Traders work on the trading floor of the Hong Kong Stock Exchange, in Hong Kong, China. (Photographer: Xaume Olleros/Bloomberg)

BlueOrchard Fund Has a Money-Making Strategy Amid EM Tumult

(Bloomberg) -- Sebastien Juhen’s simple investment strategy, inspired by a two-year bike ride across the Americas, is paying dividends for investors at a time when almost everything else in emerging markets is in freefall.

BlueOrchard Fund Has a Money-Making Strategy Amid EM Tumult

Eschewing the derivatives favored by others, the money manager who runs BlueOrchard’s $1.6 billion Microfinance Fund has eked out a 2.5 percent return this year. That makes it one of only two of the 251 emerging-market funds bigger than $1 billion to have gained at all in dollar terms, according to data compiled by Bloomberg. Emerging market equities sank into a bear market last week.

Juhen’s strategy: invest only in institutions that lend small amounts of money to low-income clients who may not have access to banking facilities. The fund currently has outstanding loans to 148 institutions in 46 countries from Costa Rica to Cambodia. Its returns are steady if unspectacular, underperforming peers during the good years and outperforming during the bad ones.

BlueOrchard Fund Has a Money-Making Strategy Amid EM Tumult

"Our spreads don’t vary a lot over time, so of course there are periods where it plays with you and goes against you," said Juhen, 39, who got to know microfinance during his 17,000-mile bike trek to Argentina from Alaska a decade ago. "This year illustrates the strength of our investment process over time and how resilient we are to such stresses on the markets."

BlueOrchard’s approach means the fund misses out on boom periods for emerging markets like 2016 and 2017, but avoids slumps like this year, when MSCI’s emerging-market currency index slumped amid trade tensions, dollar strength and rising U.S. interest rates.

Repayment Record

Since the fund’s conception in 1998, just 1 percent of its 2,120 loans haven’t been fully repaid. Juhen attributes the low default rate to BlueOrchard’s emphasis on short duration and its localized process of scouting investments.

The money manager Skypes daily with some of his more than three dozen investment officers embedded around the world from Tblissi, Georgia to Nairobi, Kenya. They visit institutions in their region and submit an about 40-page memo to a credit committee, which has the final call on any investment.

Aside from creditworthiness, the firm also considers the social performance of microfinance institutions, including their treatment of clients and employees and environmental protection standards. It assesses country risk by examining the regulatory environment, central bank behavior and the broader political and economic backdrop.

"If we see that risk is not eliminated enough, we will not invest," Juhen said. "If local- currency interest rates are not high enough, that will stop us from investing."

Top 10 EM Funds > $1B assets

Return YTD in USD
of Primary Share Class

BlueOrchard Microfinance Fund2.5%
Man GLG Global EM Debt Total Return1.2%
BNP Paribas Parvest Aqua-0.2%
Daiwa Fund Wrap International Equity-0.7%
Pictet Short Term Emerging Corporate Bonds-0.7%
Neuberger Berman Short Duration EM Debt-0.8%
Ashmore Emerging Markets Short Duration Fund-2.3%
Credit Suisse PUB Bonds Emerging Markets-2.7%
Goldman Sachs Emerging Markets Corporate Bond Portfolio-3.0%
Pictet Emerging Corporate Bonds-4.3%

While Juhen expects emerging-market assets to remain beaten down as the U.S. Federal Reserve raises interest rates, that shouldn’t endanger his fund, he said.

"I’m very confident that we are well-equipped to go through this turmoil and keep our returns as high as they are and as high as they have proven to be," Juhen said.

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