Dear friends,
I talked for about 45 minutes with Ms. Kong, who'd already visited the board, read and thought about your questions. Here's the short version of what I heard:
- headline risk is the least of your worries. We started with the questions around Russia and Ukraine. Her position is that the outcome there is relatively short-term and difficult to predict. At the margins, the presence of NATO sanctions is causing wealthy Russians to move their money to Asian financial centers but those flows really aren't driving markets.
the US is being irreversibly marginalized in global financial markets which is what you should be paying attention to. She's neither bemoaning nor celebrating this observation, she's just making it. At base, a number of conditions led to the US dollar becoming the world's hegemonic currency which was reinforced by the Saudi's decision in the early 1970s to price oil only in US dollars and to US investment flows driving global liquidity. Those conditions are changing but the changes don't seem to warrant the attention of editors and headline writers because they are so slow and constant. Among the changes is the rise of the renminbi, now the world's #2 currency ahead of the euro, as a transaction currency, the creation of alternative structures to the IMF which are not dollar-linked or US driven and a frustration with the US regulatory system (highlighted by the $9B fine against BNP Paribas) that's leading international investors to create bilateral agreements that allow them to entirely skirt us. The end result is that the dollar is likely to be a major currency and perhaps even the dominant currency, but investors will increasingly have the option of working outside of the US-dominated system.
- the rising number of "non-rated" bonds is not a reflection on credit quality: the simple fact is that Asian corporations simply don't need American money to have their bond offerings fully covered and they certainly don't need to expense and hassle of US registration, regulation and paying for (compromised) US bond rating firms to rate them. In lieu of US bond ratings, there are Asia bond-rating firms (whose work is not reflecting in Morningstar credit reports) and Matthews does extensive internal research. The depth of the equity-side analyst corps is such that they're able "to tear apart corporate financials" in a way that few US investors can match.
- India is fundamentally more attractive than China, at least for a fixed-income investor. Most investors enthused about India focus on its new prime minister's reform agenda. Ms. Kong argues that, by far, the more significant player is the head of Indian's central bank, who has been in office for about a year. The governor is intent on reducing inflation and is much more willing to deploy the central bank's assets to help stabilize markets. Right now corporate bonds in India yield about 10% - not "high yield" bond but bonds from blue chip firms - which reflects a huge risk premium. If inflation expectations change downward and inflation falls rather than rises, there's a substantial interest rate gain to be harvested there. The Chinese currency, meanwhile, is apt to undergo a period of heightened volatility as it moves toward a free float; that is, an exchange rate set by markets rather than by Communist Party dictate. She believes that that volatility is not yet priced in to renminbi-denominated transactions. Her faith is such that the fund has its second greatest currency exposure to the rupee, behind only the dollar.
- the appointment of a new comanager is mostly a recognition of the strong contributions that person has made since joining the fund at inception. The new comanager is a credit specialist. The existing one is an interest rate specialist.
- two factors seem to be constraining growth of AUM: (1) there's a general withdrawal from fixed-income in reflection of interest rate anxiety and that withdrawal seems to disproportionately impact non-core categories and (2) advisors are intrigued even to invest their own money in many cases but not yet ready to invest their clients. They seem to be waiting for a three year record and "clarity" in the market.
- the fund's maximum drawdown continues to track the firm's expectations which is good given the number of developments which they couldn't have plausibly predicted before launch. They're sitting at a beta of about .30.
For what that's worth,
David
Comments
Owning MAINX provides the following country exposure as of 3/31/14:
The first and last (Cayman Islands and The British Virgin Islands) seems to hold some intrigue, especially the over weighting of the Cayman Island bond Issues.
Any thoughts?
Updated per AndyJ's link:
The Caymans are a tax haven. Pretty much all the debt issued there is not by the local government or local companies (same as most American companies headquartered in Delaware aren't really Delaware companies), so you'd have to dig into the individual issues to see where they're really from.
Countries of the issuers are shown on the Matthews web site; see the lower half of the page, under 'Country Allocation.' This is another case where information from the source is more useful than M*'s aggregation.
It was enlightening to read that Ms. Kong checked out MFO before the interview. If you are reading this Teresa, thank you very much for the insights , especially on the dollar.
DLENX July 31 fact sheet
http://www.doublelinefunds.com/pdf/EM_Fact_Sheet_Monthly_Update.pdf
Excerpts:
Team continues to actively manage
duration
At year end 2012, DBLEX had a duration of 4.4 years compared to the 2013
year end duration of 6.6 years. This shorter duration absorbed most of the impact from rising rates in 2013. The higher duration at the end of 2013 has contributed to out performance so far this year.
We believe 10 year UST rates should remain range bound between 2.20-2.80%
Top country allocations: Brazil, Mexico, Peru, and Guatemala all up double digits
No local currency exposure in the fund, although the team continues to monitor opportunities
DBLEX duration is 5.93 years; this is a result of positioning the portfolio
in BB rated space where new issues have appeared to be
attractively priced. These securities tend to have a shorter duration
49% of portfolio is allocated to Investment Grade bonds
Top sectors: Banking, telecommunications, consumer products, mining &
oil, all of which are strategic sectors for an EM economy
Consumer products aim to take advantage of rising income levels in EM countries
Does anyone know of one I missed?
I've been in MAINX with its ups and downs, but I wanted something more focused for a modest investment.