Market analysts say Argentina is currently in a state of risky business - as are most sub investment-grade countries - but Ashmore Investment Management Ltd. says: Bring it on.
With only 23 employees, this London-based firm is managing nearly $1 billion in emerging market debt and currency in special situations. Of that, between 30% and 40% are collateralized debt obligations or collateralized bond obligations.
The company has a target volume of $2 billion to $3 billion over the next couple of years. To reach that goal, Ashmore is not planning to add staff members, as it has the structure and the systems in place to accommodate that kind of growth. "The main thing is really working with investors who want to get exposure to this asset class," said Tony Kane, director of Ashmore.
The Ashmore team started to build expertise in emerging markets when it was a part of the Australian New Zealand Bank (ANZ). "We have been active market makers and investors and we started our mutual fund or common gold fund for third party investors in 1992," Kane said. "We call that the emerging markets liquid investment portfolio (EMLIP), and that fund has done very well. We eventually built that up and had the opportunity to buy it just over two years ago - which we did and formed Ashmore."
Most recently, the firm completed a $170 million CDO via Lehman Brothers in Singapore (see previous page). And, Kane hinted that there may be another CDO in the pipeline for later this year.
"We exclusively like to do one or two [CDOs] a year so that we kind of keep the pipeline coming and build a base around that, but we like actively managed portfolios as well," said Kane. "In fact, in some ways that's kind of where our preference is because you feel like you have a lot of value that way."
Interest in LatAm,
Unlike many investment firms, Ashmore's favorite regions are those that lie beneath the comfortable investment-grade rating level. "The market would generally perceive below investment-grade as being riskier and so therefore the prices are cheaper and more attractive from that point of view," said Kane. "The key from our point of view is understanding the situation in that country or that debt instrument such that we feel we understand the risk and the risk isn't as great as the market might perceive it. We are trying to find an edge there that is really being missed by the market."
That said, Ashmore sees a great deal of value in Latin America at the moment, which seems to be somewhat of a rarity for the company. Traditionally, Ashmore has viewed opportunities in other regions far more attractive, however Kane said that is not the case anymore.
Presently, the firm is very active in the Argentine market, despite all of the negative commentary from market players and the recent rating downgrades. "We think that there's a lot of value there [Argentina] now, and we are confident that conditions will improve. Spreads are very wide so it's a very good opportunity."
Additionally, the company has been very active in other Latin American countries including the Brazilian and the Mexican markets and from time to time, it has been active in the Venezuelan market.
Russia and Eastern Europe are other emerging market regions where Ashmore tends to see investment value as well. "As countries move up the scale, on the debt market particularly, the prices go up, the spreads go out, and therefore they are not as interesting to us," said Kane. "So countries like Poland, Czech and Hungary are not particularly interesting from a U.S. dollar commercial market debt perspective."
Going forward, Kane says despite the volatility in sub investment-grade rated countries the overall fundamentals of the countries are improving. As a result, countries like Mexico are stepping up the scale. Mexico is looking at a possible rating upgrade, which would boost the country to investment grade, in which case Ashmore would push its investments into lesser quality emerging markets. "People who have already been there come out and then go into other markets. That's a very positive thing," said Kane.
Ashmore is particularly focused on the fact that total debt issuance in emerging market countries will be negative this year. Because of this, interest payments and the reduction in principal will outweigh new issuances, which will generally be good for prices as a result of increased issuer supply.
Furthermore, according to Kane, more and more investors, particularly from the U.S., are adopting the Lehman Universal Index as their fixed-income benchmark and the Lehman Universal weights emerging-market debt at just under 4% "That is going to cause - and has been causing - institutions to add emerging-market debt to their portfolios for the first time," said Kane. He also referred to a study conducted by Lehman that said this trend (using the Lehman Universal) could invite between $20 billion and $40 billion of new cash to into emerging-market debt over the next year or two.
Some of the major concerns in the market right now include the attitude of the Paris Club on burden-sharing and parity among different classes of creditors, Kane said. The Paris Club is a forum for 19 creditor countries, which meet in Paris on a monthly basis to discuss debt issues. Among other things, the Paris Club addresses the issue of coordinated debt relief for developing countries that cannot service their debt.
Additionally, there are other global factors that the company is keeping its eyes on, like the U.S. and Japanese economies, as they could have negative ramifications for emerging markets.
"Right now, we are not affected by all the woes of the Nasdaq," Kane noted. "In fact we have really benefited from that because a lot of the hot money that came out of our market in 1998, ended up going into the Nasdaq and stayed out of our market. But we do suffer from some external factors. Eventually, if things get really bad, you can't escape anything of course. But so far it looks ok."
In touch with the markets
Being that many emerging-market investors are far removed from the countries and the markets that they are interested in, it helps that Ashmore's team is comprised of players that have been in the business for ten to 15 years and are natives of many of these countries.
The team also travels to these locations frequently meets with the IDB, the International Monetary Fund (IMF) and the U.S. Treasury. "We can balance the official viewpoint with what's going on locally. And we have very good contacts locally in the governments and outside the governments, so we have a balanced perspective," Kane said.