News came in April that EG Capital Advisors, a London-based investment firm with a strong background in emerging markets credit, had launched its Emerging Markets Corporate High Yield UCITS with USD75 million under management.
The new fund is a sub-fund of EG Capital Advisors Irish Collective Asset-management Vehicle (ICAV) which is registered with the Bank of Ireland. The fund suits all types of sophisticated investors who are searching for income and want to access the US Dollar-denominated emerging markets high yield corporate bonds market, a USD800 billion market which is growing at a compounded rate of more than 15 per cent per year.
The EG Capital Advisors Emerging Markets High Yield Strategy was originally established in 2009 and has been operated as a separately constituted fund since 2014. EG has circa USD500 million currently invested in the strategy globally.
Chief Investment Officer, Fixed Income for the group, Dimitry Griko (pictured), explains that performance on the strategy since 2014 is running at 27 per cent absolute with low to medium teen returns over the last couple of years.
“The strategy suits anyone who likes income streams, such as family offices or organisations that need to manage their liabilities, such as pension funds and other institutions. There is a lot of interest in the strategy given the good economic backdrop for emerging markets and the fact that high yield has low sensitivity to rising interest rates," he says.
Griko explains that the strategy is purely fundamental, using bottom-up approach to value credit risk. “Basically, we don’t say ‘we don’t like Brazil’, for example. We say ‘let’s look at Brazil’ and see why we don’t like it and how that reflects in each issue. We look for transparency of the business and analyse real cash flows.. We analyse the businesses capital structure, covenants and look at the worst-case scenarios. We spend a lot of time on recovery analysis and understanding all the downside scenarios. Our key belief is that if we do our credit analysis properly it will produce superior returns, lower volatility and increase recoveries in the portfolio.”
Griko explains that it’s a resource heavy strategy. The firm has seven people dedicated to this strategy alone.“ We believe that the risk for this asset class should not be approached with standard risk measures such as volatility and VAR. We use a credit-quality oriented risk management approach when managing risk” he says. “Emerging Markets Corporate Debt has low correlation with other asset classes in the world but the asset class is highly correlated within itself which gives us the opportunity to optimise risk/reward within the portfolio”
The strategy is truly global and extremely diversified , he says, investing everywhere throughout the emerging markets and works differently from existing emerging market benchmark indices such as JP Morgan’s Corporate Emerging Markets High Yield Bond Index , CEMBIHY, which is dominated by individual sectors and geographies, such as financials and China.
“The structure of the benchmarks is risky,” Griko says. “These are not the types of risk one would want to take when investing into Emerging Markets Debt. We believe this asset class should be managed in a conservative fashion. We take a team-based decision-making approach and avoid speculation – we use the experience of every team member to make decisions.”
The asset class has seen aggressive growth of between 15 and 20 per cent a year and now looks attractive as one of the cheapest asset classes available on a risk/reward basis, Griko says.
“The risks are defaults, which are much lower than those for developed markets high yield with the average emerging market high yield 10-year cumulative default rate running at 13.1 per cent, against the developed markets where the figure is 24.3 per cent (S&P Data), almost twice as high, while recoveries are at the same level. . And given that, you are still getting a premium in yield for similarly rated issuers in EM.
This is an asset class that offers political diversification, he says, and is an asset class that has low sensitivity to interest rate hikes. Tightening credit spreads during hiking cycles result in strong returns. “It is most important how the portfolio is managed and how risk is controlled,” he says. “We aim to take the risk away from this cheap asset class and get left with the best.”
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