Intense scrutiny from the international community and the threat of far-reaching sanctions do not undermine the fundamental strength of the Russian bond market.
That is the view of Daniel Moreno, head of emerging markets fixed income at London-based boutique ACPI Investment Managers.
‘There is one thing that is a clear negative and that is the political situation, meaning the geo-political situation. Russia is at the forefront of lots of discussions because of criticism and pressure from the United States and the EU, which are trying to push Russia into a corner.’
‘Even though it is particularly hard to analyse the outcomes, we are thinking this will be seeing a stabilisation within six months or so.’
Under Moreno’s stewardship, the fund has returned 8.19% over the six months to the end of June 2014. This compares to a 7.6% rise by its benchmark, the LCI ML HY/JPM EMLI+/JPM EMBI+ (1:1:1).
He attributes a large portion of this outperformance to the returns generated by exposure to Russia over a turbulent period. ‘We hold assets that we believe have value and, back in January, Russian bonds didn’t have value.’
'We sold out of our allocation. What we didn’t expect was that two months later they would become one of the cheaper emerging markets. So we took that opportunity to reinvest in Russia beyond the level we had held in January.'
Russian bonds are currently his largest hard currency bond exposure at around 10% while also being Moreno’s biggest local currency play, making up 5.1% of the fund. He predicts this exposure will continue to drive performance.
'There are several reasons why we are optimistic on Russia. Valuations do not correspond to the fundamentals and positioning is very light. Russia still has a very low level of debt to GDP and large amounts of FX reserves. Against that they also have a very strong middle class. With around 60% of the population being classed as middle class.'
Another change Moreno made upon taking over the fund was to increase the frontier markets exposure. He now allocates up to 20% in frontier market countries, while he has also increased the investable countries from 20-25 up to 45.
On a three-year basis, the Dublin-domiciled fund has returned 12.2% while its benchmark rose 27.5% over the same timeframe.