Portfolio Manager comment Coeli Frontier Markets Fixed Income July 2021
July 2021 – “They Paid”
The fund had a negative performance of 0.30% gross of fees in July 2021. The primary driver of performance was the overall risk-off sentiment in our space combined with more specific weakness in El Salvador and Tunisia.
The 10-year treasuries finished the month at a yield of 1.22% versus 1.47% at the end of June. BB-rated issuers were the main beneficiaries of the continued rate tightening but not the rest of the space with the index delivering a return of 1 basis point. Post month end, the IMF officially approved the issuance of $650 billion Special Drawing Rights allocation to members in response to the Corona crisis. As shown in the table below, the SDR represent a significant amount for a number of our issuers. The next catalyst for frontier issuers will be the transfer of SDRs from developed nations to specific frontier countries and the mechanisms involved.
|New SDR allocation as % of GDP for selected portfolio Countries|
|Source: JP Morgan, 3 Aug 2021|
In Tunisia, we saw the elected president use Covid related protests to suspend parliament and de facto fire the prime minister in a move that took most by surprise and markets repriced down Tunisian bonds by over 8% in July. Lack of progress and stalemate between the president, prime minister and a coalition-driven parliament has been a continuous challenge for Tunisia. The strongman approach, though supposedly in line with a broad interpretation of the constitution, has so far been given the benefit of doubt by the international community. We remain constructive on our holding of just under 3%.
Lack of reconciliation between El Salvador and the US and continued strongman tactics from the current president has resulted in negative returns for the month. At the month-end, El Salvador was downgraded to Caa1 by Moody’s which resulted in some of the bonds now yield in excess of 10%. Post downgrade we increased our holdings by 1%.
End of July, we saw Sri Lanka repay its $1 billion bond issue which was a concern and driver for the underperformance of Sri Lanka over the past two months. Sri Lanka remains a core holding which we also increased back to 8% of the fund following the payment.
Zambia was the best performing issuer in the fund and index in July on the back of commodity-driven recovery in the economy and anticipation of the SDR allocation, where Zambia is one of the largest beneficiaries in relation to existing hard currency reserves.
New issuance of bonds by frontier issuers continued ahead of the London holiday month of August. We have seen new issuance from Ivory Coast, Pakistan, Uzbekistan, Benin, and Cameroon. Our new holding in Uzbekistan is now our first “SDG bond”, where the proceeds of the bond are directly linked to numerous SDG targets. The main benefits for us are increased transparency, additional reporting, and potential increased ESG driven demand for such bonds.
The largest positions in the fund are Ghana, Nigeria, and Sri Lanka. Our current top-down spread risk level is at 118%. The increase in risk is partially due to our increase in local currency exposure to 4.8% of the portfolio. We have a yield just short of 8% and due to additional liquidity from the SDR distributions we expect an increased focus on our asset class in the coming months.
|Fund metrics 1)||Fund||NEXGEM 2)|
|Total fund assets (USDm)||37|
|Yield to worst (%)||7.9||6.8|
|Spread duration (years)||5.6||6.0|
|Number of countries||32||35|
|Number of bonds||73||144|
|Fund (gross of fees)||-0.30%||-0.30%|
|Fund (I USD)||-0.38%||-0.38%|
1) As of end of June 2021, using data from JPM Morgan, Bloomberg, Coeli
2) JPM NEXGEM is the fund’s benchmark
DISCLAIMER. The information provided here does not constitute professional financial advice. Past performance is not a guarantee of future returns. The price of the investment may go up or down and an investor may not get back the amount originally invested. The key investor information document (KIID) and prospectus are available at www.coeli.se.