Emerging Market Debt: Focus on Outcomes, Not Benchmarks

GMO's Targeting Outcomes: Taking a Total Return Approach to Emerging Market Debt argues that investors should think beyond traditional benchmark-based emerging market debt strategies and instead target explicit return objectives with greater flexibility over duration, currencies and credit quality.

• Rather than replicating benchmark characteristics, GMO proposes a benchmark-agnostic strategy targeting SOFR +3%, allowing portfolio construction to focus on valuation and expected returns instead of index weights.

• The firm sees today's opportunity set as particularly attractive because many emerging-market currencies remain undervalued while local interest rates are unusually high, creating compelling return potential before any currency appreciation is realized.

• Unlike traditional EMD funds, the strategy actively combines hard-currency debt, local bonds, FX overlays and interest-rate strategies, while using hedges and credit protection to manage downside risk during periods of market stress.

Read the full report for a detailed discussion of GMO's outlook for emerging-market debt and why it believes flexible, outcome-oriented investing is better suited to today's market.