Thriving South American economies likely to be the most attractive fixed income investment in near future, according to fund experts

News - Funds

Written by Ray Clancy

Thursday, 22 July 2010 09:26

Thriving economies such as Brazil, Mexico and Uruguay are helping funds deliver results and likely to be the most attractive fixed income investment themes for the foreseeable future, it is claimed.

According to Ralph Gasser, fixed income product specialist at Swiss & Global Asset Management, the exclusive manager of Julius Baer Funds, its Local Emerging Bond Fund has benefited from exposure to thriving economies.

He revealed that over the last 10 years, the Julius Baer Local Emerging Bond Fund has returned a cumulative165.09% exceeding the benchmark, JP Morgan ELMI+, by 48.42%. Assets under management are now US$3.7 billion, up 57% year to date.

‘We believe that local emerging markets debt will be one of the most attractive fixed income investment themes for the foreseeable future, underpinned by high interest rate returns and a strategic trend of further material currency appreciation,’ he said.

Despite a turbulent first six months for global financial markets the fund delivered a positive return of 1.7%, outperforming its benchmark by 1.5%. The fund also outperformed other emerging markets asset classes, for example emerging markets equities which were down 7.2%) and commodities, down 9.6%.

The main positive contributors to year-to-date absolute and relative performance came from combined FX, credit and/or rates positions in Indonesia, Mexico, Brazil, Colombia, Russia, Uruguay, Kazakhstan and Russia. ‘At the same time, Central and Eastern European FX, to which we have been materially underweight over the first six months, detracted somewhat given the higher link of these currencies to the EUR,’ explained Gasser.

‘Strategy wise, and not withstanding current market volatility, we maintain our preference for emerging markets currencies and credit exposure over emerging markets interest rate positions, in turn also reflecting our overall constructive stance on the asset class,’ he added.

In terms of currency strategy he added; ‘We continue to favour country exposure offering high nominal and real yield levels, comparatively steep yield curves, a commodity backdrop and pro-cyclical, excess growth characteristics’.

The fund’s main currency assets are in the Mexican Peso, the Brazilian Real, Indonesian Rupiah, the South African Rand and Polish Zloty.

Gasser expects the peso offers attractive yields and a good proxy on a US recovery. ‘Mexico will become part of the Citigroup WGBI Index series in October 2010 which will translate into significant additional demand,’ he explained.

In terms of the Real and Rupiah he says both are diversified commodity linked plays with strong domestic growth drivers and little funding challenges that offer high nominal/real carry returns.

A good proxy on global growth backed by commodity prices means that the Rand is seeing further traction and is an attractive price, while the Zloty has the strongest economic fundamentals among the central European top three countries, leading the growth cycle in the region.