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Investec’s Harling: homing in on EM credit hot spots

Investec’s Harling: homing in on EM credit hot spots

Wanting to see the effects of Western trade sanctions for herself, Victoria Harling, who runs the Investec GSF Emerging Markets Corporate Debt fund, took a trip to Russia.

When visiting a bank’s headquarters in Moscow she found out that Dilma Rousseff, president of Brazil at the time, was sitting in the next room having a similar meeting.

For the Citywire AAA-rated manager the situation illustrated how politicians around the world are discussing how best to trade with each other and how globalisation has truly taken hold.

‘When the Brazilian real collapsed, you saw developed market companies coming in and trying to buy assets.

'Saudi Arabia was quick to snap up some beef assets when they became available, because there is a protein shortage in Saudi. We run things on a global sector level so we get to see everything – all the cross-synergies and who is involved,’ she says.

Harling is familiar with Rousseff beyond sharing office space, as Brazil remains the $1.2 billion fund’s largest country allocation at 11.6%.

‘The Brazilian political landscape is still challenging but it is not a surprise anymore. Often with investments it is the shock elements that cause the biggest fear, whereas Brazilian assets have had two years to price this in.

'We still have fines that are hanging over companies, and political investigations taking place into Petrobras, but overall the market is relatively well-versed in the whole situation there,’ Harling says.

Like Saudi Arabian investors, Harling also thinks Brazilian protein producers hold opportunities. She visited one meat manufacturer on ‘halal day’, when the products are prepared especially for consumers in the Middle East.

‘Clearly the devaluation in the Brazilian real has helped increase their revenue base from an import perspective and boosted their competitiveness. We still think that the dynamics for those companies remain strong,’ she says.

Harling’s shrewd judgement can be seen in her fund’s performance. In the three years to the end of September 2016 she returned 22.5% versus 12.3% from her average peer.

Petrobras revisited

Away from protein producers, the fifth- largest holding in the fund is the aforementioned Brazilian energy giant Petrobras at 1.8%. Having sold out of the position at the end of 2014 over corruption concerns, Harling has returned to the company.

‘Unfortunately, we got back in a little bit too early. We felt that once the accounts were signed off, investors would return. One of the key worries around Petrobras had been this ‘fallen angel’ predicament, purely because of the total size of debt outstanding in the company.

‘We looked through some of that technical backdrop, believing very much in its ability to refinance itself and de-lever over time. While we bought back in, purely on a valuation perspective, we’ve gradually increased that position over time as our confidence in its recovery has continued,’ she says.

Not all industries in Brazil provide investors with opportunities of course. While financials are the largest sector in the fund at 22.4%, Harling believes Brazilian banks have been hit by the country’s political situation.

‘We have typically avoided the banks in Brazil. We felt the valuations were not necessarily commensurate with the downturn in the economy. We recognise their capital base is relatively strong, but felt the industrial names were a more solid proposition,’ she says.

Far flung corners

Unlike some emerging market managers who concentrate on major players like China, Harling spreads her fund between a wide array of different countries. After Brazil, the second largest exposure in the fund is Mexico at 10%, followed by Turkey at 8.1%.

‘We think investors are underweight in Turkey. However, from a company perspective, Moody’s chose to keep corporates at investment grade, while they downgraded sovereigns.

‘We don’t see a significant amount of issuance and yet even the banks that were downgraded to high yield on a valuation perspective are priced for further downgrades, so we see a lot of value there,’ she says.

Harling has a 2% allocation to telecoms firm Turkcell Iletisim Hizmetleri and has smaller holdings in a port businesses and a diversified conglomerate in Turkey. Elsewhere, she also has a 2.45% allocation to Kazakhstan and 11.6% to the gas and oil sector as a whole.

‘We have one position which is a high yield oil & gas name. It is quite short duration but we feel the yield is compelling given the risks this company operates within. Kazakhstan’s economy is very much an oil one so we don’t want to get too concentrated increasing our exposure here.’

Harling has spread the fund’s assets all over the world, but there are certain geographical areas which she is steering clear of due to price and performance factors.

‘We found Asian credits generally expensive and they haven’t contributed to outperformance,’ she says.

