SYZ Asset Management's CIO and deputy CIO have gained exposure to the Turkish lira bond market without running a credit risk, in what is their most ‘creative investment of the year’.
Speaking to Citywire Switzerland, CIO Fabrizio Quirighetti and deputy CIO and chief economist Adrien Pichoud revealed that they spotted a hidden gem in a Turkish supranational 10-year bond with zero coupon.
The duo invested into the International Finance Corporation’s IFC 0% bond with a maturity date set for 15 February 2029, subscribing to it for both the fixed income and conservative multi asset funds.
‘We jumped in early February as we found the perfect instrument to get some exposure without taking excessive risk: a 10-year, zero coupon bond issued by an AAA supranational,’ Quirighetti said.
‘When this new issue was released, we immediately knew it was the perfect instrument we were looking for.’
Not only is the Turkish lira very cheap, the duo explained, it also offers a 10% interest rate. However, gaining exposure to the market was not so easy.
‘The challenge is that this currency was and still is cheap for many good reasons such as the political uncertainties, high inflation and a large current account deficit in excess of 4% of GDP. So you could enter the market without knowing the bottom and you have to be ready to take perhaps another 10% downturn very quickly,’ the CIO said.
By investing in the supranational’s bond, it allowed SYZ AM to run this type of risk while being liquid and not having any specific credit risk because it is AAA rated, they said.
‘The beauty is that as it's a zero coupon in a cheap currency offering high interest rates, you have many levers. If the Turkish lira rate declines, with a long term zero coupon bond you have a lot of sensitivity and you thus benefit vastly if rates move down,’ Pichoud said.
‘For example, if rates decrease from 10% to 8%, the price of bonds will jump from 31.5 to 40 (+27%).
‘In ten years, this bond will be worth TRY 100. Assuming and reasonably expecting that the Turkish lira will be trading around the current level, you will realise a 10% annualised performance.
The bond price has moved from 31.6 to 36 since the investment was first made in February 2017, gaining close to 15% in about six months. Meanwhile, the currency has appreciated against the dollar and depreciated 7-8% against the euro, the pair said.
The trade still makes sense today, they said, as Turkish rates remain quite high relative to other fixed income instruments and the currency continues to lag.
‘In terms of all the stars aligning, it was among the best creative ideas we had this year but we clearly didn't allocate a large exposure in our funds. So in terms of contribution to performance, it's certainly not the main contributor.’