Latin Finance - July/August 2011 - 10

debt fund manager survey

Weighing Credit Risk
by Ben Miller

Investors are turning to corporate bonds and moving down the ratings spectrum to boost portfolios. This may be part of a strategic shift, but are they weighing credit risk properly?
or fund managers who wish to outperform the index, corporate bonds have become an essential part of any portfolio now that spread tightening has run its course among large sovereigns and blue-chips. Investors are taking on greater risk as they reach further down the ratings spectrum. So far, funds are largely undeterred from venturing into junk territory in a region that boasts strong fundamentals, but the threats posed by broader problems in Europe and the US are starting to cause some pushback. “Our outperformance versus the index really comes down to our focus on corporate credit in emerging markets,” says David Robbins, manager of the TCW Emerging Markets Income Fund, which had the highest return among EM debt funds in the three years to May 31, according to Lipper data. Corporates now dominate new issuance out of LatAm as investors seek higher yields through both dollar and local currency plays. Thanks to the strong economic growth story throughout the region, several debut names now have the scale to tap the dollar markets, offering the buyside the widest spectrum of corporate credits it has ever seen out of the region. Returns may be lagging US highyield and some other EM peers, but LatAm corporates have helped accounts outperform their indices while offering a relative safe haven in a wider EM universe

increasingly populated by weaker credits. For nearly two years, LatAm debt investors have branched out into new areas of risk. In this year’s discussion with the top returning EM debt funds, managers tell LatinFinance why the increased corporate buying likely represents a structural shift capable of withstanding possible upcoming shocks. Tight conditions among sovereign credits long ago pushed EM investors into the region’s high-grade corporates, quasisovereigns and banks. These in turn have become more expensive as well, pushing buyers into high-yielders and debutants they may have rebuffed in the past. “Spread tightening in the future is going to come from the corporate sector and the higher-yielding sovereign sector,” says Robbins whose TCW Emerging Markets Income Fund enjoyed 17.6% returns over the three-year period versus 9.3% on the EMBI Global index. Sovereigns in the region are fairly priced, he explains, with the spread tightening in EM’s top government credits behind us. Thankfully, lower-grade borrowers have rushed to market, filling the void and offering investors a broad menu of corporate credits. The region’s corporate borrowers issued $29.2 billion in 70 deals year-to-date through June 1, or $16.1 billion from 40 transactions if FIGs aren’t counted, according to Dealogic. That means non-government corporate issuers and banks accounted for 61.5% of regional issuance by volume,

10 LatinFinance

July/August 2011

Latin Finance - July/August 2011

Table of Contents for the Digital Edition of Latin Finance - July/August 2011