Top-Performing Bond Fund Thrives on Risks That Most Others Dodge

(Bloomberg) -- Bring it on. That's Yerlan Syzdykov's response to political and financial jolts that have whipsawed markets from Russia to Turkey in recent years, and it's paid off for the portfolio manager at Pioneer Investment Management Ltd.

Syzdykov's $3.9 billion Emerging Markets Bond fund has beaten 98 percent of peers over the past five years by making outsized bets in countries that are being roiled by everything from political coups to debt restructurings.

“If you buy everything that is consensus, you will be a consensus player,” Syzdykov said said in a phone interview “You have to differentiate yourself. Long term that's the only way you can beat peers.”

This year Syzdykov's contrarian wagers include an overweight position in Turkey, where bonds have underperformed peers amid a political shakeup, and a holding in Nigerian banks, which have been battered by recession and currency shortages.

“In Nigeria it's a muddle-through story,” Syzdykov said. “The country will get additional funding from various sources. It will be stable and that will be just enough.”

Mispriced Assets

In 2015, Pioneer loaded up on dollar debt of Russia and Ukraine while most investors were recoiling from Europe's worst military conflict in more than two decades. Those bonds generated the biggest returns in the world that year. In 2016 it bought debt of Mongolia just when it looked like default was imminent. It turned out it wasn't.

The ability to root out mispriced assets amid sudden shifts in political risk has become more important than ever for active asset managers vying for market share with exchange-traded funds that passively track indexes for a fraction of the fee. A BlackRock ETF that tracks emerging-market bonds has nearly doubled its assets to more than $10 billion in the past 12 months.

The contrarian approach puts Pioneer in a similar camp to the Franklin Templeton Global Bond Fund, which outperformed peers in the past decade with large-scale bets on unloved emerging markets. But while contrarian investors tend to make outsized gains when bets come good, they also make outsized losses when they don't.

Mitigating Risk

Templeton's fund ran into difficulties in Ukraine when the country was forced to restructure its debt, while Pioneer lost 43 percent during the 2008 global financial crisis, versus just 8 percent for the benchmark index.

Syzdykov says he tries to limit losses now by taking smaller positions on the riskiest markets. His overweights are rarely more than double the benchmark weighting. He has about 6 percent of his portfolio in Turkey and about 4 percent in Nigeria.

“2008 made us rethink our framework and reduce drawdowns,” Syzdykov said. “Now we have a much more measured approach to risk. We want to add value with less volatility.”

--With assistance from Paul Wallace

To contact the reporter on this story: Natasha Doff in Moscow at ndoff@bloomberg.net.

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Robert Brand, Dana El Baltaji