In the current context, what specific opportunities do you see in emerging debt?
We, at DPAM, see an opportunity within emerging fixed income, taking into account that it represents 27% of global debt issues and is not sufficiently represented in benchmarks. This asset, somewhat more forgotten and undervalued, offers diversification potential within portfolios, with very attractive yields above 8% and with relatively controlled durations, around 5.7–6 years.
Within the portfolios, a bottom-up selection of countries is made, that is, investments are made in those that offer a greater risk-return ratio, with attractive yields and fairly low volatility.
Within the investment universe, which regions or countries stand out for their long-term potential?
At DPAM we highlight a very diversified investment: we do not focus solely on one region, but rather we prefer to diversify, Latin America, Asia, Africa and Eastern Europe. Therefore, we have a portfolio that includes more than 37 countries with different weightings, depending on the potential we see in them.
Currently, the top five countries—among which Mexico, Brazil and Poland stand out—represent more than 37% of the portfolio; There we find those with more attractive rates, such as Brazil, which is around 13%, and Mexico, which is around 8%.
Furthermore, these countries do not represent as much volatility within the portfolio, because we like to actively manage risk and, being a very diversified strategy, we manage to reduce the total volatility of investment in emerging countries, which is usually a great unknown for many investors.
When thinking about emerging countries, it is normally associated with very high volatility, while the sovereign debt of emerging countries, in highly diversified portfolios and in local currency, presents a volatility of around 5% at most.
What opportunities and risks do you consider in these markets?
When investing in emerging countries, we apply a very holistic approach: we do not consider a country solely because it is emerging. At DPAM we establish an initial exclusion criterion based on sustainability, governance, in this case.
We exclude countries that are neither free nor democratic, following the criteria of the NGO, Freedom House, and The Economist Democracy Index. We thus remove countries with greater volatility—such as China or Venezuela—in which, furthermore, we cannot ensure that the money invested really contributes to the development of the population.
Afterwards, we perform a ranking of the countries with 60 KPIs or macroeconomic indicators that cover the social, environmental and economic environment. The countries in the first quartile, which tend to have the best indicators and, therefore, lower volatility, represent 40% of the portfolio.
Therefore, we integrate sustainability or governance and economic risks. In addition, the managers constantly travel to the countries in which we invest or in which we are considering investing, in order to complement the research of external banks and obtain a greater understanding and market feeling that traveling can give them, to learn closely about both the macroeconomic and geopolitical situation. In this way we reinforce real knowledge and an updated approach to what is happening in each country.
At DPAM, you have a well-known strategy in the Spanish market, the DPAM L Bonds Emerging Markets Sustainable. How has its performance been so far this year?
In 2025, the DPAM L Bonds Emerging Markets Sustainable fund had a more timid initial performance, not because of the performance of the bonds – the implied yield of the fund was around 8%, 8.05% at the end of October – but because of the behavior of currencies, which are also a source of alpha for the portfolio.
At the beginning of the year there was a strong rise in the euro against the dollar and, consequently, emerging currencies lagged further behind the euro (although not with respect to the dollar). In the second half of the year, since the summer, we have seen how the euro-dollar has normalized, already providing profitability to the fund.
Within the three sources of alpha – the carry with an 8% pull (even higher at the beginning of the year), the duration located in the middle part of the curve, which is where we obtain a greater return-risk binomial, and currency management – the undervaluation of emerging currencies against the euro and the dollar allows us to generate alpha and provide a differential touch within fixed income. Today this offers us extra profitability in portfolios, taking into account that the differential with respect to a Global Aggregate is above 500 basis points.
Another differential aspect of our strategy is that, by investing in emerging market sovereign debt in local currency, we achieve a differential of between 270 and 280 basis points with respect to hard currency (dollars or euros). It is, therefore, that great forgotten within the portfolios, with a greater potential for revaluation. Although in recent months we have seen greater flows, it is still largely forgotten within the asset allocation of large portfolios.
DPAM has a very defined focus on sustainable investing. In a universe as diverse and complex as emerging markets, how do you identify and select the best investment opportunities?
As we mentioned, the first approach is to exclude countries that are neither free nor democratic, which significantly reduces volatility. Then, we classify them according to 60 KPIs, and we establish that the first quartile must represent at least 40% of the portfolio, while the last quartile a maximum of 10%.
Normally, the last quartile includes more border countries, while the first is made up of more stable countries. The fact that a country is in the first quartile does not imply that we are obliged to invest in it, which is very important: the managers carry out an in-depth analysis of the macroeconomic situation, travel to the country and determine if it is really a good investment opportunity.
It is common for them to meet with government entities, local authorities, former presidents or even possible future candidates, to obtain a broad and direct vision of the country’s situation and a market feeling.
As an anecdote, the trip of Michael Banderest, one of the fund’s managers, to El Salvador stands out when Bukele took office and put his new security measures into practice. There he was able to personally verify that walking through the country’s central square was safe. Several managers attended a road show and experienced it first-hand, something that cannot be obtained by reading news or reports and they experience it in their daily lives while traveling.
What should investors looking to enter this asset class now consider?
At DPAM we consider that it is an excellent time to enter fixed income in local currency, since it is an undervalued asset, both in currencies and in weighting. It has great potential for revaluation, whether due to the appreciation of currencies against the euro or the dollar, due to the policies of central banks or due to its real yields, which are much higher than those of developed countries.
The central banks of emerging countries have managed to control inflation before, while in developed countries only this year have we seen timid rate cuts, even with inflation levels higher than those of emerging countries.
Furthermore, the attractiveness of diversification is key: a large part of the fixed income portfolios are concentrated in governments of developed countries – especially the United States, due to its status as a safe haven asset – and in Investment Grade corporate credit.
On the other hand, emerging sovereign fixed income in local currency, with low volatility, investment grade and high credit quality, offers a diversifying element with very attractive yields, spreads that act as a cushion against rate movements and reduced portfolio volatility.
It is, therefore, a very good time to enter, considering a potential for revaluation in one or two years, not only because of the monthly carry – which contributes between 60 and 70 basis points – but also because of the expected appreciation of currencies, the behavior of the euro-dollar is stabilizing, but there is still some way to go and on the part of local currencies, the macroeconomic and monetary policies that emerging countries are implementing are going to rebound.