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Fund Manager Focus: Michael Cirami

Michael Cirami, who runs Eaton Vance’s Emerging Markets Local Income fund, outlines his strategy in comparison with peers


David Robinson

What is your strategy?

Our strategy is benchmarked to the JPMorgan Government Bond Index – Emerging Markets (GBI-EM).  We call it a “benchmark aware” approach to distinguish it from “benchmark driven” strategies – those that explicitly match the index (usually passive) or do so implicitly, by over- or under-weighting it modestly.  A 2015 IMF working paper found that nearly 70% of actively managed, local-currency EM bond funds are actually either a ‘closet index’ fund or a ‘weakly active’ one.

In contrast, with our strategy we expand the opportunity set to more than 100 countries, compared with 19 in the GBI-EM. We maintain complete flexibility in currency and duration positioning, which ultimately leads to a more diversified portfolio. Positions may include benchmark countries, but only when justified by their valuations, and over the long term we have had a beta of 1 with the GBI-EM.

Why should fund selectors invest in your fund vs your peers?

The excess return generated by the strategy has historically produced at or near the top of the peer universe total return, Sharpe ratio, information ratio and upside/downside capture.

The consistency is the product of a long-tenured team, backed by substantial resources and expertise. The team conducts macroeconomic and political research for more than 100 developing countries, which gives us the ability to really hunt for investments that have a high probability of positive return.

We spend much of our time traveling to these countries in order to gain insight that may not be readily available from merely analyzing economic and political information. In fact, we have visited more than 60 countries over the past year.

Our research is complemented by a world-class group of traders, who navigate the local debt markets. In addition to prudently operating in over 80 local markets, the team has expanded into the currency and bond trading markets and has helped drive the evolution of trading best practices.

Why does your strategy stand out from your peer group?

Our portfolio positioning typically looks much different from our peers, who very often mirror the GBI-EM. In contrast, our approach is to allocate client capital to opportunities where there is a high probability of positive return.

Our strategy typically takes sizable underweight positions relative to the benchmark. We have meaningful underweights to benchmark countries like South Africa, Malaysia and Romania because we believe there are much better opportunities elsewhere. For example, as of end March this year we had more than over 45% allocated to countries outside the benchmark, including high-conviction weightings – our top-four off-benchmark positions are each 8% or greater.

How do you protect investments against market volatility?

The strategy has historically provided better risk-adjusted return than the benchmark and the median manager. Over the past 10 years through end March this year, the strategy’s Sharpe ratio put it in the top 5% of its eVestment universe, and ahead of the GBI-EM. Over the past five particularly volatile years, its Sharpe ratio was positive while the median eVestment manager and the benchmark were both negative.

How does your fund prosper in a bear market?

Historically the strategy has captured less downside than the benchmark and peers in the universe. Again, this can be attributed to relative success with country selection. For example, over the past five years ended end March this year, the strategy had captured 103% of the GBI-EM’s return in up markets, but just 88% of the benchmark’s return in down markets. In contrast, the median manager pretty much matched the market in both periods.

The strategy’s investment in off benchmark countries have been helpful in managing downside risk. Using 2018 as an example, there were very few currencies in the benchmark that produce positive total returns. In contrast the strategy’s meaningful allocation to Serbia, Egypt, Nigeria and the Ukraine all generated positive total returns.

How does your fund outperform in a bull market?

Historically the strategy has captured greater upside than the benchmark and peers in the universe. We attribute this relative to superior country selection. And while it is true that the off-benchmark currencies tend to not appreciate as much as on-benchmark currencies, their higher yields typically help to close the underperformance gap quickly. In fact, our strategy has historically produced a yield 200-400 bps higher than the benchmark.

The Chinese slowdown and the trade dispute with the US pose serious risks to emerging markets. How do you mitigate against these risks?

While the headlines certainly discourage emerging-markets investment, it is naive to think that all emerging markets are faced with a serious risk. Regarding China’s domestic slowdown, there is good reason to be concerned about trade and capital flows within the Asian supply chain and the commodity complexes in Latin America and Africa. And with regard to trade, it is also fair to argue that the headlines discourage risk appetite.

Broadly speaking we expect there to be winners and losers by country and for there to be a wide dispersion of effects. Countries like South Korea will likely suffer as trade declines. In contrast, Vietnam’s export sector has captured market share as US importers seek similar goods that China produces but without the tariffs. It is our experience that there are always winners and losers in EM.