February 12, 2015 / 6:13 AM / 4 years ago

Hit hard in Venezuela, U.S. bond funds keep their nerve

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.

Flags of Venezuela (L) and the Central Bank are seen at the central bank building in Caracas February 10, 2015. REUTERS/Jorge Silva

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.”

Fund managers also say Venezuela, unlike many other high-risk, high-yield emerging market investments, is known for meeting its debt obligations, and appears committed to keeping it that way.

During a meeting with bond investors late last month, Venezuela Finance Minister Rodolfo Marco Torres invoked the memory of the late leftist president Hugo Chavez, telling fund managers, “If Chavez taught us one thing, it was to honor our commitments,” according to Aberdeen’s Daly, who attended the meeting.

“He was really emphatic, practically pounding the table,” Daly said.

Since 1983, Venezuela has had one bond default, according to Moody’s Investors Service’s most recent annual report on sovereign defaults. That was in 1998 on $270 million worth of local currency bonds held by local residents. The default was cured within a week, according to the credit-rating agency.

Venezuelan bonds fell almost 30 percent in 2014, largely tracking the sharp decline in oil prices and hurting the performance of a number of U.S. bond funds last year. But they have rallied about 15 percent in February, according to the JPMorgan Emerging Markets Bond Index - Venezuela.

    An investor wanting to insure a $10 million portfolio of Venezuelan sovereign bonds for five years would need to spend $6.52 million upfront versus $6.32 million on Tuesday. In addition, they would have to pay $500,000 annually for the duration of the credit default swap contract, according to data provider Markit.

    Traders are pricing the likelihood of Venezuela’s defaulting within the next five years at more than 94 percent, according to the latest probabilities calculated by Thomson Reuters. Over the next six months, the probability of default is 33.4 percent.


GRAPHIC: link.reuters.com/tuq93w


U.S. bond funds held at least $2.7 billion worth of the South American country’s debt at the end of 2014, down from $4.5 billion a year ago, according to Morningstar Inc data. The year-over-year decline was caused by a combination of bond price declines and decisions by some funds to cut their exposure.

Pimco’s $2.5 billion Emerging Markets Debt Fund, for example, held $475 million worth of the country’s bonds at the end of March, but cut exposure to $291.5 million at the end of September as the risk of default rose. The Pimco fund generated a total return of 0.63 percent in 2014, beating 57 percent of peers, according to Morningstar. Pimco declined to comment and end-of-year holdings were not available.

With annual inflation topping 60 percent and oil revenue plummeting, other fund managers are losing confidence too.

Luz Padilla, director of emerging markets fixed income at DoubleLine Funds, compared the high returns that can be produced by Venezuela to short-lived “sugar highs.” DoubleLine’s $703 million Emerging Markets Fixed Income Fund has avoided Venezuela and focused on debt issued by corporations based in emerging market countries.

Eric Fine, portfolio manager of the $237 million Van Eck Unconstrained Emerging Markets Bond Fund, told investors recently that Venezuela has been unable to come up with a coherent plan for economic reform. The fund, which had 15 percent of its net assets invested in Venezuela at the end of June, has since cut that exposure to less than 5 percent, according to Fine’s latest quarterly commentary.

Venezuela’s supermarket lines have swelled over the past month as shoppers scramble to buy groceries, and the government has imprisoned executives from retail chains on accusations of intentionally creating lines as part of “economic destabilization” efforts. Maduro in January also backed increasing the price of gasoline, a politically dangerous move aimed at closing the budget gap.

For Fidelity’s New Markets Income Fund, the overweight bet on Venezuela has also been costly. The fund lost 3.28 percent in the fourth quarter, as Venezuela’s total return was negative 28.7 percent, even worse than the 27.85 percent decline registered by war-torn Ukraine.

But the fund’s stake in Venezuela was valued at about $280 million at the end of 2014, the largest stake among U.S. bond funds, according to Morningstar Inc data.

And things could be looking up. The fund’s 1-month total return of 0.40 percent is beating 60 percent of emerging market bond peers, according to Morningstar. Carlson was not available for comment, a Fidelity spokeswoman said.

Reporting by Tim McLaughlin in Boston, Brian Ellsworth in Caracas and Daniel Bases in New York. Editing by Richard Valdmanis and John Pickering

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below