BRIC bond markets are overcrowded, says Raphael Kassin

Too many emerging debt managers are concentrating on the fashionable BRIC markets, hugging a benchmark, and so missing the real opportunities in the asset class, says Raphael Kassin.

Emerging market bonds have been one of the most popular investments in recent months, with big inflows into funds in this sector. But now some fund managers in the sector are starting to sound more cautious and on Tuesday we reported that Schroders' EM debt specialist Geoff Blanning had raised his cash position to the maximum allowed, around 40%.

Kassin, head of emerging market debt at Reyl Asset Management, believes too many fund managers are focusing on a narrow range of fashionable markets, while ignoring the best opportunities elsewhere.

'I still love the fundamentals in most emerging countries and think there will always be great opportunities to be had within the EM country universe,' he told Citywire. 'However, those opportunities will not come from investing in BRIC, or EMG6 (BRIC plus Mexico and Turkey), or whichever other ridiculous acronym the sell side decides to invent in order to make an illusory market for herd following fund managers afraid of dipping their toes into uncharted waters. The reason for that is simple: bond markets in those countries are overcrowded already and yields are at best unattractive or illogical, given fundamentals.'

Known for his high-conviction style as an investor, Kassin is never afraid to speak his mind and does not hold back in his assessment of managers in his sector.

'Unfortunately, as I have been preaching for most of my portfolio management career, most emerging debt managers left these days are benchmark trackers. Many have not even been to the countries they invest in and a majority believes in the output of the numerous-times disreputed rating agencies.'

'The obvious alternative for fund managers who do not blindly follow meaningless benchmarks is to invest in a wide range of other attractive bond markets of EM countries, where yields are high and the opportunity to profit for clients are great. These are countries like Venezuela, Argentina, Ukraine and others with similarly high yields,' he says.

He acknowledges this 'road less-travelled' approach involves more in-depth research and an understanding of the risks involved in going for the extra yield. 'But that is what we are paid for by investors,' he says. 'Alternatively, investors could buy a derivative product replicating the index and save the fat cat manager fees.'

Investing in the less crowded group of countries is where Kassin sees opportunities from here onwards. Regardless of the attractive fundamentals and yields found in these countries, however, he acknowledges that investors will be always subject to volatility coming from other markets and some fund managers see plenty of such volatility instigators around this year.

Kassin is more optimistic and points out that since Russia defaulted in 1998, the JP Morgan EMBI Global was up every year until the end of 2007. 'Economic difficulties and negativity from the less educated press might torment us daily these days but unless the fleet hits the fan, I would expect 2010 to still bring us opportunities to end the year on the plus side,' he says.

Kassin made his name running emerging market debt funds at ABN Amro Asset Management, where he earned a Citywire AAA rating for his risk-adjusted performance.  He left ABN Amro in 2007 and after a less successful 18-month spell at Credit Suisse he launched a new EM debt venture with Reyl Asset Management earlier this year.