EM credit star slashes risk exposure to dodge US fallout
Fears of US political turmoil forces Alt Ucits AA-rated manager to slash net exposure, increase T-Bill shorts and load up on portfolio hedges.
by Chris Sloley on Feb 20, 2013 at 15:13
The fear of global bond markets being rocked by further political wrangling in the United States has forced Colm McDonagh to make drastic changes in his $650 million emerging market debt fund.
The Citywire Alternative Ucits AA-rated manager, who runs the Absolute Insight Emerging Market Debt fund, has moved onto a decidedly defensive position ahead of further talks on the US economic outlook on March 1.
This has seen McDonagh cut his net exposure from 50% to just 3.9% over the course of January, showing a significant reduction in his long positions.
He has reduced exposure across all emerging market debt holdings, while in his short book McDonagh upped his exposure to CDS by 20% and bolstered his US Treasury shorts by 12%.
In addition, McDonagh also increased his cash holdings, which now stands at 6.5% of the overall portfolio.
‘Our sense of caution intensified during the month and led us to significantly reduce risk exposure. While we are aware that value in the market has since been created, we prefer to maintain cautious while the market is still in search of clear direction,’ he said in an investor note.
Pointing to one of the major drivers of this significant shift to safety, McDonagh said fiscal-led issues in the US coupled with potential volatility in US treasuries had become a key concern in his strategy.
McDonagh currently has zero direct exposure to the United States in his long-book but said its overall impact on global markets could not understated.
‘External sovereign bonds, although helped by very low net external issuance, still remain at the mercy of US treasury yields and do not offer a compelling risk/reward profile in our view,’ he said.
Speaking to Citywire Global at the end of last year, McDonagh had begun tentative moves away from some areas of emerging Europe due to fears of correlation with the US politic picture. However, he has accelerated this withdrawal over the past month.
The Insight Absolute Emerging Market Debt fund returned 20.08% over the three years to the end of January 2103. This compares to the average manager in the Citywire Alternative Ucits Credit Strategies database, who returned 11.15% over the same period.
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