HY Buyer Look to Emerging Markets

Julian Adams, manager of the recently launched Aberdeen Sovereign High Yield Fund, is one of the many players confident of a strong market for the year 2000.

His fund, although small, has grown 280% since its inception this summer and he has plans to more than double the current size by the end of the year.

The new Aberdeen Sovereign High Yield Fund launched in July with $5 million. The portfolio has grown since then to $19 million, and Adams hopes to finish the year with about $50 million under management.

Already having significant exposure to the European high yield market and emerging markets equity, he said last week that he currently sees no other asset class offering the potential rewards of emerging market debt.

Not only is it cheap relative to other asset classes, but most of the issuers in the emerging markets world are past the worst, and have only the possibility to improve before them. This is one of the main reasons Aberdeen chose to launch a fund dedicated entirely to the instruments, he said.

The overall quietness that most participants had predicted would characterize emerging debt markets this quarter is by no means a reflection of weak fundamentals, Adams said.

Since September, the market has not only experienced a rally, but has also succeeded in increasingly de-coupling from the U.S. equity market - two factors attesting to its strength, he said.

Once the Y2K issue - the main concern this quarter - fades into the background, investors will come back into the markets, and next year emerging debt will rally further.

The new fund, which, as its name suggests, invests in sovereign instruments across the emerging markets, looks to buy "improving credit stories," Adams said, those countries on the road to progress and whose debt instruments offer good yield.

The fund's objective is to select securities that have the potential to offer excess relative returns in the medium to long term.

Currently, it has a 45% exposure to Latin America, a 21% exposure to Eastern Europe, an approximate 12% weighting in Asia, and a small exposure to exotic countries such as Cuba, Sudan and North Korea.

The choice of all countries included in the portfolio depends mainly on their potential for improved economic performance, Adams said.

North Korea, for instance, is now a country open to U.S. investors, and FDI inflows should help its economy to grow. Cuba is another example of a country that many believe is getting closer to becoming a part of the global economy.

Adams's choice of the more stalwart credits is based on the same rationale he uses to choose the more exotic part of his portfolio.

In Latin America, the fund's most significant weightings are in Brazil, Mexico and Venezuela, three countries where all factors seem to be enabling them to reach a position of significant strength, he said.

While some investors may be concerned about the political situation in Venezuela, Adams is comfortable that there won't be any major upheavals there to cause a derailment. The country's oil-exporting capacity will also continue to stand it in good stead, too, he said.

Another important country that has benefited from rising oil prices and plays an important part in the Aberdeen Sovereign High Yield Fund is Russia.

Russian debt is more attractive now, Adams said, because the country is in a much more solvent position than it was earlier this year, as a result of the combined effects of rising oil prices and last year's ruble devaluation. The economy has shown signs of an improvement at the micro level, and this will translate at the macro level going forward, he said.

Of course, the political situation in Russia is still an issue, Adams said. But if parliamentary elections scheduled for December proceed smoothly, and the change of power in the country does not cause things to go awry, the Russian economy has the potential to stabilize further and achieve growth, he said.