Meet the Street: The Outlook for Emerging Market Debt

As this eventful year draws near its conclusion, Meet the Street takes stock of how some funds focused outside the U.S. have performed. Today we check in with Jan Faller and Jack Janasiewicz, lead portfolio manager and co-portfolio manager, respectively, of (SCEMX Quote)Scudder's Emerging Markets Income S fund. Year to date, this volatile fund is up 8.8%, while its benchmark, the J.P. Morgan Global Emerging Markets Bond Index Plus, is down 1.4%.

Jan Faller, Lead Manager, Scudder Emerging Markets Income Fund

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Faller and Janasiewicz describe the challenges in this year's bond market, including the troubles in Argentina. Overall, though, they see much opportunity in Latin America as well as in Russia, the latter of which has come a long way since the crisis of 1998 and has emerged as one of the strongest performers in the global market this year. Find out what's powered the two managers' strong performance this year, and what they're expecting in the future.

TSC: First of all, could you briefly describe your investment philosophy and criteria, given that you focus on the debt side of emerging markets?

Faller: We try to look at investing for our fund within the risk-return framework. We wouldn't look at either factor in a vacuum. So the key question is with what kind of returns are we compensated for the levels of risks we take? We spend a lot of time thinking about anticipated returns and historical levels of volatility, as well as forecasting volatility going forward.

This has been an extremely unusual year. Generally, the most dominant driver for emerging markets' debt is market direction. At times, it doesn't matter which country you own -- country correlations are very high. But in the spirit of things, and as long as you get the direction of the market right, you will do well. You will either be overweight or underweight the market, and that is the dominant driver of your return.

We also consider factors such as global liquidity and commodity prices, risk appetite and actions taken by central banks. Consideration of these factors will lead us to an opinion about the direction of the market in general. The last six months have been quite unusual, because this hasn't really been true. That is due to Argentina being effectively decoupled from the rest of the index.

The next layer in this process of understanding the return side of the equation is country selection. This is generally a second-order question, after the market direction. But in the last six months, it has become a first-order question with regard to Argentina. We start looking at specific situations within each country. After this, we move to the third driver of performance, which is securities selection. This includes yield-curve management question, type of issuance, etc.

TSC: Could you talk us through your performance year to date? Has it adhered to your expectations? ...