InvestmentsJun 9 2014

Fund Review: Pictet Global Emerging Debt fund

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Simon Lue-Fong took over as manager of the $5.4bn (£3.2bn) Pictet Global Emerging Debt fund in 2005, although the vehicle dates back to 1998.

Its benchmark is the JP Morgan EMBI Global Diversified index.

The manager notes: “Our first job is to get those returns in the most efficient way, so we’re not going to buy all the bonds in the index, but we’re going to construct a portfolio so the returns mimic that of the index and that requires good portfolio management skills.

“The second job is to try and outperform the benchmark and we’ll do that by taking underweights or overweights relative to that benchmark.”

PROCESS:

Mr Lue-Fong refers to the investment process behind the fund as a “two-step” process. The first part of stage one is to assess country fundamentals, where he looks at roughly 60 countries in total. “We try and have a good macro understanding of what is happening in all of these countries. In a more simplistic way we’re trying to figure out what direction the credit quality of that country is going in,” he explains. The metrics that go into assessing this include the growth prospects of a country, its debt dynamics, inflation rate, fiscal deficit and current account deficit.

The next part of the first step is to consider how the top-down view will impact the portfolio’s investments. As an example Mr Lue-Fong cites Mexico, a country he likes. “It looks like it’s moving in the right direction from a macro point of view, but at the same time the top down is negative, which it was last year because there was tapering and therefore removing liquidity from the market, and the market was getting quite uncertain about this.

“Then we might decide that, yes, we like Mexico but we’re going to temper our views because the top down could have a negative influence on emerging market assets.”

Mr Lue-Fong refers to the second step in the process as working out how to express that view in the fund.

At the moment, he observes the top-down view in the portfolio reflects the fact markets are “less negative” now than in the last half of 2013.

“The bottom up, to us, seems to suggest that in EM countries the performance is much more mixed. There are still a few countries we think are moving in the wrong direction and those countries are Brazil, Russia, Turkey and South Africa and so we’ve had a bias to protect the portfolio from a potential repricing,” he adds.

On a risk-and-reward profile the fund is at level five and has an ongoing charge of 1.42 per cent.

PERFORMANCE:

According to FE Analytics, the fund has been top quartile in the IMA Global Emerging Bond sector across one, three, five and 10 years. In the 10 years to May 28 2014, the fund posted a return of 160.40 per cent against the sector average of 125.31 per cent.

Mr Lue-Fong suggests the fund has had a “decent” run and attributes its strong performance to a rigorous and nimble process.

“Our view is that markets are just as likely to go up as well as down and therefore we try not to be one dimensional,” he observes. “There are quite a few managers out there who are always long on the market because it’s a risk premium asset class, whereas we tend to be much more balanced in our view. And I think that should help to protect the portfolio in times of stress.”

On the outlook for the market, the manager highlights Venezuela as “good value” but cautions that the deteriorating credit story in Brazil means the portfolio is underweight to the country on the expectation it will remain under pressure.

Mr Lue-Fong remarks: “We are broadly positive this year but we just have to be careful of Treasuries and if we do see any weakness in EMs we’re probably going to see the adjustment come mainly through currencies. And hopefully this fund would be underweight currencies to benefit from that and to protect the portfolio.”

Expert view

Ben Willis, investment manager and head of research, Whitechurch Securities: “This is an established, long-running, multi-billion dollar fund. Indeed, Pictet is considered one of the market leaders when it comes to EMD. Simon Lue-Fong and the EMD team have managed the fund since 2005 and they have comfortably outstripped both the sector and its benchmark during that period. Given the size of the fund and its relative positions, it provides a solid, long-term core holding for those looking for this type of exposure.”