Argentina's Best Bond Fund Actually Eked Out a Profit in 2018

(Bloomberg) -- Argentina’s peso rout was so deep this year that only one fixed-income fund posted a positive return in dollar terms, eking out a small gain by avoiding the local currency.

ICBC’s Alpha Renta Fija Global won the top spot with a return of just 1.7 percent after manager Marcelo Otermin stuffed his fund with short-term, dollar-denominated local notes known as Letes, according to data collected from the Argentine Chamber of Funds. The No. 2 fund, the Alpha Renta Cobertura, was also managed by Otermin and focused on peso-denominated notes known as Lecaps, with a 70 percent currency hedge reducing this year’s loss to 0.9 percent.

On average, Argentine fixed-income funds with at least $10 million in assets lost 27 percent in dollar terms this year, while the worst performer lost more than half its value.

Argentine stocks, bonds and the currency are some of the world’s worst performers in 2018 amid concern about a large budget deficit, double-digit inflation and a shrinking economy. While President Mauricio Macri has recovered some investor confidence since tapping the International Monetary Fund for a record loan, the peso has still lost more than half its value this year and overseas bond borrowing costs have more than doubled.

“Argentina has been hard-hit this year,” Otermin said. “At a time where the premium in the country spreads are rising, the best strategy is to invest in short-term assets.”

Alpha Renta Fija Global has more than 70 percent of its money in Letes, but Otermin’s team plans to revamp holdings next year to focus at least 85 percent of holdings on overseas, investment-grade bonds that he predicts will perform better as global interest rates increase. Bonds from Chile -- either sovereign debt or corporate notes from copper miner Codelco -- are particularly appealing, according to Otermin.

Argentina's Best Bond Fund Actually Eked Out a Profit in 2018

Current regulations limit Argentine funds from investing more than 25 percent of their money in assets from outside Argentina, Chile and other South American countries with which it has a trade pact. But securities regulators have put under public consultation a plan that would allow funds for “qualified investors” -- institutions or individuals who invest frequently and attest to understanding the risks -- to be exempted from the limit. If that happens, ICBC is likely to create new funds and may expand its team of six portfolio managers, Otermin said.

“We’ll see then if we need additional resources,” he said.

One overhang for Argentine bonds next year is concern that Macri’s government will be voted out, derailing his plans for shoring up the budget and bolstering economic growth. He’s likely to face off against former President Cristina Fernandez de Kirchner, who was largely despised by investors for her economic intervention, and a third, more moderate opposition candidate. Argentina’s overseas bond spreads are now the highest since Macri took office.

“Argentina is feeling the effects of political uncertainty,” Otermin said.

Otermin noted that Argentina’s steep yield curve -- dollar bonds maturing next year yield 3.7 percent, while those due in 2021 pay 11 percent -- shows that investors lack confidence about what will happen after money from the IMF’s loan is used up. But he says bonds due in 2020 are a good value as he expects the government to successfully roll over its short-term local debt.

“We don’t see such a large risk there,” he said. “It’s not clear at this point that the government will have a difficult time finding financing in 2020.”

©2018 Bloomberg L.P.