Emerging-market funds launch amid pandemic sell-off

[LONDON] Two emerging market debt funds launched this week despite hefty outflows from the sector in March, saying they would seek to take advantage of sky-high premiums on bonds, overestimated default probabilities and underestimated recovery values.

Swiss private bank Union Bancaire Privee (UBP) and William Blair Investment Management both announced new funds this week, and a lawyer told Reuters she was currently working on a new emerging markets hedge fund to launch in the third quarter.

The recent market rout has hit riskier emerging market assets particularly hard as investors faced with the toxic combination of the economic fallout from the coronavirus pandemic and an oil price shock opted for safe-haven assets.

The premium investors demanded to hold emerging market debt over safe-haven US Treasuries on the benchmark, the JPMorgan EMBI Global Diversified, rocketed to 706 basis points in late March - doubling over the month and hitting levels last seen in the wake of the great financial crisis just over a decade ago.

In March alone, investors withdrew US$31 billion from emerging market debt funds - the second-largest monthly outflow on record after October 2008, according to data from the Institute of International Finance.

Both funds are set to focus on developing countries where private bank UBP and William Blair say there is a large and growing opportunity.

"While market conditions should remain choppy in the very near term, improving liquidity conditions, declining outflows, and strong monetary easing globally provide reasons for optimism," said Marcelo Assalin, who is co-running the new fund at William Blair.

These markets offer high returns due to risk premiums overestimating default probabilities and underestimating recovery values, said the UBP statement.

"The recent sell-off provides investors with the opportunity to access these markets at yields that are much higher than they have been in recent years," Thomas Christiansen, deputy head of emerging market fixed income at UBP, said in the statement.

UBP said its new fund had US$62.4 million in assets under management. William Blair did not respond to requests for comment on the size of its fund.

REUTERS