10 lessons learnt from 10 years of managing emerging market debt

Since the L&G Emerging Markets Short Duration Bond Fund launched in October 2016, emerging market debt (EMD) has experienced an unusually varied cycle: tightening US monetary policy, country-specific crises, a global pandemic, geopolitical conflict, sovereign restructurings and repeated bouts of rates volatility.

What does a decade like that teach us about EMD? We revisit 10 defining market episodes and the lessons and decisions that have helped us generate long-term returns in each of the past 10 years.^[1]

2017: Broad rallies still rewarded selectivity

What happened: EMD enjoyed a strong year as improving global growth, supportive liquidity and reform momentum encouraged investors back into the asset class. 

How we navigated it: Our overweight positions in Argentina and Ukraine contributed to fund returns as improving policy credibility and reform expectations supported their bonds.

Lesson learned: A supportive market does not remove the need for selectivity. Even during broad rallies, differences in policy direction, we believe issuer fundamentals and valuations can create meaningful opportunities for active investors.

2018: Challenging year for fixed income led to dynamic asset allocation changes

What happened: Tighter global financial conditions and four US Federal Reserve (Fed) interest rate hikes of 25 basis points each put longer-duration assets under pressure.

How we navigated it: The fund’s strategic underweight to investment grade credit helped mitigate losses as rates sold off. Additionally, following the sharp depreciation of the Turkish lira, we turned cautious on the banking sector’s ability to service and refinance foreign currency liabilities and reduced our exposure, which also proved to be beneficial.

Lesson learned: Active management means being willing to rethink investments as valuations and fundamentals evolve, rather than remaining anchored to earlier views.

2019: The Fed’s pivot put duration back in focus

What happened: After tightening monetary policy through 2018, the Fed changed direction in 2019, cutting interest rates three times as concerns around global growth increased.

How we navigated it: These concerns underpinned our overweight positioning in longer-dated securities alongside higher yielding frontier market debt, which we believed would benefit from declining US treasury yields 

Lesson learned: Short duration does not mean avoiding duration altogether. Duration remains an active source of risk and return and can be used selectively when monetary policy, valuations and the yield curve can provide sufficient compensation.

2020: COVID-19 showed why liquidity matters

What happened: The pandemic triggered an extraordinary global dash for cash. Liquidity deteriorated sharply across financial markets before unprecedented central-bank and government intervention helped stabilise conditions.

How we navigated it: Going into the pandemic, the portfolio initially prioritised liquidity and downside risk mitigation. As policy support restored market functioning, the team selectively redeployed risk into high-quality, low-beta issuers, which we believed were best positioned to outperform amid the uncertain and risk-averse market backdrop.

Lesson learned: Liquidity is more than cash – it is optionality. Maintaining sufficient liquidity during periods of stress can help to reduce the risk of becoming a forced seller and provide the flexibility to invest when valuations become more attractive.

2021: China property reinforced the discipline to exit

What happened: China’s property sector deleveraging intensified, culminating in severe refinancing pressure and ultimately defaults in the sector.

How we navigated it: The fund began the year overweight Chinese property but reduced exposure as policy tightening and refinancing conditions challenged the original investment thesis. The team reduced all its existing positions before liquidity deteriorated more severely, limiting the eventual portfolio impact.

Lesson learned: Investment discipline includes knowing when the facts have changed. Position sizing matters, but so does continuously reassessing funding access, liquidity and recovery value rather than waiting for a formal default.

Early 2022: Russia–Ukraine highlighted geopolitical and liquidity risk

What happened: Russia’s invasion of Ukraine triggered sanctions, index exclusions and severe disruption across Russian and Ukrainian assets.

How we navigated it: Ahead of the invasion, the fund was broadly neutral Russia overall but underweight Russian financials and quasi-sovereigns. Exposure was subsequently reduced as sanctions and index exclusions emerged. In Ukraine, the team reduced risk as tensions escalated before selectively rotating into sovereign bonds where restructuring analysis suggested more attractive recovery prospects.

Lesson learned: Geopolitical risk can become a liquidity problem very quickly. Diversification, position sizing and early action can be more effective than relying on the ability to exit after an event has occurred.

2022: The global rates shock put short duration to the test

What happened: Inflation surged and the Fed embarked on one of its fastest tightening cycles in decades. Treasury yields rose sharply and global financial conditions tightened.

How we navigated it: The fund was underweight US duration during periods of rising yields. As a result, although absolute returns were negative, the fund declined less than its benchmark.

Lesson learned: Downside resilience is partly about losses avoided. Shorter duration can reduce sensitivity to a rates shock, but it cannot eliminate market risk, making country allocation and credit selection equally important.

2024: Sovereign restructurings rewarded fundamental analysis

What happened: Progress on restructurings across several frontier markets created opportunities for investors to able to assess debt sustainability and potential recovery values.

