Grantham, Mayo, Van Otterloo & Co. has been buying the commercial loans of the Republic of Algeria, as well as Russian Federation 30-year Brady bonds, on the view that they provide both safety and high total return.
Bill Nemerever, a portfolio manager who runs approximately $1 billion for the Boston-based firm, likes the un-rated Algerian whole loans because they offer 15.5-16% current yields. Despite the lack of liquidity and red tape involved in purchasing non-securitized commercial loans--loans made to the Algerian government by international money center banks--he notes the Algerian government has an excellent payment record. He also finds this paper attractive as a function of the fact that it is non-correlated to major emerging markets indices, and that the loans were structured in major currencies, like the dollar and yen, allowing them to hedge out the currency risk. He says he remains a buyer at these yield levels.
Nemerever has also been buying the 30-year Brady bonds of the Russian Federation (B3/B-), which are yielding 16% at 1,100 basis points off of Treasuries. Though he acknowledges the political uncertainty that surrounds Russian Prime Minister Vladimir Putin's authoritarian style, he believes that fiscal policies, including more reputable economic accounting practices, have given investors a modicum of confidence.
The fund has an asset allocation of the sovereign debt of 30 countries, almost exclusively in dollar-denominated paper. His top five holdings are 20% in Brazil, 18% in Mexico, 15% Argentina, 14% Russia, 6% Venezuela and 6% Algeria. He benchmarks against the JP Morgan Chase Emerging Markets bond index, and is neutral to its 4.50 year duration.
