Man GLG outlines plans for EM debt buildout

The UK hedge fund group’s co-CEO and its first head of emerging-market debt explain why and how the firm is expanding its investment in the asset class.
Man GLG outlines plans for EM debt buildout

UK-based alternatives manager Man GLG is set to build a five-strong emerging-market debt team and launch several products in the coming year, following the recent hire of Guillermo Osses as its first head of EM debt.

Osses, previously head of EM debt at HSBC Global Asset Management, and Man GLG co-CEO Teun Johnston spoke to AsianInvestor about the firm's investment strategy and expansion plans.

The aim is to build a team in the first half of the year before marketing products, said London-based Johnston, to whom Osses reports. “It’s a very broad strategy, so you can’t do that with one or two people.”

A source familiar with Man GLG, the discretionary investment arm of UK hedge fund giant Man Group, said the team was expected to be five-strong by the time it launched its first strategies.

Man GLG has not set a AUM target or time frame for its investment in EM debt, noted Johnston. “If we deliver performance, then this business will grow to a size we will all be comfortable with.”

While emerging markets are having a torrid time, he said the firm was focused on “long-term considerations rather than trying to decide whether a particularly strategy is hot or not”.

That said, now is a good time to take advantage of wide spreads and low valuations in local-currency bonds issued by commodity-exporting countries in Latin America, said New York-based Osses, as “you’re getting paid for the risk you’re taking”. 

He cited Brazil as an example, where 2023-maturity US dollar government bonds paid around Libor plus 74 basis points at the start of January 2013, but as of Wednesday (February 10) were paying Libor plus 508bp. “It is true that the quality of credit in Brazil has worsened,” said Osses, “but this is still a country that could probably pay its external debt two times over.”

The reason for such a dramatic widening of spreads in debt markets such as Brazil is that many institutional investors are limited to investment-grade debt and had massive positions in those countries’ debt, noted Osses. Hence they had to sell when those sovereigns were downgraded, regardless of the credit situation. Standard & Poor’s downgraded Brazil to junk in September last year, and Fitch did the same in December. 

“This type of technical influence is likely to last for quite a few months, but at some point the market should rebalance,” he said. “Latin American commodity exporters have all tended to suffer this way.”

Currencies such as the South African rand and the Turkish lira are also attractive now, noted Osses, having depreciated significantly against the dollar.

Moreover, for most of the last four to five years, interest rates in local-currency bonds have tended to trade at the lower end of the historical range, but there have been substantial shifts over the past year, said Osses. The JP Morgan Emerging Market Government Bond Index has risen from a relatively low yield of 5.16% in May 2013 to a 6.88% as of Wednesday (February 10), the high end of the yield range for this index since 2010.

In respect of Asia, while money can be made from being long the region’s debt markets, said Osses, they are now not so attractive from a relative-value perspective globally. For one thing, the JP Morgan EM corporate bond index’s Asia segment posted positive returns last year of 3.54%. In addition, more readjustments are needed in the Chinese economy, which is likely to negatively impact corporates in the region, he added. And in any case Asian credit markets are not particularly liquid, said Osses.

Hence Man GLG is likely, for the time being, to focus on Latin American and European countries, whose debt markets have corrected much more significantly than those in Asia, he noted. “Indonesia is probably the only market in Asia that might have corrected in a comparable way to what we’ve seen in the major commodity exporting countries.”

Local-currency instruments have become the most attractive of the EM debt segments, said Osses, followed by dollar-denominated EM bonds issued by major commodity-exporting countries. “We focus on the biggest currencies on the hard-currency side; where there is plenty of liquidity.”

Asked about his motivation for moving to Man GLG, Osses said he felt he would be well placed to seek alpha with a nimble team, focusing on only a few strategies and unencumbered by banking regulations.

“In terms of seeking alpha, it’s much easier for a smaller or more homogeneous team to manage five or six strategies than for a larger team to manage 30 or 40 in the same way,” he said. The firm declined to provide details of planned products at this stage.

Osses’ hire underlines Man GLG’s continued expansion into debt investment. It follows the late-2014 purchase of US leveraged loan manager Silvermine Capital and last year’s hire of Himanshu Gulati as head of US distressed credit investments from Perry Capital.

As of the third quarter last year Man had $12 billion of its $78 billion portfolio invested in fixed income, with $4.2 billion in US credit, $4 billion in convertibles, $2.2 billion in long-only fixed income, $1 billion in European collateralised loan obligations and $600 million in market-neutral strategies.

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