JPMorgan Asset Management is asking investors to approve an overhaul of its emerging-market sovereign bond ETF, giving managers discretion over bond selection and access to a broader range of investments.
A shareholder vote on the JPM USD Emerging Markets Sovereign Bond UCITS ETF is scheduled for 1 October. If approved, the changes would take effect on 2 December, when it would become JPM USD Emerging Markets Bond Active UCITS ETF.
The fund would stop tracking the J.P. Morgan Emerging Markets Risk-Aware Bond index and instead seek to outperform the J.P. Morgan EMBI Global Diversified index.
Dollar-denominated emerging-market government debt would remain its principal exposure, although the proposed mandate also permits corporate and distressed debt, alongside limited allocations to non-dollar assets and developed-market government bonds.
The board argues that greater flexibility would help managers respond to weakening borrowers and exploit mispriced securities.
The annual total expense ratio would fall from 0.39% to 0.38%. The fund would bear transition costs, including portfolio rebalancing, which the board expects to be immaterial.
Our view
David Batchelor, senior analyst at QuotedData, said: “The important question for existing holders is whether they want the investment judgement they originally delegated to an index to become the responsibility of a fund manager. Both approaches involve choices about which risks to accept, but the basis for assessing success changes.
There is a credible case for discretion in emerging-market debt, where a borrower’s ability and willingness to repay deserve close scrutiny. Avoiding a deteriorating credit before an index removes it could be valuable. Equally, managers can misjudge both the borrower and the price.
One drawback of bond indices weighted by the amount of debt outstanding is that the biggest borrowers can command the largest allocations. That provides a clear argument for active management: managers can judge whether the yield adequately compensates investors for the risk of lending, rather than letting the size of an issuer’s debt determine its weight. That flexibility could be valuable, although its success will depend on the quality of the managers’ decisions.
Investors should therefore assess the proposed strategy on its own merits. A marginal fee saving is welcome, but it is a small consideration beside the change in how the money would be managed”.
