Featuring:
Chris Kilpatrick
Portfolio Manager
Western Asset Management
Emerging market debt remains an important area for investors seeking consistent income and diversification. Western Asset Management's Chris Kilpatrick, Portfolio Manager for the Western Asset Emerging Market Debt Fund (EMD), shares views on potential opportunities for investors, current market tailwinds and headwinds, and how emerging market debt can complement U.S.-centric portfolios.
A Franklin Templeton company, Western Asset Management is a leading global fixed-income manager with deep expertise across emerging markets. Learn more about the Western Asset Emerging Market Debt Fund (EMD) here.
Transcript
CEFA:
Welcome to CEF Insights, your source for closed-end fund and interval fund information and education, brought to you by the Closed-End Fund Association.
Today we are joined by Chris Kilpatrick, Portfolio Manager with Western Asset Management. Western Asset Management is the investment advisor for the Western Asset Emerging Market Debt Fund, symbol EMD.
We're happy to have you with us today, Chris.
Chris Kilpatrick:
Great. Thanks for having me.
CEFA:
Chris, I mentioned the Western Asset Emerging Market Debt Fund, an actively managed strategy that invests in a broad range of countries and types of fixed income securities. Can you discuss the investment strategy as well as the key objectives of the fund?
Chris Kilpatrick:
Absolutely. So EMD is a levered emerging market bond fund. We look for EM opportunities globally. Here at Western for the EM platform, we primarily focus on what I'd call US dollar hard currency opportunities. We do have the ability as well as the analysts to look at local currency and currency trades. But the real focus of the fund is on hard currency opportunities.
We currently have a large team, call it 30-plus people, on the EM team here at Western and we're located in four different offices. So, London, Los Angeles, Singapore and Brazil are the primary emerging market offices. We all work together and there's a lot of good back and forth on a regular basis.
The primary objective of the fund is really a high level of income. But almost more important than that is a consistent level of income. So, we try to keep the distribution as consistent as possible, and then we do have a secondary objective and that's certainly posting positive total returns or capital appreciation.
CEFA:
Chris, we mentioned that this strategy invests in a broad range of securities. How do you evaluate each country as you develop your portfolio?
Chris Kilpatrick:
It's a fair question. We start by looking at the sovereign risk. We do a full analysis there with our team. We look at things like, is the country running a fiscal deficit? Are they running a surplus? How large is it? Is it growing? Is it something they could deal with if they have the political, or the will to reduce it? Probably the next thing we think about would be inflation as well as growth trends. And almost more importantly than just looking at inflation and growth, it's what's our outlook? Where are these going? And so that's something we put a lot of thought in from a sovereign perspective.
We also focus on, let's see, the political environment, how stable is it? Do we like the current administration? Is there potential for it to change? Can it get worse? Can it get better and when? We think about imports and exports, what is the country good at exporting and what do they need to buy? What do they import? Are they running a trade surplus or a deficit? We look at whether they are in an IMF program, and where are they in that program? Are they on track to meet their obligations?
So, I'd call that really kind of the most important things for evaluating a sovereign and then we layer on top of all that relative value. So how does one sovereign look relative to another in terms of what we're getting paid as bondholders or shareholders, if you will.
CEFA:
Do frontier markets present additional risks and opportunities? And what type of exposure do you typically consider for those markets?
Chris Kilpatrick:
They do. We like frontier markets. We came into the year overweight frontier. It's been really a positive trade. It's been a driver of our performance for a lot of EM funds and ourselves included. One thing about Frontier is it comes with a lot of carry. A lot of those countries are in fiscal deficits and are on IMF programs. And so having that deep and experienced team with evaluating those type of risks I think is important.
Typically, though, for exposures to frontier markets, we try to keep them a little smaller and a little more diversified. So, think 50 basis points to maybe a 2% overweight would be a typical frontier position. We do have some I'll call higher-conviction, more idiosyncratic overweights. Argentina is a good example. We had a 5% overweight to Argentina in EMD coming into the year. That's been a very strong trade for us. We're all in US dollar bonds there, both sovereigns, but then also in corporates. A lot of the corporates in Argentina that we've been overweight are really low-levered corporates where if they were in a different country they'd actually be trading even tighter or a little bit underappreciated just because where they are located.
But Argentina's done really a nice job, President Milei, of doing what's one of the hardest things to do in emerging markets, which is to cut spending and maintain your popularity. And so, he's done a good job of bringing down inflation and growth has been increasing, and he has actually flipped Argentina to a trade surplus. So that's probably an example of a larger overweight to a frontier country, but not necessarily typical.
CEFA:
What is your process to evaluate the investment universe for considerations like hard currency versus local currency, and sovereign debt versus corporate as potential investments?
Chris Kilpatrick:
As I mentioned, we've been favoring hard currency. I'd say call it 93% of the portfolio is roughly in dollar debt right now. And really the way we see that is it brings down the volatility in a levered portfolio, which is really important. A lot of the other emerging market levered strategies that I see out there tend to have really heavy non-US currency components or non-local currency components. And I just think it leaves them open to big swings in currencies or markets. If there's a big down trade in markets when you're levered, you don't want to be a forced seller when everybody else is. So, we tend to focus on, again, dollar debt. It tends to have both positive performance and a lower volatility.
