New Emerging Markets Bond Fund Goes Short (Term)

Dec 1 2010 | 1:09pm ET

Steve Landis of FH International Asset Management says what differentiates the firm's new fund from its competition is that the team behind it knows both short-term debt and emerging markets.

“We’re good at managing short-term debt in emerging markets—both from the short-term debt side of the equation and from the emerging market side of the equation," he explains. "Which is something a lot of people don’t have—a lot of emerging markets people are not interest rate people, or their focus is on index performance or just high-vol total return.”

Landis, portfolio manager for the new FH Emerging Markets Short Term Debt Fund, describes it as a “niche product,” staking a claim in an emerging markets landscape he sees as dominated by investors pursuing total return strategies and “real money, index-oriented investors” racing to emerging markets debt in search of “index-like returns.”

The FH fund, by contrast, is “casting its net a little differently in the emerging markets sea.

“We think many investors are concerned about rates and are looking for current yield, and the alternatives that can generate current yield are desperately disappointing, as are money market funds," Landis says. "We’ve tried to come up with a product that meets the duration constraint of a short-term bond fund.”

Landis, who describes himself as a “short end of the yield curve kind of guy,” joined FH in 2000. Prior to this, he’d traded government securities (“especially at the short end of the yield curve”), run mutual funds (“the kind of products that got me involved in emerging market debt”) and run a short-term bond fund. He says that in making the switch from trading government securities to trading merchant-market, chiefly sovereign, debt, he discovered that “all the analytic techniques that I’d used involving fundamental analysis were very relevant for trading emerging market debt.”

For his fund’s purposes, emerging markets include any of the countries in the JPMorgan Emerging Market Bond and JPMorgan Corporate Emerging Bond indices, but also other countries of interest to the investment team.

“The threshold for being included in those indices is demanding, and excludes a number of countries that I think very few people would argue are emerging market countries...[that] simply don’t have a large enough debt stock or a large enough issue size to be included,” says Landis. (As an example, he says they are currently looking at a mining project in Sierra Leone—a country that “may be in some African sub-index” does not make the cut for the larger indices.)

Those larger indices, says Landis, are “predominantly investment grade,” which means they’re sensitive to interest rates; that's why it’s important “professionals with our background are choosing to do what we’re doing.”

“One of the biggest single decisions you make in determining your total return outcome is where you set the duration of your portfolio. So, if it’s investment-grade debt, unless there’s some material spread widening or spread tightening, interest rates will matter, U.S. rates will matter.”

Landis feels this is where his team's experience comes into play—their strong analytical skills, he says, will allow them to continue to generate the kind of rates they’ve seen in their model portfolio.

“I think the term ‘portable alpha’ is very much out of vogue these days, but what we’re trying to do right now is construct a portfolio that lives within the very well-defined investment constraints of the peer group we’re trying to outperform…The most important credit hurdle we look at for this portfolio is the ability of the obligor to redeem at par  because this is intended to be a zero-default  portfolio and since we’re buying short-term debt, the inevitable first question you ask yourself is, ‘How can they return my principal at par at maturity?’

“And what we do is try to do is construct a portfolio that allows us to keep an acceptable level of diversification, live within our tightly defined maturity guidelines, and maintain an investment grade credit rating.”

The new fund has a target size of about $500 million and a minimum investment of $250,000. It’s a good fit, he says, for “those interested in current income, low-volatility, attractive, absolute risk-adjusted return.”


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