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This material is marketing communication
Before making any final investment decisions, please read the prospectus, its Annual Report, and the KIID of the relevant Sub-Fund here
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Portfolio Manager comment Coeli Frontier Markets Fixed Income February 2022
Summary
The Fund lost 4.6% gross of fee in February 2022. The invasion of Ukraine by Russia on the 24 February 2022 is a defining moment for global geopolitics and not least frontier markets. The fund has not been invested in either Russia, Ukraine or Belarus, however all high risk positions performed poorly during the month.
Weakness in our markets is driven by increased probability of further military conflicts, trade disruption, commodity driven inflation and unknown effects of sanctions imposed on Russia.
Key Market Developments
The war in Ukraine is a new defining moment in global geopolitics. Russia invaded Ukraine and Ukraine fought back. Russia’s intentions are not clear, but appear to be a combination of protecting its borders from NATO and re- establishing its prior regions of influence.
The first degree impact has been a collapse in the bond prices of sovereign debt issued by Ukraine and Russia. Followed shortly by that of Belarus who is actively helping Russia.
The US, EU and NATO have responded with some of the harshest sanctions seen for decades. These sanctions and expectations of their impact have lead to a wider wave of secondary market effects including a collapse of the Russian Rouble and Russian securities in general.
In addition to a general repricing of risk premia we have seen the following third degree effects: Oil prices have breached 100 USD/barrel, Wheat prices have increased substantially, yields have widen across all Russia neighbor countries and not least inflation expectations have increased.
Any further sanctions against Russia will likely further result in increased inflation in Europe given the strong dependance of Europe on Russian gas.
In the background, we also had Mali, the country, be the first default of the year following its militant coup. Ghana, the largest issuer in our space, was also downgraded during the month by Moodys.
In February, we also had two large EU summits, one with Africa, where the EU pledge €150bn towards Africa and an Indo-Pacific summit where support for the region was indicated. The African summit lacked any specifics and the Indo-Pacific event was overshadowed by Ukraine’s war and did not deliver any concrete action points for our issuers.
Post month end, we have seen operational challenges in relation to Russia securities and restrictions on payments for non Russian owners further isolating Russian securities from global markets.
Portfolio Developments
On a relative basis the portfolio outperformed substantially due to the collapse (-70% YTD) in Belarus debt which has been the worst performing position in our benchmark and which we have never held. Equally, we did not hold any off benchmark positions in Ukraine or Russia.
Weakest performance came again from our position in Ghana which continued to underperform as the Government has failed to deliver on its pledge of the e-levy tax. We continue to hold our position given the pricing of our bonds implies significant distress.
Up until the war, the fund expanded its holdings in bonds in local currencies as a way to further reduce correlations of our low risk investments. Here were invested in local currency exposure in Uruguay, Dominican Republic and Kazakhstan. This was partially funded with our exit from Tajikistan bonds on the back of outperformance relative to Kazakhstan. Our local debt exposure now adds up to 8.5% of the portfolio.
By adding exposure in Dominican Republic and additional exposure in the Bahamas we have continued to add to position the portfolio to a rebound in global tourism. The drop in Ukraine and Russian tourists will unfortunately have a negative effect but should not offset the post covid recovery.
We also closed out of our position in Honduras after initially increasing our holdings. We initially increased the position on the back of back-tracked debt restructuring comments from the new government. We gave the new government the benefit of doubt, but closed out of all holdings after we did not see a change in sentiment around the Government intentions. Since, the government has indicated accounting issues by the previous government.
Finally, we further reduced our exposure in Zambia ahead of restructuring discussions. At the same time we added a new position in Bolivia on the back of their new issuance.
We ended the month with a risk level of 131% versus a year end figure of 133%.
Top 3 and Bottom 3 Contributors in DecemberTOP | BOTTOM |
| Lebanon – IMF discussions with new government | Ghana – lack of progress in renevue generation |
| Iraq – corporate oil producer exposure | Nigeria – large position |
| Tajikistan – high coupon and sold before war | Sri Lanka – rising inflation and no progress on FX reserves |
Source: Coeli; Bloomberg; Based on February 2022 contribution to the fund’s performance
Outlook
Russia and Belarus are likely to be un-investable while the current government remains in power.
Further breakdown of trading in commodities between Russia and the West will determine additional inflation pressures.
Despite risk premiums with regards to political risks in frontier markets are up, we believe that high risk issuers not directly linked to Russia have potential for price appreciation.
We have also yet to see appreciation from commodity exporting issuers who have not yet benefited. Equally, we expect weakness among issuers who are heavily dependent on commodity imports.
In line with history we expect frontier fixed income markets to reprice early on if we see any positive developments with regards to the conflict in the Ukraine.
Administrative Updates
For avoidance of doubt we would like to confirm that we are not invested in Russia, Ukraine or Belarus. We may consider investing in Ukraine in the future.
