Union Bancaire Privee has launched a fund aimed at taking “advantage of the attractive return potential offered by investments in frontier markets”.
The firm claims that a “window of opportunity” has opened following the recent market sell-off, in addition to risk premiums overestimating default probabilities and underestimating recover values.
What’s the strategy?
The UBAM – emerging markets frontier bond fund will target low double-digit returns using a bottom-up approach.
It will focus on deep fundamental knowledge and analysis of each country and security, with a specific framework designed to address bonds at risk of distress and potential defaults.
It will be run by the UBP emerging market fixed income team and lead portfolio manager Thomas Christiansen.
Why frontier markets?
According to UBP, frontier markets have grown rapidly in the past decade and are an increasingly important part of the emerging market debt and global fixed income universe.
Less than 15 years ago, only 10 countries with a combined market cap of $20bn (€18.4bn) were categorised as frontier.
This has now grown to 35 countries and $100bn in market capitalisation.
“Frontier markets are more diverse than most appreciate and offer better diversification than sovereign bonds on average,” UBP said.
Christiansen said: “Frontier markets offer a compelling investment opportunity with returns outpacing those on sovereign bonds in broader emerging markets over the long run, thanks to their attractive carry.
“We expect this long-term positive trend to continue despite the fact that, with the combined effect of a global economic slowdown triggered by the coronavirus and heightened tensions in the oil markets, emerging market frontier bonds have been and will likely remain particularly volatile for now.”
He continued: “In addition, 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.”
Nicolas Faller, co-chief executive of asset management and head of institutional sales at UBP, added: “Our analysis shows frontier debt to be an effective diversifier to global balanced portfolios.
“This new fund is, therefore, particularly attractive for investors as part of their wider asset-allocation considerations.”
The fund is currently available to investors in Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Spain, Sweden, Singapore and the UK.