In terms of sovereigns versus corporates, generally if we're comfortable with the sovereign, we'll start looking at the corporates. Again, we have that big and deep experienced team, so we have a lot of folks that have sector experience. But ultimately once you get into the corporate side, we're applying that next level of relative value where you're now looking at how does a corporate yield relative to the sovereign? How does a corporate in Chile, for example, look relative to a corporate in Hungary? And so, you start comparing corporates across the globe, basically.
CEFA:
How do you then make specific security selections and allocate those positions as you build your portfolio?
Chris Kilpatrick:
Yeah, sure. On the sovereign front, I already walked you through our process there, but maybe I'll dig more into the corporate side, and I think just that's interesting. What we're really trying to do is find out what drives fundamental performance for a lot of these issuers. And almost more importantly, how can it change the fundamental trajectory of a company? And so, we like to talk to the management team, we think that's really important. And maybe that's something I think we do a little different is put a little more emphasis on a management team. We want to know are they investing in the business? Are they trying to take dollars out and pay themselves the distribution? Are they leveraging up? Are they deleveraging the balance sheet? Are they looking at M&A?
And almost more importantly, because I feel like a lot of companies spend a lot of time looking at M&A, is it something that makes sense for them? Is it a business line that they understand? But what we've seen in emerging markets and in corporate credit here in the US is management teams will get into M&A that they don't really understand, or they felt like they understood it, and they didn't. And so those are things that they can get us to change our positioning, or stuff that we may be focused on more than some of our competitors out there.
We also look at the balance sheet, it's super important to look at leverage. Is the company generating cash flow? Are they paying down debt? And then lastly, I've mentioned this a couple of times, but I think it's really important, is valuations. Are we getting paid for the risk of the sector, of the country? And you have to compare those across other opportunities.
CEFA:
What factors or events would lead you to significantly change your portfolio allocation?
Chris Kilpatrick:
I'd say the biggest one would be changes in valuations. As you know, bond prices change, and yields go up and down. So as of right now, we're probably getting paid a little bit less than we were at the beginning of the year or maybe pretty significantly less than we were post Liberation Day when the initial tariffs were announced and obviously spreads blew out. But we still see a lot of opportunities, and we still see plenty of bonds that can go tighter.
But it's probably worth mentioning that spreads have tightened in a bit here. One of the trades we've done recently is we've reduced our frontier exposure. We're still overweight and probably significantly overweight, but we did take that down again as yields have come in and that's been one of the stronger trades this year. And we did add some front-end global corporate bonds in dollars around the world.
These are companies that are performing well. We are looking out about five years for opportunities. We didn't want to go too far out on the curve in dollars. And the reason we didn't want to go too far down the curve is in case you could see the curves steepen here in the US. If you get slower growth and rate cuts, you see the front end of the curve rally. And so, we thought it made sense to kind of try to capture some of those potential rate cuts by staying in the front end. And it also cushions you a little bit if there's any tariff impact in terms of negative fundamental performance from tariffs or inflation impact from tariffs going forward. So, we thought that was a good opportunity and we've been doing that over the last few months. And actually, it's been a good trade so far with a lot of those bonds that outperformed here recently.
CEFA:
Chris, the US is working to reset trade policy, while regional conflicts have also introduced some volatility to markets. However, there are strong global demands for energy and various commodities. Where do you see the emerging fixed income markets currently? And what is your outlook for the rest of 2025?
Chris Kilpatrick:
I'd say the general view for emerging markets for the rest of 2025 is we see some really big and positive tailwinds, and some real material headwinds that we're watching out for and trying to navigate, if you will. Certainly, the headwinds are obvious, you hear about them every day. There's a lot of uncertainty in the market. There's a lot of geopolitical strife, things like Ukraine and Russia, and obviously what's going on with Gaza and Israel, and there's a lot of conflict. You also have the tariff uncertainty. Is inflation going to creep back into the system?
But then on the other side of that, you have really powerful tailwinds such as positive fundamental performance. So, companies on the EM front are doing really well. We're seeing earnings growth and top line growth. You're also seeing balance sheets in pretty good shape with leverage ratios pretty low and interest coverage ratios pretty high. So again, really high, strong tailwinds and strong headwinds. But I think it's important to have a deep and experienced team to find the opportunities and, almost more importantly, avoid the pitfalls.
CEFA:
What are the most significant risks you consider in the current environment?
Chris Kilpatrick:
I'd say valuations would probably be. We're not overly concerned, but we're certainly watching it. Just you're getting paid less today than you were coming into the year. And then the second factor would definitely have to be tariffs. There's just a lot of uncertainty not just on where they're going to land. Obviously, we struck a lot of transactions here recently out of Asia, and obviously the European tariff deal looks like that's going to settle in on a blended rate in the low teens, if you will, for the tariff rate. But there's just a lot of uncertainty there and so that's certainly a risk. But almost more important than that is what's going to be the impact on global growth. I don't think people know, but it's something we're certainly monitoring.
