Emerging markets fixed income has only had negative returns for three years in its 20-year history, Luz Padilla, senior portfolio manager, emerging markets fixed income at DoubleLine, tells Managing Editor Lorie Konish. Here, Padilla discusses how the asset class has changed and which countries are poised to succeed in the coming year.

1. How has the role of emerging markets fixed income changed?
After 2008 we started to see greater participation by new investors. In 2009 it was more directed toward local currency investment. In the last couple of years, the flows have really been more directed into dollar-denominated emerging market debt. Part of it has a great deal to do with the way emerging market debt proved itself to be so resilient to the global banking sector crisis. The performance of the asset class in 2009, 2010 and 2011, certainly has had positive and, in [some] cases, strongly positive returns. That gave investors that had not previously participated in this asset class the vote of confidence to be able to put money to work.


2. What place do you see emerging markets fixed income having in a portfolio?
In a well-diversified fixed income portfolio, it certainly deserves an allocation. In terms of a starting allocation, I think something in the 10% to 15% range. If there's extreme value in the asset class, which quite frankly I don't see today, that maximum allocation should be bumped up to the 30% to 40% range.


3. What opportunities do you see in 2013?
For the last several years, we've been very excited about the corporate space and EM in dollars. We've seen a lot of these large economies within the emerging markets asset class take their place in a more global setting. Countries like Brazil, Mexico, Russia are now at the higher end of the credit spectrum. Now we're starting to see their corporates come to market. Where we see growth, in terms of dollar-denominated product, it's been from emerging market corporates, the bulk of which are still at the higher end of the credit spectrum. And these corporates are tied to the global growth story.


4. What kind of global growth are you expecting this year?
That's been ratcheted down to the 3% range. A lot of it has to do with what's happening in the U.S. and Europe. The bulk of the growth still is going to come from emerging market countries. We're looking at countries like Mexico. We think that there can be some reforms made that can open up that country and really put it on a different trajectory. Other countries such as Peru and Colombia are doing very well. Brazil seems to be on a slowing down trajectory. But longer term, we think that Brazil certainly has claimed its space in the global economy and I doubt it's going to let it go. They have good prospects, especially because of their enormous oil finds. Russia continues to do okay, and we expect that it will maintain next year.


5. What misconceptions persist about emerging markets?
This asset class has been traditionally weighed down by the headline risk of the market. When you think about emerging countries, you're talking about a country like Singapore, that's triple A, or Qatar, Malaysia or South Korea, which are in the single A space, or Brazil, Russia, Mexico, Peru, Colombia, all in the triple B area. Those countries probably represent the bulk of the income generation or GDP portion of what people would think about as EM. And you're lumping them in with countries like Argentina and Venezuela and Ivory Coast that are less advanced. Whenever you hear of a negative headline about some of these countries, you tend to lump them all together and [you shouldn't].