* Flows into emerging debt funds more than $8 bln in 2009
* Scarce specialist talent in demand
By Claire Milhench
LONDON, Jan 15 (Reuters) - Fund firms are launching dedicated emerging market corporate debt funds and fighting over scarce specialist corporate talent to help ramp up exposure to the high-reward, high-risk sector.
Emerging corporates are expected to offer good value for yield in the next few years relative to Western corporates, where strong demand in 2009 pushed prices up.
Recent growth in issuance has also helped ease concerns about liquidity and lack of depth, with emerging market corporate bond issuance reaching $115.2 billion in 2009, according to Thomson Reuters data.
"I have been following corporates for almost 10 years and it is a growth area -- it will be necessary for us all to have it to enhance the performance of our funds," said John Morton, chief investment officer for fixed income at emerging markets specialist Rexiter.
Fortis Investments believes the market is now deep enough to support a pure corporates strategy, saying that high-grade Asian names are especially liquid, even more so than many sovereigns.
It is preparing to launch a dedicated EM corporate debt fund in response to investor demand for such a strategy, which offers a spread above external sovereign debt. ING Investment Management is also mulling a launch.
Such launches have been encouraged by record inflows into emerging market debt funds last year. Data from EPFR Global showed net inflows of $8.1 billion to daily- and weekly-reporting emerging market bond funds in 2009, compared with net outflows of $14.7 billion in 2008.
Managers also point to positive long-term fundamentals for emerging corporates, with David Rolley, a portfolio manager at Loomis Sayles, taking the view that more regional players will become global operators.
He cites Brazilian firms like protein producer JBS, CVRD and Petrobras as successful examples. Smaller, well-run companies would offer both a risk premium and an unfamiliarity premium, he added.
"A lot of people won't buy them because they've never heard of them, as they're coming to the market for the first time, but if they're good operators, and if the growth story in that region makes sense, then it's probably a reasonable idea."
To see a graphic for 2007-2009 emerging market debt issuance, click http://link.reuters.com/cyh89g
MANAGEMENT TALENT
However, one problem is finding the right talent: "Emerging markets is a young business and people with this unique skill-set are difficult to source," said Rexiter's Morton.
As a specialist niche highly susceptible to momentum plays, the EM corporate debt sector requires market timing based on years of experience, said Amin Rajan, chief executive of consultancy Create Research. "That expertise is scarce."
JP Morgan Asset Management recently hired four emerging market debt specialists from Fortis Investments, one of whom is dedicated to corporates, and Raphael Kassin, former head of Credit Suisse's emerging markets debt team has just been hired by Swiss private bank Reyl & Cie.
But Sergio Trigo Paz, chief investment officer for emerging markets debt at Fortis Investments, warned that where firms promoted credit analysts or high yield managers, there was a danger of them relying too much on financial statements.
"It is not possible to make EM corporate debt trades simply by looking at balance sheets," he said. "You need to know who the owner is, what their links are to the government and whether they are in favour... Once you get the quarterly financials it is too late."
Some managers also question whether the market is adequately diverse or liquid enough to support pure corporate funds.
"We don't think you can get the diversity of names that you would want and that means you end up taking too much risk," said Martin Reeves, director of global credit research at Alliance Bernstein. He argued that the stability of the sovereign was still key when assessing EM corporate debt.
But, as is often the case with emerging market instruments, higher returns are there to be had as long as investors take due care.
Rexiter's Morton said that the higher-yielding issues demanded close attention.
"You have to read the prospectus very carefully (and look at) the capital structure to make sure you are where you expect to be," he said.
Managers are making fewer assumptions about implicit guarantees for state-controlled firms, as tested recently by Ukraine's Naftogaz and Dubai's Nakheel.
"It is a dangerous shortcut to assume the company will be bailed out," said Trigo Paz at Fortis. "We analyse these quasi-sovereigns on their own terms."
Standard Bank is planning an African corporate debt fund which will exclude sovereign and quasi-sovereign debt.
(Editing by Sitaraman Shankar)