Emerging market debt fund achieves returns of 87.56% over three-year period by investing in short-term instruments and holding on to them
Most offshore emerging market debt funds have been structured according to their volatility level and risk profile. As expected, funds with high volatility over the past three years have had a high-risk profile, while low volatility funds have generally had a lower risk profile.
The Growth Management Limited (GML) fund is an exception. It has low volatility over a three-year period and yet has achieved a high return of 87.56%.
Juan Costain, spokesperson for the Growth Management Limited fund, said the portfolio has achieved a low beta over the past three years due to its investment philosophy.
The fund offers high to moderate returns of around 20% a year with low volatility and correlation with market indices. It achieves this by investing in short-term instruments. The philosophy is value investing ' buying investments on the basis of expected cashflows and holding them until maturity.
Returns in the fund have been consistent throughout the past three years because GML holds a number of core investments in the fund such as highly-structured, self-liquidating trade finance transactions, typically with terms of three to 12 months, and in almost all cases guaranteed by a bank.
Other investments include non-performing trade debt that is subject to restructuring or can be exchanged for other assets, and longer-term sovereign obligations that are seldom available to investors in the secondary markets.
Costain said GML's trade finance transactions use the same structured merchant banking firms employed in developed markets, except that, as the fund is dedicated to emerging and transitional markets, the cost of capital and returns to the fund are dramatically higher.
A bottom-up approach is used to decide in which type of trade finance to invest. This analysis includes understanding the borrowers' business models and experience, the credit risks of guarantor banks, as well as having confidence that the flows of goods and/or services underlying such transactions are secure.
A reasonable level of liquidity is also kept in the fund at most times. According to Costain, this is to ensure it is able to take opportunistic short-term positions in other types of assets, generally based on insights from GML's network of overseas offices in places such as Almaty, Belgrade, Istanbul, Kyiv and Moscow.
When there are no such short-term trading opportunities available, cash balances are kept in a highly liquid form.
The emphasis of the fund is in Central and Eastern Europe and Central Asia.
Over the past three years, the portfolio has had a heavy emphasis in Russia, which the group believes has improved in credit ratings and benefited from higher oil prices, political maturity and increased investment in businesses following government reforms.
In Central Asia, Costain said, the fund has been overweight Kazakhstan over the past three years. This country has enjoyed good recovery following political and fiscal reform.
It has also benefited from high oil prices and greater integration into western economies, including significant foreign direct investment in the energy sector.
The most volatile fund in the emerging market debt sector has been the Ashmore Russian Debt portfolio.
This fund's volatility has been considerably higher than the company's other two funds in the sector ' the Ashmore Emerging Markets Liquidity Investment Portfolio (EMLIP) and the Ashmore Local Currency Debt Portfolio.
The Ashmore Russian Debt fund has had a return of 885.1% over the past three years with relatively high volatility.
EMLIP has had a return of 138.94% with moderate volatility and the Ashmore Local Currency fund has had a return of 116.95% with lower levels of volatility.
Jerome Booth, head of research at Ashmore Investment Managers, said each fund has had different standard deviation scores over the past three years because each uses very different strategies.
According to Booth, the Russia Debt fund has a high-risk profile and therefore higher volatility, representing the bonds in which it invests.
Over the past year, the Russia Debt portfolio has mainly been invested in long-dated eurobonds due to the spread contraction that has occurred in Russia.
Its concentration on a single market also increases the risk profile of the portfolio.
EMLIP has had higher volatility than the Ashmore local currency debt fund. Booth says volatility is higher on EMLIP because it invests in US dollar-denominated sovereign debt and distressed corporates.
The Ashmore Local Currency Debt fund has had a lower beta because it invests in higher graded credit quality with shorter duration.
The fund has been mainly been invested in Polish external debt and six-week interest rate swaps.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till