The mid-2000s were a good time for emerging markets as economies gained traction and investor interest grew.
Invesco’s Claudia Calich certainly made hay – clocking up Citywire ratings for 18 consecutive months for her strong performance across hard and local currency as well as corporate developing world debt. However, the global downturn of late 2008 changed all that.
In the eight years prior, Calich had consistently outperformed her benchmark. She returned 153% in US dollar terms compared to the JP Morgan EMBI Global, which rose 127% over the same period. But Calich has struggled to regain her form over the past four years.
Yes, she was badly hit by the downturn but she stands by her overall approach to what was, and still is a nascent asset class both in terms of size and sophistication.
‘Look, 2008 was a huge underestimation of liquidity requirements post Lehman,’ she says.
'You not only had the markets freezing up as a result of various credit risks and counterparty risks but there were also the outflows from riskier assets into safe havens and this trend hit us particularly hard.'
We had a fair share of redemptions, as did a lot of our competitors, but in a couple of cases we had higher than average redemptions and that translated into negative performance both on an absolute and relative basis.’
Calich says part of the impact on her performance came from being forced to sell key positions in a sub-optimal market. However, she does admit some of the riskier positions left her exposed.
‘There were a couple of credits where perhaps we should not have been overweight or we should have been underweight at that time, including some of the riskier calls like Argentina and some of the smaller corporates.’
In the aftermath Calich and her team reviewed their approach. They upped their liquidity threshold and not only applied this to corporates but in some cases to sovereigns as well.
‘The increased liquidity is coming from our exposure in EM corporates, where we have a wider array of companies to choose from than in 2008,’ says Calich.
Widening the search
The Invesco Emerging Market Bond fund’s performance has continued to suffer since the 2008 downturn.
Prior to the crash the fund had consistently beaten its benchmark, the JP Morgan EMBI Global index, but has lagged it in the four years since.
As part of her attempt to recover performance, Calich has broadened her investment universe and a number of African countries have appeared on her radar for the first time.
‘Right now the universe already includes more than 50 countries and we have recently started looking at Namibia, Zambia and Angola.’
Calich says the revised liquidity thresholds she has put in place have been key and enabled her to access markets on a firmer footing and gain exposure to these ‘smaller exotic countries’.
‘As far as the African exposure (and other smaller sovereigns), we continue to size the positions accordingly, so that less liquid instruments are assigned smaller holding sizes than the more liquid sovereigns.’ she says.
Staying close to her Latin American roots, Uruguay is another location Calich invests in and is one she retained exposure to through the 2008 downturn.
‘The big winners, particularly when you include 2009, were almost a mirror of the big losers in 2008. So, we are still holding some local bonds in Uruguay and some inflation-linked bonds in pesos and they really got destroyed in 2008,’ she says.
Calich believes this was a prime example of liquidity issues being caused by correlated macro impact, in this case the perceived weakness in the Brazilian economy which triggered a rush to sell LatAm positions wholescale.
‘But that would not have justified why those bonds were trading at 10% real yield. So if you look at those bonds in September 2009, there was a huge rally that continued for several years and now Uruguay is held as investment grade by two agencies, with Fitch still saying it is BBB.’
Macro concerns are never far from Calich’s mind and she has previously told Citywire that the eurozone’s political wrangling makes it a greater risk than emerging markets.
On the topic of Europe, Calich encapsulates her thoughts in a footballing analogy and says the monetary union is currently enjoying the half time rest created by the Outright Monetary Transactions policy.
However, she warns: ‘We are just now starting the second half of the game and hopefully we won’t go to penalty kicks.’
Calich’s European exposure is centred mainly on opportunities in Russia, which comprises almost a third of the benchmark allocation for the Emerging Markets Bond fund.
However, she is not just there to match the index and notes the merits of the country’s economy.
‘I think it is a very different economy from the rest of Europe. It is dependent on oil and gas but also, of course, on the rising domestic demand,’ she says.
‘So it is not directly impacted by what has happened in Europe in the same way an exporter like the Czech Republic or Poland will be, for example, or even Hungary.’
However, Calich says that while Poland and Hungary do not offer great potential on a sovereign or corporate debt basis, she is invested here as part of her Local Currencies Debt portfolio.
She also likes the Turkish lira, which she says has better prospects as Turkey has lessened its dependence on the eurozone as a trade partner and moved closer to the Middle East on that front.
While discussing the Baltic States, which suffered a market slowdown ahead of the eurozone’s full-blown debt crisis, Calich suggests these countries could in fact benefit from the increased scrutiny and support the EMU region is now experiencing.
‘If you are going to go into a crisis, maybe it’s better if you do so a little before your neighbour goes into a bigger crisis,’ she says.
‘Maybe if your house is burning and your neighbour’s house starts burning, it’s better if you already have the fire trucks parked on the block.'
‘The big fire in some of those countries has been put out and you are now doing the follow through and the clean-up and trying to rebuild.’
Calich’s fund, like many of the countries she invests in, is still on the road to recovery following the big burn-out of 2008 but it appears she is taking steps to ensure she is sufficiently protected should the flames rise again.
Calich’s fund has been slow to recover but has managed not to lose too much pace with her peers over the past four years.
She appears to have been hit by overweighting volatile markets at difficult times and has sought to counter liquidity risks by investing more widely into emerging corporates.
However, as corporates do not make up the bulk of her exposure in the Invesco Emerging Markets Bond fund, it remains to be seen whether this move will help turn around the fund’s performance.
Calich has also opened up of the fund’s investible universe over the past four years but sceptics may argue this has exposed it to more potential turbulence in the future.
This interview first appeared in the October 2012 edition of Citywire Global magazine.