Russia's Bond-Market Rout Hits Shareholders of Emerging Markets Debt Funds
Russian Bonds Batter Emerging Markets Debt Funds: Mutual Funds
Boston, Aug. 17 (Bloomberg) -- Russia's bond market rout means hefty losses for shareholders of numerous emerging markets debt mutual funds, some of which recently allocated more than a fifth of their assets to the Russian market.
Funds with big stakes in Russia included the Morgan Stanley Institutional Emerging Markets Debt Fund, the Scudder Emerging Markets Income Fund, the Phoenix Emerging Markets Bond Fund and the Aim Global High-Income Fund. ''These aren't obscure funds by any means,'' said Gregg Wolper, international fund editor at Morningstar Inc., the Chicago-based research firm. ''They're managed by some of the most prominent names in emerging markets investing.''
The Russian debt market plunged after the government said it will allow the ruble to fall by as much as a third this year and will extend repayment of about $43 billion in short-term debt to ease a cash crisis that has pushed the government to the brink of default. Russia also declared a 90-day moratorium on the repayment of foreign debt owed by Russian commercial banks and other private borrowers to avert a string of bank failures.
The result: The Russian bond market declined about 19.1 percent today, said Peter Lannigan, manager of the $100 million Phoenix Emerging Markets Bond Fund, which has about 18 percent of assets invested in Russian bonds. ''That's some drop,'' Lannigan said. The decline was so severe because the government lied, he said. Russian politicians were saying as recently as this weekend that they wouldn't devalue the currency. 'They Lied' ''They lied and that's unfortunate,'' Lannigan said. ''Hopefully, they'll see the market's reaction and take note. The Russians have to start thinking about how the market responds to policy actions that they take.''
Lannigan's fund wasn't the only one in the U.S. holding a lot of Russian debt. The Morgan Stanley Institutional Emerging Markets Debt Fund had 26.5 percent of assets invested in Russian bonds as recently as July 31 and the Scudder Emerging Markets Income Fund had 19.5 percent of assets in dollar-denominated Russian debt as recently as July 31.
The Russian debt market has risks, but yields are high so if the government can develop a ''sensible'' financing program and demonstrate an ability to increase tax revenue in the next couple of months, the market should rebound, Lannigan said.
A big concern is that the volatility in Russia will heighten volatility in other emerging markets. ''It's quite possible that governments in Brazil, South Africa and to a lesser extent Argentina will face market pressures that could continue to roil their currency markets,'' said Craig Munro, co-manager of the $250 million Aim Global High- Income Fund, which has about 12 percent of assets in Russia.
The situation remains chaotic in Russia, Munro said. The devaluation did little to answer lingering concerns about the country's economic and social crisis, Munro said. ''We're supposed to know more on Wednesday when the government releases details about the debt restructuring,'' he said.
Fund List
Below is a list of some emerging markets debt funds with large holdings of Russian securities and year-to-date returns as of Friday.
Y-T-D
Amount in Russia Return Morgan Stanley Emerging Mkts Debt 26.5% (as of 7/31) -15.3% Scudder Emerging Markets Income 19.5% (as of 7/31) -15.1% T. Rowe Price Emerging Mkts Bond 18.8% (as of 6/30) -12.2% Phoenix Emerging Markets Bond 18.0% (as of 8/14) -21.7% Alliance Global Dollar Government 16.0% (as of 6/30) -13.0% Aim Global High-Income 12.0% (as of 8/14) -15.1% Fidelity New Markets Income 9.2% (as of 6/30) - 8.8%
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