-yielding EM currencies where the expectation is for little depreciation against the dollar, or the yield more than compensates for the expected depreciation. For example, the Turkish lira yields 40%-plus for an expected 15-20% depreciation. The currency commands 5% of the Finisterre Unconstrained Emerging Markets Fixed Income strategy. The allocation highlights an important point: the approach to EMD taken by Principal Finisterre does not reference any benchmark and rather focuses on expressing the team’s true convictions. ‘Turkish lira is nowhere in any index these days,’ says Buchet, who holds a Citywire A rating alongside co-manager Christopher Watson. ‘Managing EM debt against the benchmark in a semi-passive way is absolutely the wrong approach to extracting value from these markets. This is why our total return approach has been so successful, and why last year we delivered more than 3.5% of net positive outperformance versus a one-third equal-weighted index of the entire universe.’

Value for money

Active EMD income strategy, long-biased investing. Carry-driven in EUR.

Fund facts

Fund size:

Finisterre Emerging Markets Debt Euro Income fund

Finisterre Unconstrained Emerging Markets Fixed Income fund

€104.12m

Base currency:

Euro

Launch date:

2020

SFDR classification:

Article 8

Investment philosophy:

28 Aug

Institutional share class (I Acc): IE00BJK0G937 / PRDEIIE ID Retail share class (A Acc): IE00BJK0G374 / PRDEIAE ID

ISIN / Bloomberg tickers:

Active, unconstrained, adaptive, long-biased, multi-EMD strategy

Fund size:

$2.16bn

Base currency:

USD

Launch date:

02 MAY

2017

Investment philosophy:

Institutional share class (I Acc): IE00BD2ZKP80 / PGFUEIU ID Retail share class (A Acc): IE00BD2ZKR05 / PGFUEMA ID

ISIN / Bloomberg tickers:

SFDR classification:

Article 8

download fund fact sheets

Frank Talbot

A strong track record in EMD

In this section, we review two Principal Finisterre strategies: the Finisterre Unconstrained Emerging Markets Fixed Income fund, the flagship strategy launched in 2017, and the Finisterre Emerging Markets Debt Euro Income fund, which launched in August 2020 and is positioned by Principal Finisterre as the solution for investors searching for Income in Euro. Since the inception of the Principal Finisterre Emerging Markets Debt Euro Income fund, both strategies have maintained a healthy lead above both the Global Emerging Markets Bond - EUR Hedged sector average and the Bloomberg EM Hard Currency Aggregate index. The Emerging Markets Debt Euro Income fund has just edged its stablemate, returning 5.2%, while the Unconstrained Emerging Markets Fixed Income fund has gained 4.9%. The peer group’s average return is a loss of 3.7%, and the benchmark has shed 5.7%.

Performance overview

Head of investment research, Citywire

When discussing the Finisterre Emerging Markets Debt Euro Income fund, one thing immediately obvious from the portfolio’s performance profiles is the manager’s approach to capital preservation. The volatility investors are exposed to is significantly lower than in both the peer group and the index. The annualised standard deviation is 6.4% compared with the peer group average’s 8.4% and the index’s 7.8%, and the maximum drawdown of -18.3% – registered during 2022’s fixed income selloff prompted by rising and sticky inflation – is much less than the peer group average’s -25.5% and the index’s -24.9%. Emerging Markets Debt has been one of the most resilient parts of the fixed income spectrum since the return of rapidly rising prices and, when coupled with the downside protection, the positive gains achieved by the fund are something of a rarity across all debt funds. The Unconstrained fund, meanwhile, enjoyed a great run during its first full year in 2018, restricting losses to 1.6% while the average fund fell 6.2% and the index gave up 3%. This resilience placed it in the top decile worldwide.

Robust returns in a challenging climate

Downside protection enables outperformance

The Finisterre Emerging Markets Debt Euro Income fund is just outside the top decile over the past three years. When looking at calendar year returns, the portfolio held up well in the 2021 and 2022 down markets and was above benchmark and in line with the category average in 2023. In 2024 it performed very strongly, returning 7.4% compared with the index’s 0.4% and the peer group average’s 4.9%. The last two years indicate it can deliver in both good and bad periods for the sector. The Finisterre Unconstrained Emerging Markets Fixed Income fund meanwhile enjoyed a great run during its first full year in 2018 restricting losses to 1.6% while the average fund fell 6.2% and the index gave up 3% - this resilience placed it in the top decile worldwide. Outperformance of the peer group and index during a falling market has been repeated in every year in which the sector has experienced a loss since its launch, most impressively in 2022 when it limited losses to 9.6% compared with a peer group average decline of 16.2% and a 16.6% index loss. Reassuringly this hasn’t been achieved at the expense of upside potential, with the portfolio in the top two quartiles every year since launch. Moreover, it has outperformed the sector and benchmark every year since launch, including in the year to date. This all-weather track record makes it an interesting prospect in an uncertain climate for rates and inflation going forward.

An asset class that is as richly diverse and highly volatile as emerging market debt requires a new, flexible blueprint.

