The Citywire AAA-rated team behind the Avaron Eastern Europe Fixed Income fund are holding around a fifth of the strategy in cash amid low levels of high-yielding issuance in the market.

The co-managers – Peter Priisalm, Valdur Jaht and Kristel Kivinurm – had 19.8% in cash in the €7.9 million fund at the end of August, which was due to a number of positions being called and profits being realised.

Speaking to Citywire Selector from Estonia, Priisalm said the trio were moved to reduce exposure in Austria and Poland, which accounts for 12.2% and 1.9% of the fund, respectively, after a period of corporate refinancing in the region.

‘In Poland in particular, we have seen yields come down and corporates use this as an opportunity to refinance. This is across several large issuers and we are essentially forced to close out the position, whereas we would rather keep the positions,’ he said.

Priisalm said the team has decided to sit on its cash holding, despite reducing it from 20.9% in July, as there are limited corporates issuing the higher yielding opportunities they would want.

He said there is activity in some areas, notably financials, but given the sector accounts for 38.5% of the fund at present, the team is reluctant to add to exposure here for fear of increasing single sector risk.

‘Issuance as a whole is very low and, while the financial sector tends to be more active in the higher yielding parts of the market, we don’t want to allocate too much to one area. There is a very low cost of risk in the sector, due to low levels of unemployment, but we remain cautious and prefer to wait for opportunities.

‘We are not using cash tactically but there has been limited new issuance in Eastern Europe which 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.’

The Avaron Eastern Europe Fixed Income fund returned 7.7% in euro terms over the three years to the end of August. This compares to a 3.7% rise by the BofA Merrill Lynch Eastern Europe Govt TR EUR, its Citywire-assigned benchmark, over the same period.