How we navigated it: We closely monitored IMF programmes, bilateral relief coordination and private credit proposals to evaluate exit yields on many of the distressed issuers.

Lessons learned: Distressed debt should be approached through recovery analysis, not simply price. Understanding debt sustainability, documentation, policy direction and potential catalysts is critical when assessing potential restructuring opportunities.

2026: Rates volatility kept the focus on carry and roll-down

What happened: Long-dated US Treasury yields remained volatile as investors balanced inflation, fiscal and monetary-policy uncertainty. At the same time, emerging market credit spreads remained relatively resilient.

How we navigated it: The portfolio remained broadly duration-neutral to its benchmark, while the team emphasised carry and roll-down rather than materially increasing broad market beta.

Lesson learnt: When spreads are tight and yields are high, carry is highly effective when combined with selectivity.

2026: Rising oil prices: Selectivity across energy and airlines

What happened: Rising oil prices brought differing exposures among oil producers, oil importers and fuel-dependent sectors into focus.

How we navigated it: We selectively added exposure to sovereign and corporate oil credits, while focusing on reform stories among oil-exporting credits. In airlines, we pursued relative value opportunities, overweighting carriers with lower fuel exposure or leverage against underweights in highly leveraged or weaker credits.

Lesson learned: The same oil price move can affect issuers differently. Selectivity means looking beyond sector exposure to assess reform progress, fuel sensitivity and balance-sheet strength. 

Lesson of the decade: Conviction requires humility 

If the past 10 years have taught us anything, it is that markets rarely unfold exactly as expected. Even well-founded views can be overtaken by changing policy, liquidity, geopolitics or unforeseen events. We believe conviction requires humility: we don’t have a crystal ball and we recognise the limits of our foresight and remain open to reassessing our views.

What matters is having a clear plan for when investments do not perform as expected. Our framework combines a top-down macro approach with fundamental research, valuation discipline, diversification and position sizing. We believe disciplined risk management, including the use of stop-loss limits, helps us mitigate the downside. Continually testing our assumptions and being willing to change course remain essential.

[1] Lipper as of October 2026. Reference to 10 years of long-term returns relate to the Z USD Acc share class of L&G Emerging Markets Short Duration Bond Fund which was launched on 24 October 2016. This share class is only available for investors resident in jurisdictions where this fund is registered for sale. It is not an offer or invitation to persons outside of those jurisdictions. Investors should verify that they are eligible before making any investment decisions.

Key risks

It should be noted that diversification is no guarantee against a loss in a declining market.

• The value of an investment is not guaranteed and can go down as well as up; you may not get back the amount you originally invested.
•  This fund invests in countries where investment markets are considered to be less developed. This means that investments are generally riskier than those in developed markets because they: may not be as well regulated; may be more difficult to buy and sell; may have less reliable arrangements for the safekeeping of investments; or may be more exposed to political and taxation uncertainties. The value of the fund can go up or down more often and by larger amounts than funds that invest in developed countries, especially in the short term. 
• This fund holds bonds that are traded through agents, brokers or investment banks matching buyers and sellers. This makes the bonds less easy to buy and sell than investments traded on an exchange. In exceptional circumstances the fund may not be able to sell bonds and may defer withdrawals, or suspend dealing. The Directors can only delay paying out if it is in the interests of all investors and with the permission of the fund depositary. 
• The fund invests directly or indirectly in bonds which are issued by companies or governments. If these companies or governments experience financial difficulty, they may be unable to pay back some or all of the interest, original investment or other payments that they owe. If this happens, the value of the fund may fall. 
• Prices of the Asset‑Backed Securities (ABS) and Mortgage‑Backed Securities (MBS) may be volatile, and will generally fluctuate due to a variety of factors that are inherently difficult to predict. In addition, the terms of the ABS/MBS may restrict its sale in particular circumstances. 
• The fund could lose money if any institution providing services such as acting as counterparty to derivatives or other instruments, becomes unwilling or unable to meet its obligations to the fund. 
• Derivatives are highly sensitive to changes in the value of the asset on which they are based and can increase the size of losses and gains. The impact to the fund can be greater where derivatives are used in an extensive or complex way. 
• The fund may have underlying investments that are valued in currencies that are different from the currency of this share class. Exchange rate fluctuations will impact the value of your investment. Currency hedging techniques may be applied to reduce this impact but may not entirely eliminate it. 
• We may take some or all of the ongoing charges from the fund's capital rather than the fund's income. This increases the amount of income, but it reduces the growth potential and may lead to a fall in the value of the fund. 
• Investment returns on bonds are sensitive to trends in interest rate movements. Such changes will affect the value of your investment. 
• The Fund has a sustainability and/or ESG focus in its investment process which may
  i) limit the Fund’s exposure to or exclude certain companies, industries or sectors
  ii) impact the Fund’s investment performance compared to other funds that do not apply such criteria and,
  iii) differ from an investor’s own sustainability and/or ESG criteria