LatinFinance - May/June 2017 - 16

End of the bear run?
Net flows into emerging market bond funds since January 1, 2014 ($m)

20,000
10,000
0
-10,000
-20,000
-30,000

3/22/17

12/14/16

9/7/16

6/1/16

2/24/16

11/18/15

8/12/15

5/6/15

1/28/15

10/22/14

7/16/14

4/9/14

1/1/14

-40,000

Source: EPFR

funds leading this year's Scorecard have used a range of strategies in
their Venezuelan investments, depending on their views of the risk.
Vontobel has opted for cheap, long-dated PDVSA bonds.
"Exposure to PDVSA 2024, 2026, 2027 versus PDVSA short-end
bonds makes a lot of sense from a risk management point of view,"
says D'hooge. "These bonds have lower prices than the short
maturity bonds. This means you will lose less money and you might
actually make money if the recovery rate is higher than the bond
price at default."
NN Investment Partners, whose $4.4 billion hard currency
Emerging Market Debt Fund ranks eighth on the Scorecard,
similarly has most of its Venezuela exposure at the longer end. That
includes Venezuela's 2027 bond and PDVSA paper with a low dollar
price.
"We spent a lot of time adding up the sources and uses of
cash flows and monitoring the developments in the country and
willingness to pay," says Jared Lou, a New York-based portfolio
manager for hard currency emerging market debt at NN, who went
to Caracas earlier this year to understand the situation.
"It's not Syria," he says of the trip. "There are shortages. There are
a lot of queues and hungry people. But when I was there, it wasn't
quite the war zone that people expect it to be. The private sector
is more vibrant than I would have guessed. A number of high-end
restaurants still operate."
When it comes to picking bonds, Lou prefers those without
collective action clauses, such as the 2027s. "Trying to predict
recovery value on a bond, you're never going to get that right.
Given the high willingness to pay and the fact that having access to
international capital markets is so important for this country, we
think the Vene 2027s will be treated more favorably than the rest of
the curve. We think a lot more activists will be involved in this bond
as well."
Others fund managers have taken the opposite approach, buying
Venezuelan bonds with much closer maturities. These notes are
much more expensive, which means more is at stake in case of
default, but the rewards are rich if they pay in full at maturity.
"It's definitely a nerve-wracking trade," says Mike Conelius, who
manages T. Rowe Price's Institutional Emerging Markets Bond Fund,

Returns leap ahead

LatinFinance's 2017 Debt Investor Scorecard
Manager

Name

1

Vontobel

Emerging Markets Debt Fund

2

T. Rowe Price

Institutional Emerging Markets Bond
Fund

3

GMO

Emerging Country Debt Fund

Gross returns (%)

LatAm
allocation (%)

Assets
($m)

1-year

3-year

38.1

684.71

15.55

8.14

36.65

296.8

14.58

33.1

4,092.3

16.02

5-year

10-year

7.70

6.74

7.55

7.63

8.53

9.22

4

Nordea

Emerging Market Bond

36.55

1,403.9

12.73

7.51

5

Fidelity

Emerging Markets Debt Fund

41.62

1,306.0

15.54

7.45

6

BlackRock

Emerging Markets Flexible Dynamic

28.26

1,662.9

13.55

7.33

6.87

7

Candriam

Emerging Markets Bonds

42.54

1,520.3

12.12

7.16

8

NN Investment Partners

EM Debt (Hard Currency)

31.38

3,346.0

12.48

6.90

7.08

9

Goldman Sachs

EM Debt

40.55

6,743.4

10.78

6.88

6.79

7.79

10

Julius Baer

BF Emerging

41.97

492.8

10.39

6.55

5.75

7.72

Source: Lipper. Data to March 31, 2017

16 L ATINFINA NCE.COM - May/June 2017
http://www.LATINFINANCE.COM
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