Emerging market corporate bonds have undergone a remarkably rapid transformation from one of the least-loved asset classes to perhaps the most popular.
Citywire + rated Lundie said he has invested in emerging world opportunities which have strong fundamentals and underappreciated recovery players compared to their developed world peers.
Lundie, who currently has a 9.71% country allocation to Latin America in the Hermes Global High Yield Bond fund, said he has added to Brazil-based steel company Gerdau and Russian steel firm Severstal.
‘Severstal has improved its credit profile in the past two years and benefits from a strong asset base with low costs and proximity to infrastructure for export, combined with a conservative financial policy.’
‘As a result, even in volatile times for the global steel markets and during a recession in the Russian domestic market, the business has managed to significantly improve its credit profile leading to its recent upgrade to investment grade by S&P.’
Lundie said Brazilian company Gerdau has historically been bond-holder-friendly by raising equity, tendering for bonds and not raising new debt in the past two years.
‘Gerdau has a globally diversified business with a very strong market position in its largest market, Brazil.'
'Its business is mainly made up of minimal-based assets, which are more flexible than blast furnaces and able to process scrap metal as well as pig iron.’
Lundie said now is the time to increase vigilance and move up in quality, despite risks still being prominent. He said the renewed decline in the oil prices and other majority commodity prices is a main risk.
‘A Fed rate hike and geopolitical risks also remain as potential deterrents to continued outperformance,' he said.
‘It is essential to combine a thorough assessment of operating financial and ESG risks, to identify companies that are able to prosper in an environment where many emerging market economies are still struggling to return to growth.’
Fraser said a return to fair value has compelled him to remain up in quality and highly selective as the trend passes.
‘Given the persistent call for yield, and the exogenous catalysts of the BoE and ECB programs are expected to endure, it is more important than ever to fully exploit flexible, global mandates to eke out returns where risk is deemed appropriate.’
Since launch in May 2013, the Hermes Global High Yield Bond fund has risen 16.4% in euro terms. That is compared to its Citywire-assigned benchmark, the BofA Merrill Lynch Global Non-Fin HY Const TR EURH, which gained 14.5% during the same time period.