Asset Class Should Not Be Overlooked by U.S. Institutional Investors

BOSTON, May 5, 2009 — Emerging market debt has outperformed by a wide margin U.S. high-yield bonds, emerging market and U.S. equities, and most other risky asset classes on a one, three, five, and 10-year basis. Yet, as a result of a bias toward investing at home as well as an equity-oriented culture, many institutional investors from the United States still tend to overlook this asset class, said Alexander Kozhemiakin, director of emerging market strategies for Standish Mellon Asset Management Company LLC, the fixed income specialist for BNY Mellon Asset Management.

For example, over the three-year period preceding the end of the first quarter of 2009, emerging market debt denominated in U.S. dollars, as measured by the JPMorgan EMBI Global, returned six percent, while emerging market local currency denominated bonds, represented by the JPMorgan GBI-EM Global Diversified, generated a 16 percent return. During the same period, U.S. high-yield corporate bonds, as measured by the JPMorgan U.S. High Yield Bond Index, lost 14 percent; emerging market equities, as measured by MSCI EM, dropped 28 percent; and the Standard & Poor's 500 representing U.S. equities plunged 38 percent*.

The reasons for the resilience of emerging market debt include improved credit quality of most sovereign issuers, a generally favorable balance between supply and demand for sovereign debt and more rapid growth of emerging market economies compared with the developed world; and these factors are likely to continue supporting the asset class going forward, Kozhemiakin said.

"Over the past decade we have seen tangible macro-economic improvements in many emerging market countries. These improvements are manifesting themselves in lower sovereign debt ratios, higher foreign exchange reserves, and more competent fiscal and monetary policies," Kozhemiakin said. "It is therefore not surprising that emerging market sovereign bonds and currencies have outperformed emerging market equities, which are also directly exposed to the company risk. In contrast to the well-documented macro-economic improvements, evidence of general progress on company-level issues in the emerging markets, such as adequate and timely disclosures, managerial motivation and investor protection, is far less conclusive. However, all emerging market asset classes are likely to do well once global economic activity starts picking up again."

According to Kozhemiakin, emerging market debt continues to look attractive and has the potential to produce equity-like returns with less risk. In addition, it is an asset class that is replete with market inefficiencies, thus presenting alpha opportunities to skilled managers. "The importance of emerging market debt in a well-diversified portfolio should not be overlooked," he stressed. "Beware of the benchmark drift, however, as emerging market debt has become a very heterogeneous asset class. In particular, investors as well as emerging market debt portfolio managers should explicitly identify their strategies by separating dollar-denominated debt from debt denominated in local currency, and sovereign bonds from corporate credits."

Standish Mellon Asset Management Company LLC, with $45 billion of discretionary assets under management, provides investment management services across a broad spectrum of fixed income asset classes. These include corporate credit (investment-grade and high-yield), emerging markets debt (dollar-denominated and local currency), core / core plus and opportunistic (U.S. and global) strategies. Standish also provides advisory services on $21 billion of assets in respect of its global workout solutions business. The firm also includes assets managed by Standish personnel acting as dual officers of The Dreyfus Corporation and The Bank of New York Mellon, each a subsidiary of The Bank of New York Mellon Corporation. Headquartered in Boston, Standish is one of 17 investment boutiques that comprise the BNY Mellon Asset Management business.

BNY Mellon Asset Management is the umbrella organization for The Bank of New York Mellon Corporation's affiliated investment management firms and global distribution companies.

The Bank of New York Mellon Corporation is a global financial services company focused on helping clients manage and service their financial assets, operating in 34 countries and serving more than 100 markets. The company is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. It has $19.5 trillion in assets under custody and administration, $881 billion in assets under management, services more than $11 trillion in outstanding debt and processes global payments averaging $1.8 trillion per day. Additional information is available at www.bnymellon.com.

*These indexes are trademarks of JPMorgan, Morgan Stanley and Standard & Poor's. The foregoing indexes/ licensors do not sponsor, endorse, sell or promote the investment strategies or products mentioned in this article and they make no representation regarding the advisability of investing in the products or strategies described herein.

All information source BNY Mellon Asset Management as at 31 March 2009. The views represented in this document are those of Standish Mellon Asset Management and do not necessarily represent the views of the BNY Mellon Asset Management umbrella organization. This press release is qualified for issuance in the US and is for information purposes only. It does not constitute an offer or solicitation of securities or investment services or an endorsement thereof in any jurisdiction or in any circumstance in which such offer or solicitation is unlawful or not authorized. This press release is issued by BNY Mellon Asset Management to members of the financial press and media and the information contained herein should not be construed as investment advice. Past performance is not a guide to future performance.
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