Schroders EM bond duo take bet on Argentinian debt

Schroder ISF Emerging Market Bond manager James Barrineau has been buying Argentinian sovereign debt despite ongoing legal proceedings against the country over previous debt defaults.

Barrineau, who runs the $28 million fund alongside Schroders Asian head of fixed income Rajeev de Mello, has around 4% of the fund invested in short duration local Argentinian debt, and argues that the country, along with Venezuela, is currently offering the best risk-adjusted returns on debt of any emerging market.

The fund has an overall exposure to Argentina of around 6.1%

Barrineau told Citywire Global that ‘there was certainly a risk’ attached to holding Argentinian sovereign bonds, but that the country’s relatively favourable near term debt profile and attractive yield made it a risk worth taking.

He said: ‘There are ongoing legal proceedings against Argentina which are hard to predict, but very little of its debt matures until 2015.

‘There is one small [maturity] in 2013 and nothing due in 2014 so we are comfortable to hold some exposure and there is also a decent chance of a positive surprise.’

Barrineau said the bonds were currently yielding 13% and cited Venezuela as a positive example of what could develop.

‘There is risk with Argentina but we are getting paid 1% a month to hold it. Venezuela was yielding 10% just two months ago but it has had a rally and its bonds are now trading on 8-9% yields which leaves Argentina as a huge outlier.’

He added: ‘At a time when investors are scouring the globe for yield we think holding Argentinian debt is a risk worth taking and there are very few other options among emerging markets which offer that kind of yield.’

‘In non-investment grade emerging market (EM) sovereign bonds we are holding the shortest possible dated debt. Some of this debt is yielding 8% and if you don’t think a country will default you should be happy to hold it.’

Optimistic on Venezuela

Some 10% of the fund is exposed to Venezuelan sovereign debt, and Barrineau is optimistic that political change, sparked by the gradual demise of President Chavez, will be positive for the country’s debt and equities market alike.

‘Venezuela has $60 billion of debt outstanding and there are lots of opportunities to generate returns. We think that it will be very hard for Chavez’s supporters to avoid an election and we think there will be a devaluation of the currency.’