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The emerging world is a large and growing part of the global economy that presents an excellent opportunity to asset owners. However, with less than 50% of the universe[1] achieving positive returns above benchmark even before fees are taken, the majority of investors have historically been disappointed by active investment approaches in emerging market debt. Willis Towers Watson argues that this is due to the challenges of any single manager seeking to cover this broad asset class.

Most investors have previously treated EMD as a single asset class; however, Willis Towers Watson argues that it is at least three distinct asset classes:

• Local currency sovereign debt
• Hard currency sovereign debt
• Hard currency corporate debt

These different asset classes all require particular skill sets along with the ability to manage the distinct characteristics of different regions - Latin America, Emerging Europe, Asia, Africa, Frontier Markets and the Middle East. This challenges the traditional implementation favoured by many of appointing a single manager based in London or New York.

Willis Towers Watson argues that investors buying simple, benchmark focused EMD managers often fail to justify the investment management fees charged and often struggle to access the most interesting corners of the opportunity set. As a solution, Willis Towers Watson proposes the specialist implementation approach. Building a portfolio by selecting the best manager in each asset class and region, with specific knowledge and skills has seen clear improvements in downside protection, a notably higher Sharpe ratio and stronger overall returns.

Chris Redmond, Global Head of Manager Research, Willis Towers Watson said: "The emerging world is a large and growing part of the global economy, just take China's increasing importance, through global trade and economic growth in the last few years. EMD is consequently an ever more important asset class with even larger allocations from asset owners and continuing attractive return potential and diversification benefits.

EMD is not a single opportunity so it cannot be captured by a single, broad mandate. We believe investors need to consider a shift in focus is needed towards specialist implementation, building a portfolio comprised of a 'master' in each area of the market."

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