Harling believes that confidence in China is starting to rise after hitting rock-bottom at the beginning of the year and says its economy is an indicator of how the rest of the world might move.

‘If the global environment starts to perform, then emerging market economies should do very well. I don’t think it is a bubble, there were some overblown concerns on China and the slowdown since 2015, but the country has surprised on the upside this year,’ she says.

‘China’s economy is really starting to perform, not only from the real estate side of things, but its recovery is feeding through into consumer confidence now. That will be one of the key indicators going forward for how the rest of the world could perform.’

Bargain hunting

In terms of her selection process, Harling looks at companies from a bottom-up basis. She describes herself as a value hunter and likes grabbing a bargain.

‘We focus on global sectors and look at value. Some of our peers look at things regionally but we choose not to. We view everything on an individual company basis. We also focus intensely on total return rather than being benchmark-relative and think about the risk-adjusted return with every investment we make.

‘I think some of our peers are more top-down driven in terms of macro thinking. Some of them try to allocate to a country and backfill the companies, whereas we are thinking about the macro environment for any given company and whether that is conducive to the business performing or not,’ she says.

Harling does not do all of this alone. The co-head of emerging market fixed income at Investec, Peter Eerdmans, is also a named manager on the fund and she says the Citywire A-rated manager’s role on the strategy ‘is one of CIO’.

‘I am responsible for the day to day running of the fund, and the risk it generates. Peter is really there as a manager to oversee things and check the process is being run properly and that the risk in the portfolio is in line with our strategy,’ she says.

Despite being one of the lead managers on the fund, Harling looks to her team of six, as well as Investec’s macro desk, for support.

‘We don’t run a portfolio and an analyst model, everybody who contributes is an alpha generator. My job is to make sure we have the best risk-adjusted investments and to pull all the ideas together to make it the most robust and highest-performing portfolio that we can.’

The long game

One tactic that Harling employs to boost performance is maintaining long duration. A number of high-profile fixed income investors have cut duration in 2016 due to central bank monetary policy.

However, Harling believes that longer duration is better in the emerging market space and says curves in this sector are some of the steepest.

‘There might be opportunities to reduce duration right now but we take a bottom-up perspective looking at individual investment opportunities. Our overall portfolio currently sits slightly long of the benchmark but we have specific holdings that we feel are able to withstand a short rise in interest rates.

‘We get asked what we think about the impending rising rate environment. To me there is a difference between rising short rates and rising long rates. Most of my clients would like to see interest rates rise, so they can invest at higher yields. This suggests we should continue to see demand for long-end assets,’ Harling says.

‘When you think about our macro view, there is no evidence that inflationary pressures are coming through. Until we see an environment where central banks are hiking to counteract this and we see more concrete evidence of a global economy that is really picking up steam, then I think demand will remain for long-duration assets.’

Confidence builds

As bond yields have shrunk or even descended into negative territory, many investors have flocked to higher-yielding and riskier credits. Harling says emerging market debt offers investors more opportunities than other asset classes as they have seen the bottom of the cycle and markets are calmer.

‘From 2013 to 2015 emerging market economies were undergoing a correction and we have seen significant downgrade cycles. When we are looking at these economies and thinking about visibility it is very hard in the downturn to feel confident in that transparency and look forward.

‘Now we have seen stability and improvement, people are looking at emerging markets with more confidence at a time when yields are still quite attractive. This contrasts with developed markets, where surprise economic data continues to disappoint market expectations,’ she says.

Harling dismisses the prospect that the popularity of emerging market debt will wane and says this year’s big inflows have been in the emerging market hard currency sovereign space rather than corporate debt or local currency markets.

‘We saw significant outflows from emerging market local currency sectors from 2013 to 2015, so we think that some of this is simply a readjustment of that underweight position over two years,‘ she says.

Regardless of investor demand for emerging market corporate debt, Harling enjoys the perspective the asset class gives her. ‘It is like a jigsaw puzzle that you can put together every day. The multiple bits of information make our job fascinating, I love it,’ she says.

This article originally appeared in the November edition of Citywire Selector magazine.

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