In this weekly series, investment reporter Elliot Gulliver-Needham sits down with a fund manager for a Q&A. This week, we’re hearing from Victoria Harling, head of emerging market corporate debt at Ninety One.
How does your fund stand out from others in the same market?
Our emerging market corporate credit fund is built from the bottom up, based on our high-conviction investment ideas and a very careful eye on market valuations.
We are ‘benchmark-aware’ rather than ‘benchmark-relative’ investors, this approach means the fund typically has a higher active risk than its peers to facilitate strong alpha generation through the cycle. This is driven by higher weightings in positions we believe can outperform over time regardless of benchmark weight.
This approach appeals to investors with a medium to long-term horizon as we are patient investors as opposed to momentum chasers. While the volatility of our fund tends to be higher than its peers, it’s broadly similar to the volatility of the emerging market sovereign debt market, which tends to be put in the same asset-allocation bucket as the emerging market corporate credit asset class.
Which of your holdings are you most excited about?
Given our bottom-up focus, we are excited about many of the fund’s holdings. We continue to see very attractive return opportunities from some high-yield (B and CCC rated) holdings that have emerged from liquidity crunches; we see opportunities here across tech, media and telecomms, as well as oil and gas.
In the investment-grade and BB rated market, we think spread curves are too steep and we expect these curves to flatten which should pave the way for strong returns from credit spread compression alone.
From a sector perspective, there is plenty of potential for M&A activity in metals and mining this year, and so we continue to favour takeover targets, although market valuations already reflect a lot of the potential positive news there.
From an economic-outcome perspective, we think India is a positive structural story given the different pillars of growth there. Our positioning there is mainly in bond issuers involved in renewable energy – these companies are not only contributing to the structural growth of the economy, they are actively shifting the Indian economy away from coal to renewable energy, which is crucial for the future of our planet.
What is the biggest mistake you’ve ever made in the fund?
The fund was positioned too aggressively in China’s real estate sector going into the COVID pandemic and before the subsequent collapse of the Chinese property market.
Our rationale for holding the positions was our observation of how the Chinese government had reacted to previous real-estate downturns. That, coupled with real estate being such a major part of the Chinese economy, led us to believe the sector was too important for the authorities to allow it to fail. That view turned out to be incorrect.
Given multiple signals of support for the sector from China’s authorities at various stages, we felt vindicated to stay invested, however concrete measures to stabilise the sector ultimately proved elusive, resulting in prolonged downturn and a significantly worse outcomes for bond investors than we had anticipated.
As a result, we have implemented a more disciplined stop-loss strategy and introduced tighter controls within our investment decision-making process to more clearly distinguish between concrete facts versus messaging.
What’s one change you made in the fund recently? Why didn’t you make it sooner?
We have reduced – and continue to trim – the fund’s exposure to Argentina. A recent scramble by other investors to close underweight positioning has pushed up valuations. As a result, we see more compelling return potential in other investment opportunities that have better credit ratings and have less downside risk.
We did not reduce our position sooner given the turnaround in sentiment towards Argentina’s corporate bond market stemming from optimism around a potential economic turnaround story under President Milei, who was elected at the end of last year.
Milei’s high level of domestic approval and backing on the international stage led us to expect the positive momentum to continue, allowing us to be patient on reducing our multi-year overweight, which has been a strong contributor to our performance over time.
It could turn out that we reduced the fund’s exposure too early, given the high yields on offer, but there are plenty of other opportunities to invest in that look more attractive to us at this stage.