Rates will slowly rise but the EMD market has become so well traded and well informed these changes are becoming less relevant, Vontobel’s head of emerging market bonds has said.
Speaking to Citywire Selector, Citywire AA-rated Luc D’Hooge, who runs the Vontobel Fund Emerging Markets Debt fund, said his team would normally stay away from taking big bets based on rate positions.
'There is so much uncertainty in EMD that it’s difficult to get a high information ratio out of that, we tend to play rates a little bit, but its independent from the spread duration.
'I currently have an overweight on spread duration but no overweight in interest rate duration. We hedge it partially and sometimes we even over hedge it.
'Currently, I am below the benchmark in interest rate duration and that’s where the fund has been for the last few years,' the Swiss-based investor said.
D’Hooge said the team will sometimes play rates, but said people tend to overreact to Fed announcements.
He also highlighted the team’s stance on holding debt-to-maturity and revealed his buying and selling triggers.
‘I look at the fund with a long-term investment horizon, it doesn’t mean that I keep the debt for a long time. We tend to trade quite often in this market, for example, we have 40.68% of the fund invested in LatAm but you always compare other countries to other issuers.
‘For instance, you could take a position in Brazil, on the view that you would stay there for at least two-to-three years. But maybe one bond in Brazil is cheaper to the one that you have, so then you go for the other one.
'That’s why you trade quite often, as there are a lot of bonds that you can compare, so there is a lot of opportunity in this market.’
Debt to maturity
D’Hooge currently holds most of the fund’s assets in BBB-rated debt, with 36.27% allocated to the sector. However, he said it’s not very often he will actually hold a bond to full maturity.
‘Very often these bonds are such a short-term maturity that sometimes you need liquidity, so I often sell those in the short term. There is currently a lot of segmentation in EMD and lots of fashion traits, but people are still afraid of duration.
‘They don’t want to be exposed to duration. We’ve seen many asset managers launching fixed maturity funds, three to five years maximum – then they still won’t have enough yield, which pushes them towards high yield or emerging market funds.’
Over the three years to the end of August, the Vontobel Fund Emerging Markets Debt fund returned 20.39% in US dollar terms. This compares with its Citywire-assigned benchmark, the JP Morgan EMBI Global Diversified TR, over the same time period.
D’Hooge will feature in the next issue of the Citywire Selector magazine, to request a copy click here.