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Portfolio Manager comment Coeli Frontier Markets Fixed Income October 2021
The fund had negative performance of 0.65% gross of fees in October. The fund performance since launch was positive 2.42% at the end of the month. October performance was defined by volatility in our markets, continued de-risking and followed by a recovery in the last week of the month. Ghana was the main underperformer during the month.Key Market Developments
Market weakness in September continued in October until the third week of the month. Of the three macro drivers highlighted last month, (i) China contagion, (ii) US rates widening, (iii) stagflation, the focus in October has been on the last two.
On China (i), several small developers defaulted but the second largest developer managed to delay the actual default through a payment. General risk appetite sensitivity to new headlines has subsided outside of Asian credit. US 10 year rates (ii) stopped widening during the month, but saw shorter maturities continue to widen. 30 year rates actually tightened during the month resulting in a curve flattening in US rates. Weak growth and inflation headlines (iii) were on the forefront for all investors. Inflation has been driven by the steep rise in commodities, chip shortages and shipping bottlenecks.
IMF held its annual autumn meetings during October, which provides more clarity on individual countries and of the global picture. Details on the SDR re-distribution of an additional 100 billion towards developing countries was however missing. Comments from the IMF have pushed the process into the future. Admittedly, the IMF has been busy with a scandal involving the current head of the IMF.
On a country level, we have seen the security situation in Ethiopia deteriorate with the government losing control in the military conflict. With a population of 115 million, there had been high expectations for future growth prospects in the country, these and the ongoing debt restructuring discussions will now be in the background. The fund is not invested in Ethiopia.
Portfolio Developments
Ghana, which has high levels of borrowings, has been performing poorly since the last IMF review, where the government has not been able to demonstrate any fiscal consolidation as was expected. As yields increased on their debt, the price action turned into a negative spiral where the country cannot raise more debt at such high yield levels. It announced it has postponed issuing additional debt this year as initially planned. The government is due to publish it’s budget for 2022 in mid-November where it will need to demonstrate fiscal constraints. Closer to month end we saw yields compress and retrace some of the widening in October.
In Tunisia, we saw bonds drop 10% before ending the month down just over 3%. Lack of concrete discussions with the IMF were reasons for concerns but that was offset by positive news concerning a new government and potential financial support from the middle east.
On the positive side we have a seen a rebound for our positions in El Salvador and Sri Lanka. The economy in El Salvador is performing though the relationship with the US remains strained. Sri Lanka is in the process of getting funding from Oman.
Throughout the month we have continued to add risk to the portfolio reaching a level of 130% mid-month. In October we have added to our holdings in Ghana, Tunisia, Nigeria, Egypt and Maldives. We funded these purchases by reducing in Pakistan, Jordan and Paraguay.
We also halved our position in Zambia ahead of the start of debt restructuring negotiations with the IMF.
Top 3 and Bottom 3 Contributors in Q3TOP | BOTTOM |
| Sri Lanka – New credit facility with Oman | Ghana – Lack of fiscal consolidation, postponed issuance |
| El Salvador – Increased transparency | Nigeria – Expected issuance |
| Zambia – Expected start of restructuring and IMF talks | Tunisia – Stressed funding situation |
Source: Coeli; Bloomberg; Based on Q3 2021 contribution to the fund’s performance
Outlook
We ended the month with a risk of 121% compared to 123% at September end as result of the reduction in our position in Zambia.
With a yield of 8.6%, spread of 741 bps, and substantial exposure to commodity exporting countries we believe the fund is well positioned to weather continued interest rate uncertainty but also benefit from a return of risk appetite in the wider EM space.
The fund continues to benefit from coupon payments in excess of 0.5% per month from its holdings.
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) | 38 | |
| Yield to worst (%) | 8.6 | 7.3 |
| Spread (bps) | 741 | 615 |
| Running yield (%) | 6.6 | 6.6 |
| Spread duration (years) | 5.4 | 5.8 |
| Number of countries | 34 | 36 |
| Number of bonds | 74 | 151 |
| Performance | MTD | QTD | Since launch |
| Fund (before fees) | -0.65% | -0.65% | 2.42% |
| Fund (I USD) | -0.73% | -0.73% | 1.83% |
| Benchmark (NEXGEM) | -0.22% | -0.22% | 2.64% |
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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 | 77% | 95% |
| Quasi Sovereign | 8% | 5% |
| Corporate | 6% | - |
| Supranational LC | 3% | - |
| Sovereign LC | 2% | - |
| Supranational HC | 1% | - |
| Cash & FX | 4% | - |
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Instrument 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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