A $100 Billion Bond Fund Says Resurgent Dollar Set for Reversal

Jim Schaeffer says a resurgent dollar that’s crushed returns for local debt from developing nations is due for a turnaround.

The deputy chief investment officer at Aegon Asset Management is sticking with his unhedged overweight position in local-currency bonds even as losses pile up. Aegon oversees $103 billion of fixed-income assets, including $4 billion dedicated to emerging markets.

“The strength in the dollar probably surprised us a little bit,” Schaeffer, who is based in Chicago, said in an interview. “When the dollar is doing well against major currencies the weight is on emerging markets. We see this as relatively transitory and for the dollar to weaken against major currencies through 2018.”


The Bloomberg Barclays Emerging Markets Local Currency Government Index has sunk 2.8 percent this year to its lowest since November as weaker currencies dragged down returns in dollar terms at the same time that rising Treasury yields cut into the rate advantage for developing nations. It’s a stark turnaround for an asset class that was all the rage last year.

Fundamental forces will eventually snap the dollar’s rally and revive emerging-market currencies, according to Schaeffer. The Bloomberg Dollar Spot Index has climbed 4.7 percent since mid-April.

“EM has fundamentals and valuations on its side,” Schaeffer said. “A lot of countries are executing laudable and orthodox reforms while EM is compelling on a valuation basis; all that supports our positioning of remaining overweight EM local currency versus hard currency.”