Published April 17, 2013
NEW YORK – The TCW emerging markets bond team has always sought investment opportunities in economic and political upheaval, a strategy that has led to double-digit returns for its fund's investors.
"When the perception of risk is greater than reality, we look to get involved," said Penny Foley, who manages the TCW Emerging Markets Income Fund with David Robbins.
When Cyprus was flirting with default on its debt in March, Foley slightly increased the TCW Emerging Markets Income Fund's stake in dollar-denominated Russian bank bonds.
Russia had about $30 billion to $40 billion in cross-border loans to Cypriot companies tied to Moscow and about $12 billion on deposit with Cypriot banks at the end of last year.
Worries had spread that both insured and uninsured Cypriot depositors would face a haircut following an initial tax levy, but Foley correctly anticipated that the proposal would be modified and that the country's $13 billion bailout would protect insured depositors.
The bet is paying off. Prices on Russian bank securities have increased since Foley's move, with the yield on bonds from VTB, the nation's No. 2 bank, dropping to 7.1 percent from 7.6 percent. Moreover, about $50 million in new cash has flowed into Russian bond funds since Cyprus reached a bailout deal, according to EPFR Global.
The investment strategy at the fund has become one of the most closely watched in the industry. Its annualized return of 13.9 percent over the past five years has beaten results from the benchmark JP Morgan EMBI Global Diversified index by more than 4 percentage points and made it the top performer of its group, according to Lipper.
Small wonder that TCW has also drawn the attention of investors. The fund has grown from $149 million in assets when Foley and Robbins began managing it in December 2009 to its current size of about $7.6 billion.
Los Angeles-based TCW had more than $138 billion in assets at the end of last year.
"The guys at TCW have been around a long time and do a very good job," said Raymond Zucaro, managing principal and portfolio manager at SW Asset Management LLC, which specializes in emerging market corporate bonds.
Despite political and economic risks, the TCW team says emerging market corporate debt offers advantages over government bonds this year. Its fund has 47 percent of its assets in corporate bonds.
Prices on corporate bonds are more compelling over the next 12 months, Robbins said, as yields on government debt with investment-grade ratings have fallen amid global growth concerns.
Indeed, political risk has become less heated this year after events such as the election of Chinese President Xi Jinping and a decline in Russian political protests, but North Korea remains "acute" because of its nuclear program, Robbins said.
Robbins said emerging market corporates benefited from the "hyper-aggressive" easy money policies of the world's major central banks, which are flooding the global financial system with liquidity.
"The global economy has been rebalancing for the past several years, with a greater and greater share of global GDP and global GDP growth emanating from emerging economies," he said. "This process is ongoing, if not entirely smooth."
The shift from export-led to domestic-led growth in emerging markets will take time and play out differently from country to country, he added. Robbins said China's first-quarter gross domestic product was "disappointing," but still showed the fastest growth among major economies.
Robbins and Foley lead a team of five analysts covering sovereign risk and four focusing on corporate credit. Before investing, they consider 40 different criteria in 75 different countries, from a bond's yields to an economy's debt ratios.
EYE ON GOVERNMENT
TCW still has exposure in emerging market government debt, albeit lower than in recent years. The team cut the fund's stake in Venezuelan government bonds and the country's state-owned oil company, Petroleos de Venezuela SA, after the death of President Hugo Chavez on March 5, given the political uncertainty facing the nation.
Venezuelan bonds account for just over 4.5 percent of the fund's holdings, down from 7 percent or 8 percent in 2010. The fund has reaped large profits from PDVSA bonds as yields have fallen to between 8 percent and 9 percent from more than 16 percent in 2010.
The reduced stake in PDVSA bonds came ahead of some political unrest, including post-election street violence on Monday [nL2N0D32PM]. The company's debt prices have fallen, and the yield on PDVSA's 7-year bonds, for instance, has risen nearly 1.5 percentage points in the past week.
(Reporting by Sam Forgione; Editing by Jennifer Ablan, Chelsea Emery and Lisa Von Ahn)