Pictet launches first fund on Latin America Local Currency Debt

Emerging USD debt spreads have tightened dramatically over the last few years, in turn providing high returns. Nonetheless, this is not expected to continue and nowadays investors are looking for returns elsewhere. The fast developing local currency debt markets have been able to offer these high returns and have the potential to continue to do so.

In 2006, Pictet Funds already launched two compartments investing in local currency debt, PF(LUX)-Emerging Local Currency Debt investing in worldwide emerging markets and PF(LUX)-Asian Local Currency Debt focusing on the Asian region. Since their inception in June 2006, assets under management in local currency debt went from USD 50mio to more than USD 1.6bn.

To increase its fund range and to give its clients the possibility to customize their geographical allocation, Pictet Funds now launches the first fund focusing on Latin American countries, Pictet Funds(LUX)-Latin American Local Currency Debt.

Local debt in this region has grown significantly as governments bought back foreign-currency denominated bonds and started issuing bonds in their own currency. The market value of local debt has increased from USD 50bn in the early 2000's to reach more than USD 250bn nowadays.

The demand/supply dynamic for local debt nonetheless remains favourable as demand for these local bonds is high and still rising. "Latin American pension funds are the natural holders of these bonds and their assets are growing rapidly", explains Simon Lue-Fong, manager of the fund and head of Pictet Asset Management's Emerging Debt team, "moreover, other investors want in on the game. For example, foreign pension funds, mutual funds, hedge funds, petro-dollars, and central banks are all attracted to the region's local bonds for additional returns and high coupons."

Despite a strong improvement in fundamentals and increasing investment flows into Latin American countries, on various measures, the region's currencies continue to be undervalued. The artificial intervention in the foreign exchange markets by some local governments, indicates that there is still significant room for the currencies to appreciate, which will be further driven by the still improving economic fundamentals.

Furthermore, correlation between Latin American debt and other asset classes is very low, providing good diversification and attractive risk and return characteristics.