Frontier Tields Lure Aberdeen as Demand to Spur New Fund

Aberdeen Asset Management Plc (ADN), Scotland’s largest money manager, plans to start a fund this year to tap investor demand for bonds offered by the world’s least developed countries.

Frontier markets, which have in the past depended on aid from the international community, are now “looking to go to the bond investor” as wealthier countries tighten budgets amid slowing economies, Kevin Daly, who oversees $11 billion of emerging-market assets at the Aberdeen, Scotland-based fund manager, said in an interview at Bloomberg’s headquarters in New York today. “Rich countries are broke.”

Investors are searching for higher yields as the U.S. and Europe hold benchmark interest rates near zero to fuel economic growth. As emerging markets such as Brazil mature, limiting potential returns, investors are boosting their tolerance for the risks posed by smaller, less developed countries, Daly said. Average emerging-market bond yields have fallen 97 basis points from a June high, according to JPMorgan Chase & Co. data.

“That’s an opportunity for us,” he said.

Honduras, rated five levels below investment grade by Moody’s Investors Service, tapped international debt markets yesterday for the first time, selling $500 million of bonds due in 2024 to yield 7.5 percent. Aberdeen bought some of the notes, Daly said.

Rwanda, Uganda and Mozambique are also planning debut bond sales, according to an Oct. 3 report from Moody’s. The average yield on frontier sovereign debt is 5.84 percent, according to JPMorgan’s Next Generation index. That compared with an average yield of 4.74 percent for emerging markets.

Some of the frontier countries are overlooked by investors and rating companies, keeping their bonds undervalued, Daly said.

The new Aberdeen fund will also invest in local-currency corporate bonds from emerging markets, he said.

Aberdeen’s existing $2.9 billion Global - Select Emerging Markets Bond Fund (ABESOAA), gained 10.7 percent annually over the past three years, outperforming 84 percent of its peers, according to data compiled by Bloomberg.

Daly said Mexican bonds are among his favorites as President Enrique Pena Nieto pushes through reforms in the state-controlled energy industry to boost economic growth. Standard & Poor’s signaled yesterday that it may upgrade the country’s BBB rating.

Aberdeen has reduced holdings of Argentine bonds because of rising litigation risks, Daly said. Cristina Fernandez de Kirchner’s administration is locked in a U.S. court battle with a group of investors demanding payment on their holdings of securities from the nation’s $95 billion default in 2001.

To contact the reporters on this story: Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.