Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
Vontobel Fund - Emerging Markets Corporate Bond is a $1.8bn fund launched over 5 years ago which invests primarily in Emerging market corporate debt globally, across all sectors and ratings.
Two main drivers; "spread optimization" and "spread diversification".
The former is based on a value and contrarian approach whereby we invest in issuers which we consider to be "cheap" (more spread) compared to other issuers for a comparable level risk and with more attractive upside potential. Frequently, these bonds have underperformed because of their sector, country, issuer etc. and less demand delivers higher spread.
Generally, about 75% of the funds assets are invested in such Value strategies. Whilst the average rating of this part of the portfolio is typically a bit lower than the benchmark, the spread pick up is typically between 250 and 500bp, feeding into markedly higher yields.
"Spread diversification" complements the above "value" approach.
25% of the fund's assets are invested in "event driven" situations; a company with poor results, downgrades, liquidity problems, etc. The common result is an (excessive) bond price action. By taking multiple, modestly sized positions in such situations, we are able to generate significant alpha, but above all, decorrelated alpha as the driver of price action is not market based (S&P or UST go up or down) but purely idiosyncratic. And in a world of low, correlated, yields where investors need spreads, we believe that such "spread diversification" is a holy grail for credit investors.
How are you positioning your portfolio to prepare for the global recovery from the Covid-19 pandemic?
We do indeed believe that EM corporate debt is an attractive opportunity for income, but the multitude of mispricings advocates a truly active approach.
Typically in fixed income, periods of strong economic rebound tend to favour spreads (less credit event risk) over rates, which tend to suffer as higher growth/inflation feeds into higher yields. This is what we've observed so far in 2021. Rates have suffered, spreads have been rock solid.
Where do we tend to find higher spreads/growth in global credit markets? In EM.
Lower duration? EM Corporates. Compared to US high yield, EM corporate HY delivers more spread for a better average rating and lower duration….
But spreads globally do look a little tight, explaining the need for active management. Currently, we have a barbell. The value book is looking to improve liquidity/quality/diversification as we expect to see higher volatility this year, whilst still delivering significant excess spreads/yields. The event book is increasing in size as we see multiple events, even legacy from last year, given the uneven economic rebound. The presence of forced sellers offers attractive opportunities. This has indeed been the major driver of returns this year. The book remains highly diversified to limit specific risk.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio?
We observe that the duration of the IG issuer segment of the market has grown significantly these past few years, making such issuers more sensitive to higher rates. At the same time, spreads in IG are not particularly attractive on average and offer little protection (to higher rates).
We thus tend to prefer HY whilst building on IG weakness on a case by case basis as mentioned in the barbell strategy above (looking for cheap and underperforming IG names).
The book remains highly diversified in order to limit specific risk, so very few tickers exceed 2% of AUM. The turnover of the portfolio remains elevated given the plethora of value and event opportunities available. For example, China is suffering a bout of volatility as the level of sovereign support is questioned by investors and this turmoil leads to interesting opportunities in our opinion. But we have also seen bouts of volatility in Mexico, Peru, Turkey, etc. recently, and others will come as the dust settles on this exceptional period.
