Emerging markets fund managers reveal most exotic bets

On the 08/06/19 at 7:57AM


Adrien Paredes-Vanheule

Asset News has asked three emerging and frontier markets investors to disclose their most exotic positions.

Beyond evoking nice destinations for summer holidays, countries classified as emerging and frontier markets by index providers can turn into quite original investments for specialised fund managers. For instance, Franklin Templeton had invested in corporates based in Azerbaijan or Trinidad and Tobago in its Emerging Market Corporate Debt fund as of 30 June 2019.

Says Alejandro Arevalo, emerging market debt portfolio manager at Jupiter AM, Central America forms one of the largest overweight positions in the Latin America's investments of the Jupiter Emerging Market Corporate Bond fund and Guatemala its biggest exposure in that pocket.

"The investable universe is limited with five corporate issuers in Guatemala but in our view the overall fundamentals are strong. For instance, we hold debt of local cement manufacturer Cementos Progreso and Banco Industrial, the largest financial institution in the country. Guatemala is often overlooked by international investors because issuance size is often too small. Investors prepared to do their own diligence can really unlock value in such a market", he explains to Asset News.

Two other Central America's bets in Jupiter's EM corporate bond fund remain Panama, with holdings in Banco General and energy provider AES Panama, and Costa Rica.

"Generally, in Central America, the average size of an issue is below $300m. As a result, the bond issuer doesn’t go into the main benchmarks and that limits the ability of large international investors to buy these bonds. We don’t hold bonds in either Salvador, Nicaragua or Honduras in part because there is so little corporate issuance coming out of these countries”, Arevalo says.

Jupiter's portfolio manager considers the fund's holding in Ivory Coast's sovereign debt as its most exotic position, highlighting the absence of corporate issuances in the African country. 

'Going the extra mile'

West Africa is also picked by Emre Akcakmak, portfolio advisor at Stockholm-based investment manager East Capital, when asked the company's most unusual bet. Speaking to Asset News, he reveals Sonatel, a leading telecom operator in five West African countries Senegal, Mali, Guinea, Bissau and Sierra Leone, is probably the one most exotic holding of the firm's investments at the moment.

"Sonatel has a fast-growing mobile payments operation which we think is following the footsteps of Kenyan Safaricom’s highly successful M-Pesa business. We came across to this company first during a simple screening process but then were able to meet with management on different occasions.

"The company represents one of the most interesting smartphone penetration and mobile money stories with an opportunity to grow with almost 60 million population in the five markets they operate. We’re particularly encouraged by the high dividend payments in a relatively stable West African CFA franc which is pegged to the Euro. The last dividend we received in May 2019 suggested 9% yield", pinpoints Akcakmak.

He says going the extra mile is in the manager's DNA. So is being on the ground to monitor countries' development and not rely on headlines too. Hence the team visits well-covered countries such as Argentina, Vietnam and Kuwait but also flies to less known locations including Zimbabwe, Iraq and Rwanda.

"Even if some of these trips do not lead to investment decisions after our first time, it is always good to meet the reality on the ground, form our own opinions and have some follow up trips to see how these markets develop and if there are any emerging opportunities. We do avoid investing in some sanctioned countries, countries which pose security risks and some having certain issues such as currency repatriation", Akcakmak outlines

The potential of the Three Seas' region

With its 10-year background investing in Eastern Europe and Central Asia, Pieter van der Byl's focus is rather East. The senior portfolio manager works for Liechtenstein-based investment boutique Principal Asset Management, from where he runs C-Quadrat Orient and Occident fund - also called the Three Seas fund (Black Sea, Caspian Sea, Mediterranean Sea) - which launched earlier this year. 

"The C-Quadrat Orient and Occident Fund focuses mainly on opportunities arising from China’s One Belt One Road project for the countries that fall along its path. Investment potential linked to the project in Central Asia and Eastern Europe is huge. Also in terms of demographics, the region of the Three Seas carries an interesting potential", he points out to Asset News.

The fund currently carries positions in the Northern Iraq/ Kurdistan region, of which van der Byl says it contains some of the most interesting and underdeveloped oil fields worldwide. Hence, it is invested in Gulf Keystone and Genel Energy, both trading in London, in addition to DNO International, which is listed on the Oslo Bors. 

"We would prefer to invest locally but if there is no established domestic stock exchange, as is the case here, we invest on foreign exchanges", he adds. van der Byl says the firm is monitoring very closely Tajikistan and Uzbekistan as it looks to make first steps in these markets.

"Nonetheless, it depends on how much these countries will be open for business with foreign investors and the ease of investing. However, we hold positions in neighbouring Kazakhstan.  We own companies such as Kazatomprom, that produces 20% of the world’s uranium or the extremely attractively valued Halyk Savings Bank of Kazakhstan. We initially take small positions, which we build over time as we become more comfortable with the company and its valuation."

His most exotic value call remains a Warsaw-listed Ukrainian company called Kernel Holding, the world’s largest producer of sunflower oil and a leading Ukrainian agricultural company. "I believe that few investors realise there are these interesting Ukrainian companies traded on the Warsaw Stock Exchange."

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