Luis Olguin: Corporates are becoming an ever more important part of emerging market hard currency debt investments.
On-screen: What are the advantages of a corporate allocation to emerging markets debt portfolios?
Luis Olguin: There are several advantages to the corporate credit allocation in the current market environment.
First, corporates are predominantly of lower duration and sovereignty. A key performance driver in times of higher and more volatile interest rates.
Second, over 80% of corporate bonds we analyze currently, trade out a positive spread to their respective sovereign. For a manager that is able to appropriately navigate these credit risks, this additional yield can be added to performance.
Third, the diversity of corporates also provides for an assortment of investment drivers, above and beyond a sovereign credit quality. While sovereign risk is a driver of corporate bond returns, corporate credit drivers can at many times dominate. Particularly when the sovereign credit landscape is stable or improving.
On-screen: How do you navigate corporate risks, which are different from sovereign risks?
Luis Olguin: We assess corporate fundamental risk through our corporate risk model and ESG scorecard. Our corporate risk model views credit risk through a multi-angle approach. We look at an issuer's financial risk through a financial model with a focus on credit trajectory and potential downsides. An issuer's business risk is analyzed by studying its industry competitive environment, and the issuer's market position within it. We assess a company's management strategy by scoring its policies, track record, and growth plans.
One of the most important risks in corporate credit analysis, is the debt structure risk. This looks at an issuer's maturity profile, and its debt composition - which is crucial to assess a likelihood of default.
Last but not least we assess the issuer's degree of sovereign related risks by examining the country's macro, political, and regulatory environment. As well as the probability of a sovereign rating change, given their effect on corporate issue ratings. Our ESG scorecard is our tool to analyze and issue our ESG risks. We have built this scorecard based on sassy materiality factors, our assessment of what is material, and a double materiality framework based on sustainability and business impacts. Our analysis is done through informational engagement with issuers and complemented with third party sources, leading to an overall score for the ESG pillars, an incident management assessment, and an outlook for the issuer.
On-screen: What is your approach to adding corporate issuers to emerging markets debt portfolios?
Luis Olguin: At William Blair we use a systematic, repeatable framework for our corporate credit allocation. Our process begins by taking the sovereign and corporate universes and applying ESG-related exclusions for global norm violators and controversial sectors, as defined by William Blair's internal policies. We then duration match corporates and sovereigns by country, and by applying our proprietary beta bucketing approach. Using external ratings as a guide, we limit the max credit rating differential as a way to limit excess credit risk. We then run a valuation screen, focusing on the historical spread relationship between the corporate and the sovereign. This is important as we aim to enter a trade when historically more attractive.
Our fundamental analysis now takes a key role. Using our corporate risk model and ESG analysis, our analyst team provides their fundamental assessment of the issuer. This assessment and evaluation screen are then reviewed on a monthly basis by portfolio managers for potential investment. Complementing this process is our ongoing monitoring, as well as our formal bi-weekly performance assessment, which is performed by the whole EMD team in an open discussion.