Jerome Booth, head of research at Ashmore Investment Management, answers SCI's questions

Jerome Booth

Q: How and when did Ashmore Investment Management become involved in the structured credit market?
A: Ashmore Investment Management was formed out of Grindlays Bank (which was bought in 1984 by ANZ), whose London unit made markets in emerging market debt. We then began taking on simple corporate restructurings in Latin America, then government-to-government restructurings and ended up building an investment bank around this focusing on emerging markets. We were also a founding member of EMTA (the trade association for the emerging markets).

We're a specialist emerging market asset manager, highly experienced in restructuring and managing sovereign debt, local currencies, derivatives, government paper, infrastructure loans and private equity. Our special situations experience has given us a strong ability to work with local participants. We've invested in many deals and countries and consequently have a strong reputation.

We launched our first fund, the Emerging Markets Liquid Investment Portfolio (EMLIP) in 1992. It outperformed through the severe stresses during the 1990s, with a pattern of underperforming on the way down as we bought value in falling markets, followed by strong outperformance on the way up. Our assets under management totalled US$37bn in June 2008, but subsequently fell to US$24.5bn in December and US$23.5bn in March - the downturn is due to performance as well as redemptions.

Additionally, we listed on the FTSE 250 in 2006 primarily for the profile it gave us. Central banks and finance ministries like the accessible governance structure of an exchange.

Q: What, in your opinion, has been the most significant development in the credit market in recent years?
A: The credit crunch has turned the world upside down, but within this there are opportunities to take advantage of the growth in emerging markets as an investment destination. Equally, the fastest growing investment pools are in emerging market countries, thanks to the huge reserves that central banks have built up over the last few years and large domestic populations and savings bases.

Q: How has this affected your business?
A: The potential for growing our business has been accelerated by the credit crunch, especially since the competition has reduced in number. Our conservative approach and stable investor base has certainly helped us vis-à-vis our peers. Our investor base, 90% of which is institutional investors, has been built up organically and many accounts have seen such a down-turn before.

We had one of seven or eight external Russian debt funds by early 1998 (we launched ours in 1996), but by the end of 1998 ours was the only fund remaining. The current crisis is therefore familiar territory to us, whereas many funds in developed countries have never experienced such a downturn.

For instance, the competitors that failed weren't defensive enough in their investments and messed up the recovery of the assets or had damaged portfolios. The key is to manage the portfolio as a whole in line with the most negative scenarios and then add returns within this constraint.

Emerging market assets require a different skill-set to managing typical fixed income assets in Europe or the US - it is necessary to understand the political and technical dynamics across the different jurisdictions and have good local relationships. This is very different to the 'straw man' characterisation of developed world private equity deals, which is as follows: find an asset that is, say, 5% undervalued, leverage it up to the hilt, shout about it and this then attracts an exit opportunity.

This is a bit of an unfair description, but makes a huge contrast with EM, where we do not employ the leverage approach and do not publicise what are often sensitive problems for companies in need of capital and restructuring. They are often family-run businesses that need restructuring or simply a capital injection on a discreet basis, and we are often not competing against others for this business in any public auctions.

Our reputation is one of effectiveness and constructiveness: we've helped countries develop their capital markets, for example by offering free policy advice. It takes time to develop relationships and this is one barrier to entry - the other is critical mass. We're the only institutionally-sized fund manager that is dedicated to emerging markets and across a full range of EM asset classes.

Q: What are your key areas of focus today?
A: Illiquid markets have created high spreads because few participants want to put risk on and there has been a huge flight to liabilities in the US, which has created a downdraught. However, EM has largely been on the road to recovery since October.

Nonetheless, we've been more careful about liquidity and have adopted our normal barbell approach in EMLIP, consisting of liquid sovereign bonds and illiquid assets. Around 70% of NAV is invested in high beta assets and the rest is in high return, less liquid paper.

Additionally, we went into the credit crunch with a defensive position and cash in the portfolio, though we are now more bullish. Ashmore does not manage any highly levered or hedge funds, but we do alter our exposure through cash and/or some moderate leverage - clients in effect delegate some of the tactical asset allocation to us, so they can think more strategically.

Corporate high yield and special situations are highly attractive right now, and local currency is a good insurance against dollar weakness as well as offering good medium-term appreciation. We are just starting to be more cautiously bullish on equities, having been at zero since September in our multi-strategy fund.

We also recently launched the Ashmore Global Consolidation and Recovery Fund (see SCI issue 134 for more), which involves banks swapping their distressed emerging market exposures for units in the fund, thereby enabling those banks to retain the upside associated with a recovery in asset prices.

Q: What is your strategy going forward?
A: There is scope for pension funds to have as much as a 50% allocation to emerging markets, if they begin considering asset allocation at a strategic level. We are ready to help investors get to much higher allocations by continuing to grow organically, build out more local operations and offer more products in more EM asset classes to cater for this growth.

Q: What major developments do you need/expect from the market in the future?
A: Emerging markets are in a good position and in this interconnected world will be the next engine of growth. The emerging countries and their numerous asset classes stand to benefit significantly from the changed global balance.

The average non-weighted reserve-to-GDP ratio in the emerging world is 30%, meaning that EM countries are large net creditors and exporters of capital. Central banks alone have US$5.5bn that could be pulled back from developed economies and the danger is that they may behave in a similar way at the same time - this is why the G20 has become so powerful.

It also explains the switch in economic bargaining power from developed to developing countries. There'll be some short-term stress in terms of exports, but it should be replaced by domestic consumption.

The reality is that there is now a higher ten-year risk of sovereign default in some developed countries than in many EM countries, for example. Compared to the last crisis, the risk of sovereign default in EM is minimal - there's no sense of the financial contagion of the 1990s.

This is because, for the most part, EM countries do not have credit crunch disease - a process of deleveraging after years of developed market excess leverage - but rather have collateral damage in the forms of reduced cross-border flows and reduced exports (neither exclusively or even dominantly EM problems). Eastern Europe is the exception because it has some credit crunch disease. The last few years have seen huge fighting for market share among Western European banks in countries that were becoming 'developed'.

Russia has always had a dysfunctional banking system. The trade shock resulted in a devaluation of the currency, but sovereign credit risk is fine - the central bank has US$400bn in reserves, for example.

The behaviour of central bank reserve managers will impact markets going forward in terms of stabilising currencies. Lower reserves may lead to domestic investment booms, thereby impacting the level of foreign investment in US Treasuries. The net effect will be increased economic growth in developing countries.

About Ashmore Investment Management
Ashmore Investment Management Limited is one of the world's leading investment managers dedicated to emerging markets, with a history of consistently outperforming the market. Ashmore focuses on a number of investment themes, including external debt, local currency, special situations (incorporating distressed debt and private equity), corporate high yield and equity.

CS