The Big Interview: Eric Vanraes – EI Sturdza Investment Funds

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The Big Interview: Eric Vanraes – EI Sturdza Investment Funds

bond funds (the EI Sturdza Strategic Euro Bond fund, Strategic Global Bond fund and Strategic Quality Emerging Bond fund). The first is Libor flat because it is a low risk fund. The global is Libor plus 100 and the EM is Libor plus 200.

“The Euro bond fund is absolute return and the two others are total return. I’ve been asked why don’t you want to put more yield in your bond fund to have more performance, [or] a better ranking in Morningstar, and so on. I say no, I don’t want [that].

‘Buy low quality, low liquidity’

“If you want to have a better ranking to have a five star [rating], you need to deliver performance. To deliver performance today you need higher yield. If you want a higher yield, then you have to buy low quality, low liquidity and also you have to buy spread. And spread has a huge correlation with equity.”

At first glance, Vanraes comments seem extraordinary, but there is a method to his philosophy and what he believes is the often unmentioned and overlooked correlation between bonds and equities.

“At the end of the day if you buy a bond fund with good performance then you buy an equity fund,” he says.

“But you don’t understand that you buy an equity fund. I have the privilege to belong to the Sturdza Group. The equity range is just great and they deliver a lot of performance.

“So, I say to everybody – and this is our DNA – [that] if you want performance, then buy our equity funds. They are fantastic. But I am the bond guy and I don’t want to have a correlation to equities.” 

As Vanraes explains no matter how talented equity fund managers are, one day, equity markets will collapse or fall. And on the day equity goes down, with his funds, he has, as he calls it, the “natural hedge on the others”, and therefore expects to see the net asset value of his funds going up.

“If I put in yield and spread I am correlated to the others and when there is a problem the equity fund will not perform and my fund will not perform as well,” he says.

“If you buy a bond fund today with an attractive yield then you buy low quality, but very low liquidity.

“I am very serious when I say that you buy more risk than [you do if you buy] in equities and [there is] less expected return. So, it is 100% stupid behaviour.”

Conviction

Vanraes’ ultra-direct approach suggests he is absolutely convinced that he is correct. Even when dealing with large institutional clients, he admits to being just as direct.

“I am very proud of managing bond funds with low return today,” he says.

“I met an institutional client recently. I asked [do] you have a house? Yes. You bought your house 20 years ago? Yes? You insure against fire? Yes of course. Did you have a fire during 20 years? No. So, you are stupid. Call your insurance company and say you will remove the insurance. He said, ‘no, no, no’.

“Bonds and bond funds are the insurance against fire in your house. You buy equities to access performance. You buy bonds to avoid the problems.”

Vanraes makes the point that it is very difficult to push the steady approach, because people often want to see instant returns, and many will say that he is not performing as well as others in the sector.

“I say ‘I know’,” he notes. “I don’t want to. “The emerging markets fund performs fantastically, but it is a different animal. But the European and the dollar bond fund don’t really perform. Equities are rising every day [but] momentum is not in favour of bonds.

“But, I don’t know, probably in six months, [or] in nine months, [or] in one year, bonds will climb again. And you will be very happy to have your insurance.” 

EXPERIENCE MATTERS

In a career that has spanned three decades, Vanraes has managed money for some of Europe’s biggest asset management houses.

A French national by birth he will also able to call himself a Swiss national later this year, as he has been living in Switzerland for 17 years, in Geneva.

“I feel that now I am Swiss,” he says. “I am French but I am from the other side of the border (near Nancy). It is in the French Alps. In my mentality and behaviour I am like the Swiss.”

And he says, he also found ‘home’ through his work when he accepted the offer of a Geneva-based job, working alongside long-time friend and associate Eric Sturdza in 2008.

“They already had a very talented equity fund manager, but zero fixed income in the EI Sturdza asset management company,” he says.

“I started from scratch and built fixed income team and fixed range. In 2009, I started with the European bond fund investment grade but very low duration and very low credit risk. A kind of absolute return short term duration fund.

“In 2012, we launched a US dollar denominated global bond fund for people who want more yield and don’t want to invest in Europe.

“We were very happy with these two traditional funds, but as you know, yields decreased dramatically, especially in Europe. And we wanted to find a less traditional bond fund, to have more ‘juice’ for our clients, and one year ago we started with a new fund.”

Three funds

Vanraes manages three funds but it is when he is talking about the emerging markets offering that he is most animated.

Like a child with a secret that he is not supposed to share with everyone, he is cautiously keen to reveal what makes its management style different to others. Particularly as he believes that he has a formula for combatting contrasting investment cycles.

“We launched this fund one year and I am really excited by it,” he says. “I think that we have a bright future. We called it the Quality Emerging Bond Fund, because it is emerging, but only [targets] the highest quality of emerging markets.  

Vanraes takes the country and company bonds within the JP Morgan EMDI index with around 70-80 countries to choose from and then he removes “all the bad quality” and keeps only the 20-26 best countries that are investment grade or double B+ rated.

So, why is Vanraes so excited by this fund and which geographical areas are providing returns in this space?

“Because the spread is huge,” says Vanraes. “You cannot explain this huge spread only by risk or lack of liquidity. You have a premium. It is very important to take the opportunity to invest in these countries. One example in all of these countries is that inflation is decreasing dramatically.

“But the yields are not decreasing as much so the real yields are huge.”

Growth is back

Growth is back in many countries, he says. For example, it is back in Russia and it will be back in Brazil in the coming months.

“It is like an alignment of planets,” says Vanraes.

“Take energy markets. You have to favour energy and in bonds in particular. We like these bonds. In some emerging markets, it is better to invest in bonds rather than in equities, because many companies

are government-owned. “Let us take an example of Gazprom [Russia’s state-backed energy company], if you are a shareholder of Gazprom, then you are obviously a minority shareholder, as the major shareholder is Putin.

“Can you imagine for one second that Putin will give you a gift with a huge dividend? No. he will keep it for himself.

“But if you are a bond holder Putin will thank you, so he will give you a good coupon for the bond and the rating of Gazprom will remain investment grade because they need to invest.

‘In the bond market Putin is your friend’

“In the bond market Putin is your friend. In the equity market, he is not your friend. So, if you want investment in Gazprom, buy bonds. Never buy equities. And If you want to do well with government equities then you can pick good equity companies by buying the bonds.”

Vanraes does warn that with emerging markets, even within the ‘top quality’ countries, there may be scandals, corruption and political turmoil. The secret is to either get out quick or “to stay quiet”.

“If you think it can be dangerous for your portfolio then you have to sell immediately – which we did in Turkey last year,” he says.

“But if you think that OK, it is only more scandal, bond prices will decrease but after one month they will recover, then you keep your bond. You have more volatility of course. but you have a huge yield.

“The magic of emerging markets is that the average coupon is 5, 6 or 7 so when the price of the bond decreases from 98 to 95 you don’t lose 3% because if you wait then you have the coupon coming and you have the 6% coupon.

“It is the basics. A lot of investors forget that.” ■

Author spotlight

Gary Robinson

Commercial Director, Head of Video at International Investment.