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AAA-rated EMD trio: how best to leverage location

AAA-rated EMD trio: how best to leverage location

Fund selectors often champion the benefits of finding managers operating within the local market itself to understand the heartbeat of the investment community.

For Peter Priisalm, who co-runs the €7.9 million Avaron Eastern Europe Fixed Income fund with Kristel Kivinurm and Valdur Jaht, the Estonia base of boutique group Avaron Asset Management is beneficial on two levels.

‘If you are sat in New York you would have a different picture of this market,’ Priisalm says. ‘Although you don’t necessarily have to be in Tallinn, there is an added element in the fact Estonia’s market is so small as to almost be non-existent.

‘This means we are close enough to observe what is happening in bigger markets nearby – such as Turkey, Russia and Poland – without succumbing to a home bias. We are able to understand what is happening without being blinded by activity within our own borders.’

This focus across borders has propelled the fund to lead the field on a risk-adjusted basis and return 7.7% in euro terms over the three years to the end of August in absolute terms. This compares with a 3.7% rise by the BofA Merrill Lynch Eastern Europe Govt TR EUR.

Turkey, namely its corporate bond market, accounts for the largest exposure at present – 38.9% of total exposure. Priisalm says the team were not swayed by the attempted coup over the summer, with the event clearly not as ‘black and white’ as many outside investors understood.

‘What people don’t understand is it was an “attempted” coup, which is a big difference. We are focused on blue chip companies, such as debt from a lot of the big equity companies. These did not have their fundamentals affected by this geopolitical risk, so we have stayed strong here.’

The trio did move away from Austria and Poland over the past year but Priisalm says this was a response to refinancing in those markets, which resulted in a number of corporate debt positions being recalled, rather than taking a strong stance on the markets as a whole.

‘There are, and will continue to be, opportunities in those markets but the nature of the bonds means they were callable and so we realised profits,’ he says. As a result of the realisation of profits, the fund currently has a cash balance of nearly 20%, but Priisalm stresses this is intended to be reinvested.

‘We are not using cash tactically but there has been limited new issuance in Eastern Europe that meets our high-yield emphasis. We run a concentrated portfolio of 20-to-25 holdings and so, with yields dropping, we are sticking with positions rather than reinvesting.

‘When the fund was launched in 2012, we held very high cash levels for nine months, as we were waiting for attractive entry points, which took time. For example, we then invested a third of that cash in a few days when the issuance was attractive.  We feel we could be in a similar position now.’

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