High-Yield Quasar Fund Favors Brazil, China as Economies Recover

As the global economy gradually emerges from the coronavirus pandemic, a high-yield bond investor who has beaten 93% of peers in the past five years is looking to Brazilian and Chinese companies to cash in on renewed growth.

Nathan Shor, a partner and portfolio manager at Sao-Paulo based Quasar International Cap Mgmt Ltd, who runs the $115 million Galloway EM Hard Currency HY Bond Fund, began to invest again last year after raising cash levels at the start of the pandemic. But he is steering clear of the riskiest debt in countries such as Argentina, Ecuador, Lebanon and Zambia that restructured or defaulted on their bonds last year.

“It’s easy to find high returns in the high-yield world,” Shor said. “But we have to focus on avoiding headaches.”

Instead, the firm is looking to safer emerging-market credits in Brazil and China, as well as Indonesia, Mexico and Colombia. In the past year, Shor boosted to 32% from 18% his holdings in Brazil, where he’s buying notes with high coupons and a credit rating close to the sovereign. He likes perpetual bonds from infrastructure giant Cosan SA, which have a 8.25% coupon, and state-owned lender Banco do Brasil SA, which pay 9%.

Another bet is iron ore titan Vale SA. About 20% of firm’s 73 million reais ($14 million) Quasar Latam Bonds Brl FIM CP IE fund, which has outperformed 90% of peers this year, is invested in the miner’s so-called “participating notes”. The bonds pay a return based on specific iron ore production revenues and Shor calculates the current coupon yield is at 9% in dollar terms, compared with a 3.75% coupon on the firm’s 2030 dollar bonds. The possibility of the company buying back the notes and BNDES selling its holdings in the debt makes them more attractive, he said.

Shor also holds a 21% exposure to Chinese real estate company bonds in the high-yield fund, saying the world’s second-largest economy handled the virus well and is likely to recover faster than peers.

Some investors are starting to say emerging-market bonds are expensive and are willing to scoop up longer bonds for better returns, Shor said. He’s avoiding extending duration though, due to the risk of long-term U.S. Treasury yields rising. His emerging-market fund has a duration of 3.6 years.

“That’s a double-edged sword,” Shor said. “I’m staying away.”

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