I am very pleased to announce the launch of our Silk Road Income Fund.
The fund’s investment strategy is both unique and innovative. It invests in sovereign and corporate debt securities across Africa, The Middle East and Central Asia. Further below, we make the case for why we believe that now is right time to invest in this opportunity, but first here is a summary of the key points:
- Current average Yield to Maturity above 16%
- Average duration of 3.4 years
- High diversification: currently 65 holdings, 27 countries, 17 currencies
- Luxembourg UCITSIII Fund offering weekly liquidity
- Focus on uncovered regions across the Silk Road: A good fund to add on to your existing emerging markets debt portfolio
Why do we think now is the right time to invest in Frontier Markets Debt?
It very likely that we are at the advent of what could be dubbed “The mother of all carry trades” and this time it is not only coming from Asia but also from Europe and the USA.
Just put yourself in the place of a European or US pension fund manager right now. Your future financial liabilities not only seem to be coming closer as the average age of your savers is increasing, but they are also growing due to the compounded effect of current low interest rates!
The belief you used to have that the MSCI World will produce around 10% per annum has been shaken after yet another recent equity market sell off? You believed this because it had simply become taken for granted and it was even affirmed by your actuary. The same actuary that also might have told you to reduce your exposure to equities only a few months ago (after the sell off) in order to reduce your risk, only to see the market fiercely bounce back over the summer. It was a rally in which very few believed and now you are reluctant to get involved because it might actually turn out to be that ‘sucker rally’ you had been suspicious of. Developed world government debt yields are too low and commodities are looking mighty expensive! You need to cover those future liabilities and you need to find a way to cover those future pension liabilities!
As most of your holdings may be in investment grade bonds, which only yield around 2%, you know this is not enough and you take some comfort from the fact that nobody seems to be worried about inflation these days, but let us not forget there was a record amount of fresh money created recently and the inflationary effects it may have on the economy are being dismissed as a problem that may lie somewhere in the future, just like your liabilities!
Although the above may seem rather simplified and in the interest in of avoiding a longer introduction, it certainly does describe the issues at hand behind the doors of most of our world’s institutional long term investors. What is for sure is that these investors will increasingly be forced out of their comfort zone in search of returns due the current low yields in government bonds. In other words, your pension funds will eventually wind up investing a part of your future savings in frontier debt markets.
We have already seen this trade unfolding in the corporate bond arena, investors will likely continue to venture out further into the wilderness of frontier markets in search of high yields. In other words, we may be seeing “the mother of all carry trades” starting to unfold as US and European institutional investors allocate outside of their comfort zone into exotic places with strange currencies!
Just like when you travel out to an emerging market for the first time, the apprehension of the unknown and the risks ease soon after arrival. Investors will come to terms that the reality in many of these investment destinations is far better than what had been initially perceived from a distance.
Many of these countries have very healthy fiscal environments with low debt and often benefit from high reserves derived from exporting commodities.
There is very little consumer and/or corporate debt. The local banking system is reluctant to lend money or lack the experience required to evaluate the risk and therefore capital adequacy ratios in the financial sector tend to be very solid.
Many of these governments are issuing debt for the purpose of creating a yield curve in order to facilitate a back bone for a corporate bond market, a vital element for the creation of a strong and efficient economy where risk can be more objectively priced. Most of these economies are willing to pay a premium in order to achieve this objective even though they have plenty of assets to back the debt outstanding.
We have been seeing many investors and have been to a number of conferences recently and it sounds like we all agree that emerging market economies continue to grow despite the world being in recession. As these economies continue to strengthen so will their respective currencies, not only will these currencies serve as a ‘macro-economic score card’, but so will the future investment activity that comes from both the increasing number of individuals that enter the middle class which in turn will drive increased inflows from the respective local investment management industry. All these factors should be seen as are supportive for local currencies.
Even the economies with currencies that are pegged to the US$ will currently have to pay a premium in order to build our their own yield curve. Clear examples of this are Qatar and the UAE.
Where will the Silk Route Income Fund invest?
The Silk Route Income Fund will invest in both sovereign and corporate debt in Africa, The Middle East and Central Asia. It will provide global investors with a wider reach and diversification that is currently available by the existing frontier market debt indexes. As bond issuance continues to be on the increase, we will have the possibility to further diversify going forward.
Below is an indicative chart of the yield to maturity of the various issuers in our universe vs. their respective credit ratings.
If we take a look at our current portfolio as of last week, the opportunity is still very much there. The portfolio’s yield to maturity was at 16.54% with the average cash price of 87.71 cent on the dollar as many of these issues continue to trade at a very compelling premium!
There is little doubt that investing in frontier debt markets now represents a unique opportunity to capture the returns investors are looking for.
For more information, please visit http://www.silkinvest.com/
With kind regards
Baldwin
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