CEFA:
How is the EMD portfolio currently positioned? And how has this changed so far in 2025?
Chris Kilpatrick:
Sure. The portfolio is having a really strong year. I want to say the shares are up 15% on the year, and the NAV is up north of 10%, so it's been a positive year for the portfolio. We did take up leverage earlier in the year, which was beneficial. We're currently running 26%, 27% leverage in the EMD portfolio. I'd call that the more middle of the range. Most levered emerging market portfolios run that mid-20% or low-20%-type range. But again, we tend to run primarily in hard currency opportunities, which is much more stable, much less volatile and sort of supports that idea of letting the leverage do the work for you.
We've been overweight LATAM, it's been a good trade. We've been overweight places like Mexico. We think ultimately cooler heads prevail between President Scheinbaum and President Trump. There's a lot of great opportunities there, so that's been a big overweight for us, and we think ultimately, we're doing a lot of business with them once we work out things like immigration, narcotics, and then obviously tariffs. Argentina, and I've already talked a lot about that, but that has been a big overweight for us. But those are probably two of the larger LATAM overweights.
One trade we've added this year is we've increased or moved to an overweight of Eastern Europe. We added countries like Romania and Hungary and Poland, both corporate bonds as well as sovereigns. Think banks, we added some energy again, and as well as sovereigns primarily on the dollar side. Those positions have been beneficial. The idea there being that they are going to benefit from any type of de-escalation from Russia-Ukraine. These are countries that have been impacted just by their proximity to the fighting with higher energy and higher food prices.
Also, we think they will benefit from just a real shift from developed Europe, so the European Union having to defend itself. There's a lot of talk on spending, on increasing spending on things like defense. And so, these are countries that export a lot of the components to those developed market countries, so we really want to take advantage of that trend, so that's been a good overweight to Eastern Europe that we've recently added.
We've been underweight Asia. That's been a bad trade. Asia's actually done better than we had anticipated this year. We were thinking that all the noise with President Xi in China would be a negative for spreads, but spreads have actually done okay. One of our underweights in Asia that has been beneficial, we are currently underweight Indonesia in the EMD portfolio and that's been positive. There's been some political uncertainty there and a little bit of protests that have moved bonds a little bit wider. They've been pretty measured but have certainly moved wider here recently.
And then lastly, I'll mention frontier markets. We've been overweight but we have reduced that. We're probably about 13% overweight right now. Again, we've taken that down as those yields have come in and the compensation for taking that frontier risk has come down a little bit.
CEFA:
Where are you seeing the best opportunities to put new capital to work?
Chris Kilpatrick:
I'd say more on the front end. Dollar bonds have been kind of the main redeploying of cash. We see a lot of opportunities there probably more on the corporate side. Also on the new issue front, we've been seeing some new issuance opportunities. For example, yesterday we bought a Chilean copper company that did really well. We thought that was attractive. Copper's a really interesting commodity, a lot of demand, and we thought that offered some really good relative value. It was a really nice spread to Treasuries that we bought that bond at. So those are probably two of the more recent opportunities that we're seeing.
CEFA:
Chris, how do you see an allocation to an actively managed emerging markets fixed income strategy like EMD best positioned in an income-oriented investor's portfolio?
Chris Kilpatrick:
Yeah, it's a good question. I'm a shareholder as well. I think it's important. I believe in the fund, and I like the carry, if you will. It pays almost a point a month, so it's nice monthly cash distribution. Again, it's something we're focused on. We know it's important to shareholders, it's important to myself, so it is something we are focused on.
I do think the strategy is important. I know I looked at my personal account coming into the year and it was very US-centric, and so I think this was a great opportunity to add some diversification. It is a broad, diverse bond portfolio in a lot of different countries. And again, I think it complements a heavy US-focused portfolio. And then you layer on top of that an actively managed fund with a great team behind it and a nice emphasis on income. I think it makes a lot of sense for a lot of investors.
CEFA:
Chris, thank you so much for taking the time to join us today.
Chris Kilpatrick:
I appreciate it. Thanks for having me.
CEFA:
We want to thank you for tuning into another CEF Insights podcast. For more educational content, please visit our website at www.CEFA.com.
Podcast recorded September 2025.
Disclosure
This material is not, and is not intended as investment advice, an indication of trading intent or holdings or the prediction of investment performance. All fund-specific information is the latest publicly available information. All other information is current as of the date of this presentation. All opinions and forward-looking statements are subject to change at any time.
Western Asset Management disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Western Asset does not warrant its completeness or accuracy. This presentation is not intended to, and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice or service (nor shall any security, product, investment advice or service be offered or sold) in any jurisdiction in which Western Asset is not licensed to conduct business, and/or an offer, solicitation, purchase or a sale would be unavailable or unlawful.