Fidelity International’s credit analysts work with their equity and sovereign counterparts to identify opportunities that may not be obvious on first glance.
Key takeaways
- A well-run business in a traditionally volatile market can make for a good company to lend to.
- There’s usually a risk premium attached to emerging market corporate bonds, but you need to know what you’re getting into.
- I’m able to draw on work by a team of analysts with different specialisms to help me understand the risks as well as the opportunity.
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The investment universe of a global fixed income fund manager like me is huge. Occasionally, I’ll delve into emerging markets if they meet my criteria. These markets tend to be more volatile and so I need to be confident that my investments there are built on firm foundations. Fortunately, I have a small band of credit analysts I work very closely with, who conduct rigorous analysis into all kinds of potential credit ideas around the world.
One of those analysts, Sahil Kapoor, recommended a Turkish telecom name early last year, which has contributed handsomely to my fund ever since.
Several things that Sahil identified made the bonds attractive to me. First, the company had a strong track record of execution over several years, against a backdrop of hyperinflation and significant FX moves in Turkey. Part of the reason for its resilience was a conservative approach to its balance sheet, plus a discipline for keeping leverage low and dividends stable at 50 per cent of income.
Second, the company also kept around 80 per cent of its cash in hard currencies, enough to cover interest and debt maturities for the next three to four years. All these qualities are particularly attractive when assessing credits in the volatile economies common across some emerging markets.
Risk aware
What cemented this recommendation in my mind was Sahil’s reports on the company’s management team. He met with them in London last January, and they showed the sorts of traits that I look for when investing in EMs. Most important was their focus on risk management, which in my mind supported the positive signs around their balance sheet that Sahil had identified.
The work of credit analysts like Sahil is invaluable for me. I know that he’s also able to draw on other research that Fidelity is producing, whether that’s from equity analysts looking at the same companies, or sovereign analysts who can provide more context on an issuing government.
In this instance, Sahil and I had also spoke with one of our emerging market sovereign analysts, Andressa Tezine, and fellow fixed income fund manager, Philip Fielding, who invests exclusively in emerging markets. At the time, they were positive on Turkey as a sovereign, following its recovery from something close to a balance-of-payments crisis. Philip’s view is that investing in corporate credit is often the best way of capitalising on positive sovereign sentiment. In his assessment, this company was managed like a European investment-grade telecom but traded with the risk premium of an emerging market corporate. Having this sovereign background naturally helped strengthen my conviction in the corporate.
I’m always willing to introduce risk to my portfolio if I think it is manageable and can provide enough upside. It’s impossible to get that right all the time, but I have a lot of faith in the depth of research my analysts provide.
