Hit hard in Venezuela, U.S. bond funds keep their nerve
By Tim McLaughlin and Brian Ellsworth
BOSTON/CARACAS (Reuters) - Many U.S. bond funds hammered by an almost 30-percent decline in Venezuelan bond prices last year have kept big bets there, even as the South American country struggles with food shortages, runaway inflation and plunging oil revenue.
Though some portfolio managers including Pimco and Van Eck Global have pared their exposure in recent months, Venezuela remains among the largest positions for U.S. funds that focus on emerging market debt. Buttressing support for optimism is Venezuela's reputation for paying its debts.
"While Venezuelan bonds have come under pressure over the last quarter, we continue to believe that the long-term story remains positive," Fidelity portfolio manager John Carlson said in his latest commentary for investors.
Carlson's $4.4 billion New Markets Income Fund has 6.41 percent of its portfolio assets invested in Venezuelan debt, compared to the benchmark JPMorgan Emerging Markets Bond Index, which has a 4.78 percent weighting.
The $4.6 billion TCW Emerging Markets Income Fund also has kept an overweight position, with 5 percent of assets invested in Venezuela. TCW fund managers call the slump in bond prices in Venezuela "overdone." Though the $4.5 billion T. Rowe Price Emerging Markets Bond Fund pared exposure to Venezuela during 2014, it still has 7.1 percent of its assets there, one of the biggest bets, as a percentage of net assets, in that country.
Venezuelan bonds rose on Tuesday after the OPEC nation unveiled a new free-floating currency platform meant to bolster state coffers through a large devaluation of the bolivar, which is generally viewed positively by bondholders because it frees up more dollars that the government needs to service debt. Venezuela, including state oil company PDVSA, has about $62 billion in outstanding dollar-denominated debt, according to Thomson Reuters data.
On Wednesday, the Global 2031 bond fell 3.050 points in price to yield 28.043 percent, while the Global 2026 was down 4.6 points to yield 29.570 percent. Critics said the changes to the 12-year-old currency control system did not remove two heavily overvalued exchange rates, which will limit the government's ability to save hard currency amid the fall in oil revenues.
"Devaluation is huge," said Kevin Daly, a bond fund manager at Aberdeen Asset Management. "It gives the country more fiscal resources and avoids a huge spike in inflation." Continued...