The objective is to outperform the benchmark, over using discretionary management on all bond markets from emerging countries.
Tough luck for us in May as we had 4 completely uncorrelated risks going against us at the same time. Our fund EdR Emerging Bonds is down -4.06% (I share) confirming its traits as one of the least market correlated EM debt fund. For the market as a whole the trend is still positive with +0.66% for hard currency debt (EMBI Global hedged in EUR) and +1.96% for local currency debt (GBI-EM index). The biggest impact came from our position in commodity trader Noble. This strategy was a significant contributor to our performance since early 2016 with bonds more than doubling to reach a level close to par. In the meantime the company, like many of its peers in the commodity sector, was forced to deleverage and restructure its business in order to survive. Following an unexpected Q1 loss, investor sentiment turned from one extreme to the other pushing bonds down more than 50% amid low liquidity. Having taken a good part of our profits, were still left with enough size to get hurt. Being now back to square one with distressed valuations we see positive asymmetry again even accounting for the worst case scenario of a company liquidation. This is not our base case however as we think the company should be able to restructure its business and capital structure leaving some upside for bondholders at these levels. The possibility of a strategic partnership (talks about a Chinese state owned entity) is still there and one positive is that short term liquidity is adequate : banks have a strong incentive to roll over their existing facilities. The strength of the EUR, which was widespread, including against some emerging currencies like our Mexican peso and Turkish lira positions was another blow. Finally 2 other negative contributors were our special situations in Brazil and Croatia where both issuers have entered a restructuring process some time ago. However the final terms of these negotiations are still unknown and in the meantime it can take very little trading flow to cause volatility one way or the other. A rally in US treasuries on the back of Trump related political uncertainty and subdued inflation figures was the main support for EM debt. Our low duration didn't help us there but given the massive positioning of investors in US treasuries we prefer to remain cautious. Inflows are still there but valuations and positioning are unattractive with a primary market still flooded by new issues. As such we shall remain patient with an overall low exposure.
Share class (C-EUR)
(1) The rating grades the funds on a scale from 1 to 7. This rating system is based on the average fluctuations of the net asset value over the past five years. It corresponds to the variation range of the portfolio upwards and downwards. If the net asset value is less than 5 years old, the rating is determined by other regulatory calculation methods. Historical data such as those used to calculate the rating may not be a reliable indication of the future risk profile. The current category is neither a guarantee nor an objective. Category 1 does not signify a risk-free investment.