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Navigating EMD managers: what separates the best from the rest?

Data from Citywire Discovery reveals two hard currency star performers in the emerging market debt universe.

The latest data from Citywire Discovery suggests fund managers who run hard currency funds within the emerging markets debt sector falling into three broad performance camps.

This is evident on the chart on the next slide: managers with good long-term numbers but who have fallen away recently; those with dull long-term records who have rebounded over the past three years; and the minority who have excelled through both periods.

Just two stand out.

The analysis comes from Citywire Discovery, a new desktop system that allows fund buyers and fund groups to access track records of over 9,000 managers tracked by Citywire. It provides unique insights into peer group analysis, performance comparisons and competitor analysis. For more details contact support@citywireinsight.com

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There are two standout performers in the sector, who can be identified in the top-right corner of the chart above, topping the tables on both 10-year and three-year views. The two are Vontobel’s Citywire + rated Luc D’Hooge and First State’s rated Helene Williamson, who is also + rated by Citywire.

Neither could be accused of playing it safe. D’Hooge’s two greatest country weightings are to Russia and Venezuela, representing 7.8% and 7% of the fund respectively. First State doesn’t break Williamson’s portfolio down by country, but Europe and Latin America are her two highest regional allocations.

Williamson has nonetheless confirmed that she has been actively trading Venezuelan paper, exploiting volatility amid what she termed ‘violent anti-government protests’, and has done likewise with Russian debt. ‘We try to identify where the market is pricing in too much good or bad news,’ she explained.

Both have also focused on government rather than corporate bonds: Williamson has just 2.1% of her fund in corporate debt.

To their left is a cluster of managers whose weaker spell over the past three years is jeopardising their longer-term performance. These include Matt Ryan at MFS, Brett Diment at Aberdeen, Gregorio Saichin at Allianz, and Yerlan Syzdykov at Pioneer.

Broadly, this quartet runs slightly more conservative portfolios; the principal country exposures are to relative theoretical safe havens Brazil and Mexico. Perhaps not coincidentally, they all also have to contend with much larger funds. They typically curate billions, whereas Williamson has just £47 million in the First State Emerging Markets Bond fund.

Then along the bottom of the chart is a collection of veteran managers whose long-term performance is unimpressive, but who are creeping up the rankings. The two showing the most dramatic turnarounds are Eric Baurmeister at Morgan Stanley and David Dowsett at BlueBay.

Despite their longevity in the sector, neither has a particularly high profile in the UK, although that should change if they continue to perform well. They too have emphasised Brazil and Mexico in their funds, underlining that to stand out like D’Hooge and Williamson managers really do have invest differently from their peers.

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Matt Ryan, MFS Meridian

Matt Ryan joined MFS in 1997, having previously worked as an economist at both the International Monetary Fund and the US Department of the Treasury.

The Citywire + rated manager’s huge Emerging Markets Debt fund is now around £2.1 billion, swollen on the back of its strong performance over the past decade. Through that period the fund has returned a top-quintile 122%, compared with an average of 103% from its peer group.

Over the past three years, however, Ryan has slipped down the league table slightly. The fund’s return over that time is 18.2%, just outside the top quartile for all funds in the sector with a three-year record but still ahead of the average of 14.2%.

However, as the chart indicates, Ryan’s three-year numbers are considerably less impressive when taken on a risk-adjusted basis against a peer group of funds that have a 10-year history. On that basis, Ryan has actually consistently lagged the benchmark on the fund since 2011 with a risk-adjusted score of minus 0.2.

The three-year average for the sector is also negative at minus 0.09, indicating just what a tough environment emerging-markets debt has been for managers lately. By some distance the best during the period is First State’s + rated Helene Williamson, with a highly credible risk-adjusted return of 0.12.

Three-year total return: 9.3% (Peer group average: 14.4%)

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Brett Diment, Aberdeen Asset Management

Brett Diment runs two funds, one onshore and the other offshore, in this sector. The Sicav dwarfs the Oeic, with £1.4 billion to the latter’s £63 million. As their sizes implies, they aren’t simple mirrors of each other – although their portfolios are broadly similar in composition. The smaller fund has been the stronger performer over the past three years, returning 26.3% compared with the Luxembourg vehicle’s 20.5%.

That higher return from the nimbler fund has come at the cost of higher volatility, with a standard deviation of 3.9 and a maximum drawdown of 11.7% against the giant’s equivalent numbers of 2.6 and 9.5%.

The ballast associated with a billion pound portfolio – it has a 2% allocation to AAA-rated debt whereas the onshore fund has none – evidently affords ample downside protection.

By style Diment is a fundamental-driven investor, which he marries to market technical analysis for pricing assets.

Accordingly, he recently sold out of a Ukraine position on fears that the country’s bonds were not pricing in a potential escalation in the Russian standoff. Diment also reduced his Russian holdings at the same time.

Three-year total return: 23.5% (Peer group average: 14.4%)

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Simon Lue-Fong, Pictet

As discussed, the sector’s steady hands are Luc D’Hooge and Helene Williamson. But Simon Lue-Fong also deserves a mention: although his returns haven’t been as high, he does stand alone with the top performing pair, having remained above average through both timeframes. Unlike theirs, however, his Global Emerging Debt fund is immense at £2.8 billion.

That merely scratches the surface of his responsibilities, though. Since joining Pictet in 2005 he has grown the Swiss group’s emerging-market debt assets from less than £500 million to more than £13 billion, while his investment team has increased from two people to 17.

Lue-Fong is defensively positioned at the moment – with 15% in cash for example – befitting a man who says he was ‘blooded’ in the ‘baptism of fire’ of the Asian crisis.

He is nevertheless confident that his asset class is poised for recovery. As he recently told Citywire: ‘Every year that emerging market or US dollar debt has sold off, the following year has been a good one. Last year the market was down 8% so people start to panic. We expect a strong finish to this year.’

Three-year total return: 19.9% (Peer group average: 14.4%)

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Eric Baurmeister, Morgan Stanley

Eric Baurmeister, who joined Morgan Stanley back in 1997, manages two funds in this Citywire sector: the £200 million Emerging Markets Corporate Debt fund and the £255 million Emerging Markets Debt fund.

As can be inferred from their names, one focuses on corporate bonds and the other on sovereign paper. Mexico is the top country weighting in both, but beyond that they diverge. For example, Indonesia is the second greatest allocation in the government debt vehicle but does not feature in the corporate version’s top 10. Equally, in the corporate space Baurmeister is able to tap companies in more developed markets like Hong Kong, which does not appear in the sovereign fund’s top 10 – and nor does China.

Over the past three years, both funds have performed similarly. Emerging Markets Corporate Debt has returned 18.9% and Emerging Markets Debt 18.4%, both top-quartile numbers (only the government debt fund has a 10-year record, which languishes on a risk-adjusted basis but is still second quartile in absolute terms).

On the three-year view, though, investors in the corporate debt fund have actually had the smoother ride. That strategy’s maximum drawdown for the period was 8.9%, compared with 11.4% on the sovereign debt fund.

Three-year total return: 18.8% (Peer group average: 14.4%)

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