Kind Regards, Lars and Maciej
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| New SDR allocation as % of GDP for selected portfolio Countries |
| Zambia | 7.1% |
| Jamaica | 3.6% |
| Tajikistan | 3.0% |
| Namibia | 2.3% |
| Rwanda | 2.1% |
| Belize | 2.1% |
| Source: JP Morgan, 3 Aug 2021 |
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| Fund metrics 1) | Fund | NEXGEM 2) |
| Total fund assets (USDm) | 36 | |
| Yield to worst (%) | 10.8 | 8.6 |
| Spread (bps) | 915 | 700 |
| Running yield (%) | 6.3 | 6.0 |
| Spread duration (years) | 5.1 | 5.5 |
| Number of countries | 28 | 36 |
| Number of bonds | 66 | 153 |
| Performance | MTD | QTD | Since launch |
| Fund (before fees) | -4.59% | -6.27% | -6.27% |
| Fund (I USD) | -4.66% | -6.42% | -6.42% |
| Benchmark (NEXGEM) | -6.01% | -7.72% | -7.72% |
- As of end of Feb 2022, using weighted average data from JPM Morgan, Bloomberg, Coeli; proforma for any transactions completed before month Yields and spreads capped at 20% and 2000. Local currency spreads and yields adjusted for difference in IMF inflation forecasts for 2022 when aggregating
- NEXGEM refers to the Fund benchmark JPM NEXGEM For disclaimers please see the next page
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| Fund metrics 1) | Fund | NEXGEM 2) |
| Total fund assets (USDm) | 38 | |
| Yield to worst (%) | 8.6 | 7.2 |
| Spread (bps) | 754 | 611 |
| Running yield (%) | 6.6 | 6.7 |
| Spread duration (years) | 5.6 | 5.8 |
| Number of countries | 34 | 37 |
| Number of bonds | 78 | 150 |
| Performance (short term) | MTD | QTD |
| Fund (gross of fees) | 1.81% | 1.51% |
| Fund (I USD) | 1.73% | 1.34% |
| Benchmark (NEXGEM) | 1.26% | 1.27% |
| Performance (long term) | Since launch |
| Fund (gross of fees) | 5.74% |
| Fund (I USD) | 5.31% |
| Benchmark (NEXGEM) | 5.42% |
1) As of end of June 2021, using weighted average data from JPM Morgan, Bloomberg, Coeli; proforma for any transactions completed before month end
2) NEXGEM refers to the Fund benchmark JPM NEXGEM
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* the historic performance before 2018-06-30 is an estimated performance based on the R EUR share class adjusted for the different Investment Management fee. It shall be noted that the adjusted historical performance can differ from the real outcome and therefore shall only be seen as an indicator.
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Fund Managers Coeli Frontier Markets Fixed Income
Maciej Woznica
Lars Krabbe
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Fund Overview
| Fund manager | Maciej Woznica and Lars Krabbe |
| Base currency | USD |
| Benchmark | JPM NEXGEM |
| Share class I USD launch date | 31 / 03 / 2021 |
| Inception date | 29 / 03 / 2021 |
| NAV valuation point | 16.00 CET |
| I USD ISIN | LU2273160551 |
| I USD Bloomberg | COFMFIU LX |
| I USD management fee | 0.75% |
| KIID Risk category | 5 of 7 |
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Top Holdings (%)
| REPNAM 5 1/4 10/29/25 | 4.1% |
| ELSALV 7.65 06/15/35 | 2.9% |
| GHANA 8 1/8 03/26/32 | 2.7% |
| T 1 7/8 02/15/41 | 2.7% |
| NGERIA 7 7/8 02/16/32 | 2.6% |
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Instrument Types
| Fund | NEXGEM |
| Sovereign HC | 76% | 94% |
| Quasi Sovereign | 10% | 6% |
| Corporate | 4% | - |
| Supranational LC | 1% | - |
| Sovereign LC | 8% | - |
| Supranational HC | 0% | - |
| Cash & FX | 2% | - |
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Investment Objectives
The fund aims to provide returns by investing in bonds from Frontier Markets, the younger and less developed fixed income markets within the Emerging Markets segment. The fund’s objective is to outperform the JPM NEXGEM index by at least 75bps p.a.
Investment Universe
The core investment universe is represented by 36 countries as defined by the JPM NEXGEM index and is expanded by an additional 62 frontier countries where the World Bank is active. The fund will invest in hard currency sovereign bonds, quasi-sovereign bonds and selectively local currency bonds and corporate bonds. The majority of the fund’s investments are rated high yield.
Investment Process
The investment process focuses on selecting country exposures with positive momentum in terms of their economy, funding and politics. The process further aims to capture premiums from curve roll-downs, quasi-sovereigns, new issues and benchmark changes.
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ESG
On the ESG front, we now have two active engagements with two frontier issuers in order to encourage future use of sustainable bonds. Further, the fund participated in a “blue” restructuring of our small position in Belize bonds with a gain of over 20% on our initial investment. As part of the tender of our bonds, the government will need to set aside $23 million for protection of the local coral reef.
Administritive Updates
For new readers: We publish our Investor Letters on a monthly basis, however at quarter ends we focus on the full quarter. This allows our readers to follow us on a monthly or quarterly basis. Any feedback or comments are always welcome.
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DISCLAIMER. This is a marketing communication.
Before making any final investment decisions, please refer to the prospectus of Coeli SICAV I, its Annual Report, and the KIID of the relevant Sub-Fund. Relevant information documents are available in English at coeli.com. A summary of investor rights will be available at https://coeli.com/regulatory-information-coeli-asset-management-ab/.
Past performance is not a guarantee of future returns. The price of the investment may go up or down and an investor may not get back the amount originally invested.
Neither past performance nor simulated performance is an indicator or a guarantee of future performance Estimates of future returns should not be construed as a guarantee of future performance The value of bonds in the Fund and income received from it can go down as well as up, and investors may not get back the full amount invested. This material is not intended to be distributed in the USA or other countries where the content or the distribution may be prohibited The fund described herein may not be offered or sold to US citizens or residents of the USA or to a corporate, partnership or other entity created or organized in or under the law of the USA Although the information has been based on sources deemed be reliable, Coeli cannot guarantee its accuracy and assumes no liability whatsoever for incorrect or missing information nor for any loss, damage or claim arising from the use of the information in this material.
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