While emerging markets are generally viewed as more volatile, McDermott thinks this assumption will be tested in the next 10 years.
"Although day-to-day volatility in emerging markets is generally higher, on a long-term basis I think every pound invested in a GEM debt fund is at less risk than a developed market debt fund," he said.
"With gilt yields where they are and valuations exceedingly high across the developed market space, all the macro points to emerging markets as a safer investment."
McDermott thinks the risks usually associated with emerging market debt have become less pronounced in recent years.
"Currencies are much stronger and more predictable, their banking systems and government debt levels are in far better shape and their accountancy standards have also improved," he added.
"While emerging market corporate governance is improving, over here in the West it’s just getting worse."
"There are obviously still risks involved, particularly with regard to liquidity issues. Investors pulling away from emerging market debt and taking profits in recent months have had a big part to play in the recent dip in performance."
"However, that said, on a 10-year view I think investment grade emerging market debt is still a safer bet."
Performance of sectors vs average fund over 1-yr
Source: FE Analytics
There are currently 14 emerging market debt funds in the IMA unit trust and OEIC universe, including three absolute return vehicles – Henderson Emerging Market Debt Absolute Return, and the Schroder ISF Emerging Europe Debt Absolute Return and Emerging Markets Debt Absolute Return funds.
As well as significantly outperforming them over three, five and 10 years, there is already evidence that emerging market debt funds are closing the gap on their developed rivals in terms of risk.
The Threadneedle Emerging Market Bond fund, for example, has the same FE Risk Score as the average IMA UK Gilt fund. Moreover, all but three emerging market bond funds have a lower risk score than the average vehicle in the IMA Sterling High Yield sector.
Performance and risk of funds vs sectors over 5-yrs
| Name |
FE Risk Score |
5-yr returns (%) |
| Investec Emerging Markets Local Currency Debt |
56 |
94.91 |
| Invesco Emerging Markets Bond |
48 |
63.43 |
| Threadneedle Emerging Market Bond |
36 |
57.55 |
| Schroder ISF Emerging Europe Debt Absolute Return |
44 |
53.77 |
| M&G Emerging Markets Bond |
42 |
51.5 |
| Schroder ISF Emerging Markets Debt Absolute Return |
36 |
50.14 |
| IMA Global Bonds |
20 |
45.38 |
| IMA UK Gilt |
36 |
37.75 |
| Schroder ISF Asian Bond Absolute Return |
38 |
31.7 |
| IMA Sterling High Yield |
51 |
19.75 |
| Henderson Emerging Market Debt Absolute Return |
12 |
6.89 |
Source: FE Analytics
"In the last 12 to 18 months emerging market debt has been a bull asset class. Though demand has come off a little recently, I think it will become an even more important part of investors’ portfolios in the future," McDermott finished.