Andris Kotans, Citadele Asset Management, Latvia. July 2010

As for investment strategy, what are the main criteria for selection of bonds in the fund portfolio? Which indicators do you consider the most important in the investment process (duration, yield to maturity, rating, country/sector or type of issuer)?

Our universe consists of bonds passing filters on liquidity (only issues over USD 250mn), rating (sovereigns of B or better, only investment grade corporate debt) and maturity (less than 10 years). In selecting specific instruments for our portfolio, our investment process is aimed at identifying the most undervalued instruments in each region/segment. Duration, credit quality, country/sector allocations are managed at the overall portfolio level.

The fund invests in both sovereign and corporate bonds as well. What is the optimal allocation from your point of view?

Our portfolio construction guidelines set ex-ante limits on the sovereign and corporate allocations among other aspects. In particular, no less than 50% needs to be invested in sovereign debt, and no more than 50% in corporate debt. In relative terms, we continue to favour corporate over sovereign debt due to pricing – while generally the sovereign credit quality in emerging markets does not appear worse than in the industrialized world, we believe investors are not being sufficiently compensated compared to similarly rated emerging market corporate opportunities. As a result, currently the Fund has ca. 53% sovereign and ca. 40% corporate exposure (the rest being cash), which we generally see as adequate for the time being.


Does the Fund follow any internal limits for regional or sector allocation? Are there also limits for portfolio allocation according to rating or maturity (duration)? Does the Fund follow a tracking error against the benchmark?

The following table answers the first part of the question. On the tracking error – we use Barclays Global Emerging Markets index as a measure of broad market performance, but our process is not benchmark-driven, therefore we do not pay explicit attention to the tracking error.

What is the current allocation of the fund portfolio according to maturity or duration?

What developments of the yield curves do you foresee for the next 12 months in the main countries where the fund invests? In which countries do you generally see attractive bonds with acceptable rating?

Our overall view is that in the next 3-6 months we will see slightly wider emerging market spreads primarily due to global factors, but in 12 month’s time we will see them returning to approximately present levels. As a consequence, we tactically retain a relatively short portfolio duration (at 3.4). We currently do not have meaningful yield curve steepening/flattening views or trade ideas. Regionally, in the sovereign space we see the best opportunities in Asia and Africa, especially after the recent underperformance in Eastern Europe. In the corporate space Eastern Europe still stands as the most undervalued region across all credit quality buckets. Yet also in the generally overvalued LatAm we find good value-for-risk trades, e.g., Brazil, Peru.