Value Partners Credit Fund Returns 19% on SE Asia, Middle East

Value Partners Credit Fund, whose 19 percent return last year beat Asian peers, has been betting on convertible and high-yield bonds in Indonesia, Malaysia and the Middle East, said senior fund manager Fawaz Habel.

Last year’s number brought the $55 million fund’s return since its July 2009 inception to 39 percent, according to fund documents. Eurekahedge Asia Fixed Income Hedge Fund Index advanced 14 percent last year and 27 percent since the hedge fund that bets on rising and falling prices of publicly traded bonds started trading with $10 million.

Bond prices have rallied since 2009 as investors demanded lower returns to hold risky debt. Credit hedge funds like Value Partners’ have been turning to what Habel termed “less followed, less understood” countries as the bargains in the more established markets thinned.

“We came out of 2009 where spreads were still very wide and there was a lot of value in all the fixed-income space,” said Habel, who oversees the fund at Hong Kong-based Value Partners Group Ltd., in an interview yesterday. “Today, we see pockets of value but also pockets of completely no value.”

The JPMorgan Composite Total Return Index advanced 11 percent last year after gaining 28 percent in 2009. Value Partners Group, part-owned by Ping An Insurance (Group) Co., China’s second-largest insurer, oversaw $7.9 billion as of December.

In established markets such as Hong Kong, investments by local individuals and long-only funds based in U.S. and Europe have made convertible bond returns less attractive, Habel said.

Doubling Investments

The most profitable trades of the Value Partners Credit Fund in 2009 were investments in Nakheel PJSC, said Habel, 41, a native of Lebanon who has traded Middle-Eastern credit since 2005 for JPMorgan & Chase Co. and Lehman Brothers Inc. before joining Value Partners in 2009.

The fund doubled investments in the developer’s bond issue maturing in December 2009 as other investors dumped its debt on fear of default after its state-run parent Dubai World sought a standstill arrangement with creditors and said it would restructure $26 billion of debt, he said.

Last year, the fund’s return benefited from its investments in bonds such as Bumi Capital Pte and those sold by Lion Diversified Holdings Bhd. in Malaysia that are exchangeable into shares of Parkson Holdings Bhd.

China Investment Corp., the nation’s sovereign wealth fund, bought $1.9 billion of debt sold by PT Bumi Resources, Indonesia’s biggest coal producer, in September 2009. Bumi Capital is a Singapore-based unit of Bumi Resources.

China Real Estate

The Value Partners fund bought Bumi Resources convertible bonds when the company’s share price tumbled in July 2010, betting that its asset quality, chairman’s political connection and the CIC investment would help it rebound, Habel said. Bumi’s share price has more than doubled from an Aug. 19 low.

Habel also likes high-yield bonds sold by Chinese real estate companies, even as hedge fund managers such as Jim Chanos and former Morgan Stanley economist Andy Xie warned of a bubble in the industry.

“We think it’s genuine demand supported with a huge amount of cash and savings,” Habel said. “The fact is the fixed income space in real estate is still paying us much wider credit spread than the equivalent in other sectors in China.”

By contrast, investors may be forced to mark down the value of widely held, long-term investment-grade bonds as rates start to increase with inflation, he said.

Convertible Bonds

The fund ramped up its convertible bond holdings to as much as 70 percent of long investments between September and October to take advantage of the stock rally as the U.S. Federal Reserve moved to preempt an economic double-dip, Habel said.

It cut convertible and high-yield bonds to below 30 percent of long investments each in November as the market corrected, and added sovereign bonds and short positions in investment-grade and high-yield debt. Shorting involves selling borrowed securities on the expectation their value would fall.

Now the fund’s long investment is about equally split between high-yield and convertible bonds, Habel said. He said he expects certain stocks to surge as the market gains better understanding of government measures to curb inflation.

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