Rough Quarter at the Frontier Leaves Top Bond Investor Unfazed

LAGOS (Capital Markets in Africa) – Danish money manager Morten Bugge, battered by three months of carnage in frontier bond markets, says his appetite is intact — especially for Africa.

Bugge, who’s beaten 96 percent of peers in five years, succeeded in betting exclusively on these less-developed markets by buying mostly local-currency debt. His theory: most foreigners steer clear and low duration makes it less sensitive to twitchy U.S. Treasuries. Though his $343 million Global Evolution Emerging Frontier fund is down 1.5 percent since April, Bugge says he’s ready to add to holdings that include Angola, Egypt, Kenya, Zambia and Nigeria.

“Subject to any further escalation of trade tensions, the current negative sentiment appears to be an opportunity for a number of countries in the region,” according to Bugge, chief investment officer at Kolding, Denmark-based Global Evolution A/S.

Unlike most frontier investors, Bugge didn’t reserve a portion of his 39-nation sovereign bond wagers for traditional emerging markets. Three-quarters of his bets are on less liquid, riskier and higher-yielding local debt, with the rest in hard currencies.

“Many local markets have low foreign participation and as such aren’t sensitive to global headline risk,” Bugge said. “Most peers focus on hard-currency debt, which is held by foreign investors and very sensitive to risk aversion.”

It’s been a tough year for emerging markets in general as rising U.S. interest rates helped lift the dollar and trade tensions flared. Africa got hit hard — Eurobonds, local-currency debt and equities fared worse in the second quarter than emerging markets as a whole. Yields on African sovereign dollar bonds widened 120 basis points to 7.6 percent by the end of June, according a Standard Bank index. The notes now yield 7 percent.

If you go back to January, however, some African bonds have posted chunky returns. Nigerian local bonds within the Bloomberg Barclays index returned 8 percent this year, the best among all nations in the gauge. Egypt was the fourth-best performer, rising 2.4 percent, while the benchmark itself dropped 3.5 percent.

Bugge’s fund rose 0.8 percent so far in 2018, while his peers are down 3.1 percent, data compiled by Bloomberg show. In three years, his return tops 8 percent, beating 97 percent of peers.

Source: Bloomberg Business news