Redrawing the map

We have two strategies. Our Finisterre Unconstrained Emerging Markets Fixed Income fund represents our core EMD total return strategy and aims to deliver the market upside for half the downside. Beyond this, our Finisterre Emerging Markets Debt Euro Income strategy is a complementary income solution for European investors that aims to maximise a current yield of 6%-plus in EUR as a key source of return for a duration that’s slightly higher than a typical EMD short duration fund. [Watch the video for more information on the strategies.] Our team of 13 has significant bandwidth when it comes to tracking the 70 most relevant EM sovereigns and another 100-odd corporate names. Christopher Watson and I have been working together for almost 10 years as the key risk-takers on the team. We are supported by four senior credit analysts, one senior macroeconomist, one quantitative analyst, two traders and a senior risk manager on the desk. The fact we are not linked to any benchmark weight allows us to express strong convictions. The strong performance of our strategies owes largely to the fact we have the luxury to choose our battles and the ability to take drastic decisions in terms of portfolio risks and allocation at key market turning points. We don’t need to have a view on everything at every point in time, but we can quickly mobilise resources to seize opportunities when they arise in any corner of our investment universe.

What’s your elevator pitch for investing in EMD with Principal Finisterre?

We’ve redrawn the EMD map to think differently about our investment universe. Our investment concept doesn’t rely on allocation to the usual EMD sub-asset classes. We dismiss the relevance of sovereign versus corporate versus local debt as a guide to asset allocation. We prefer to articulate portfolio construction around three dimensions: income, momentum and alpha. Firstly, you have assets designed to generate the income stream – high carry, low volatility assets, often shorter duration in nature – which we use to generate our carry anchor. Secondly, you have highly volatile, very liquid and actively traded assets that adjust very quickly to a change in risk sentiment or fundamentals. These are momentum assets to add quick capital gains to the portfolio, and you can find them in US dollar bonds, long-dated local currency bonds and high-beta currencies. Thirdly, you have very idiosyncratic ways of generating value. The outlook for Nigerian Treasury bills, for example, depends only on what’s happening in Nigeria. Finally, you have cash-like EMD assets. At times, there is no better place to be than in cash. Our investment process is all about moving the portfolio from one end to the other across the cycle – from income to cash, back to momentum after a crisis, and then into alpha when we don’t have a view on the outlook but know we can still extract performance from very bespoke situations.

How do you allocate assets within your strategies?

EMD is one of the richest asset classes in terms of diversity. The benefits of diversification go way beyond adding an EMD index to your global allocation. The true benefits are articulated within the index in terms of the dispersion between index components. For example, even if Brazil is 10% of the index but we don’t think it’s the time to be in Brazil, we’ll have zero Brazil or we’ll even be short certain risk factors in Brazil – shorting the currency and buying protection with [credit default swaps]. There are times when we’re inspired by the shape of the curve or relative value between two currencies. Sometimes, rather than saying it’s the right time to buy the Mexican peso, we might say we prefer the Mexican peso to the South African rand and go long one and short the other one. These are ways to generate other sources of value that are not as correlated with the rest of the market. That gives you a sense of how dynamic and flexible we can be.

What other levers do you have to extract all the potential from such a diversified asset class?

‘Cubilia facilisis nostra torquent curae massa.’

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Praesent aptent

We were one of the few managers to make money from trading Argentina in 2019, the year the default occurred. We had up to 6% allocated to Argentina – 3% hard currency and 3% local currency. Going into August 2019, we took all our profits days before the primary election that eventually led to the default. We made good money on that. We didn’t necessarily think it would go wrong, but we measured the asymmetric risk of being wrong in our assessment. That’s often what saves us. Another example is how we managed Russia’s invasion of Ukraine. In December 2021 we had 4% in Ukraine and 4% in Russian local debt. In January 2022, amid noise about the build-up of Russian military at Ukraine’s border, we reduced both positions to 2.5%. As January progressed and we anticipated a limited invasion of Donbas, we eliminated all our Russian local debt and shorted the Russian ruble against the Ukrainian debt. We worked out a ratio of 1.5 to one, giving us almost 4% Russian ruble short versus 2.5% Ukrainian debt, and that worked well. This illustrates our flexibility to not only act on our convictions but also express them in a size that makes a difference in performance.

Can you give me a past example of how you’ve used this flexibility and changed allocations to good effect?

Fund manager Q&A

Our approach to EMD is different from that of many of our peers. There are a few reality checks to make on how returns have been generated in this asset class over the past two decades. A key starting point is to recognise income as an anchor. The income stream from EMD has averaged 6.5% over the past 20 years and has been very stable, even when global yields have been collapsing. On average over the past 20 years, 100% of the annualised returns of EMD indices has simply been about compounded income. Most benchmarked fund managers don’t add much extra value relative to the benchmark, at best 1-2%, and outperformance has tended to be unstable from one year to the next. You’ve still earned your income, but you’ve done so with a lot of volatility. This asset class also comes with recurring macro-crises that need to be actively managed. Our process has the flexibility to take advantage of that, and I mean real flexibility – being able to raise cash or cash-like allocation from 2% to 50% at times and meaningfully alter the portfolio structure around key market turning points. That is what Principal Finisterre is in the business of.

What are the strengths of your process?

Emerging market debt is a highly rewarding asset class for almost every investor given its ability to cater to many different risk profiles. Principal Finisterre – fixed income expertise within Principal Asset Management – offers two compelling funds in this space, which act as a compass for investors in navigating the diverse and often uncharted waters of EMD. In our video interview with Citywire A-rated co-portfolio manager Damien Buchet, we explore the case for allocating to EMD and how the team identifies the richest opportunities across the EMD landscape. Below, we map out the strategies in greater detail, revealing how Principal Finisterre has used its adaptability and skill to unlock value and deliver impressive results.