We believe that the performance of our fund should be supported by two key factors in 2025:
Attractive yields, which stood at 9.7% in USD for our fund at the end of 2024; and
Strong and improving credit fundamentals for emerging markets corporates, as evidenced by low expected default rates of 1.7% in 2025 in the CEMBI Broad Diversified HY index, compared to 5.0% for Euro HY, based on JP Morgan forecasts. Importantly,defaults reached 1.3% in 2024 in the CEMBI Broad Diversified HY index and remained largely concentrated in China, where we have no exposure.
Portfolio positioning as we enter 2025:
Regional allocation: We maintain an overweight in Latin America, where we find the most compelling risk-reward opportunities in the high-yield space. We are underweight in Asia, with no exposure to China and limited exposure to Asia ex-China due to tight valuations.
Duration management: Following the December rate sell-off, we are cautiously adding some duration (3.7 years at the end of 2024 for our fund). However, we remain mindful of heightened uncertainty introduced by Trump’s policies and persistent market volatility. We prefer to manage duration directly through US Treasury futures while favoring short-term high-yield credits in our bond portfolio, which we find more attractive on a risk-reward basis. Our bond portfolio had a duration of 2.7 years at the end of 2024, including cash holdings.
Credit ratings: Our average portfolio rating stands at B+, where we see valuations remaining relatively attractive compared to historical averages and other credit rating categories, especially when factoring in expected improvements in fundamentals. It is worth noting that a significant share of our single-B or below single-B names is capped by the sovereign rating of the country where they operate, leading to assigned credit ratings which are lower than those indicated by their underlying credit fundamentals.
Refinancing opportunities: As we expect refinancing activity to remain strong in 2025, we have positioned approximately 20% of the portfolio to capitalize on early repayment opportunities, which are typically offered at a premium to market prices and allow us to capture additional yield.