Now entering its sixth year of operation, ProMeritum Investment Management – a London-based discretionary emerging markets fixed income-focused manager – has notched up five successive years of positive returns since launching in January 2015.
With more than USD350 million in assets under management, the ProMeritum fund made 9.61 per cent last year, trading an opportunistic, theme-based investment portfolio built around a broad range of idiosyncratic, proprietary ideas spanning sovereign and corporate credit, local currencies and other fixed income assets.
Now entering its sixth year of operation, ProMeritum Investment Management – a London-based discretionary emerging markets fixed income-focused manager – has notched up five successive years of positive returns since launching in January 2015.
With more than USD350 million in assets under management, the ProMeritum fund made 9.61 per cent last year, trading an opportunistic, theme-based investment portfolio built around a broad range of idiosyncratic, proprietary ideas spanning sovereign and corporate credit, local currencies and other fixed income assets.
Co-founder and managing partner Pavel Mamai, who held roles at Goldman Sachs, Nomura, Lehman Brothers and Renaissance Capital before establishing ProMeritum in late 2014, believes the strategy’s successful track record stems from the management team’s willingness to adapt in a continually evolving and often unpredictable sector without changing the core DNA of the investment strategy.
“We’ve seen that our approach to risk management works – which is great – but you never stay still; you always try to optimise what you are doing,” he explains, reflecting on five years of positive performance.
Geographically, the strategy invests opportunistically in a range of markets and sectors across Eastern Europe, the Middle East and sub-Saharan Africa, with former Soviet bloc nations such as Russia and Ukraine typically prominent in the portfolio.
“We look at themes and ideas in the areas where we feel we have got a significant analytical edge,” Mamai adds.
While the first half of 2019 was dominated by a rally in US treasuries, which lifted performance across emerging market assets, the second half in contrast was very much punctuated by a range of idiosyncratic opportunities in selected countries.
“It’s a reasonably diversified performance base,” he observes of last year’s near-10 per cent gain. “We are not a fund which tries to trade US treasuries through EM. Instead, we did it predominantly through several unique themes.”
While blowouts in Argentina and Ecuador made headlines, ProMeritum delved deeper, building sector- and country-specific trades throughout the course of the year. Ukraine featured prominently in the portfolio during 2019, with gains made across credit and currency markets, particularly following President Volodymyr Zelensky’s election victory.
“Ukrainian bonds rallied quite a bit, and warrants were lagging,” he recalls. “We decided warrants were the best way to go long on Ukraine on a post-election basis. Sometimes you need a bit of luck, and just at the same time as we decided to increase Ukrainian exposure, this trade happened when a significant holder of the bonds sold their remaining position on the warrants.
“We had Ukrainian sovereign bonds, some quasi-sovereign bonds, but warrants were the largest exposure and they did deliver the best results. We were buying warrants at 63-and-a-half and we’re now at 100.”
Elsewhere, the fund made money in Nigerian longer-end bonds, and in many high-beta sovereigns across sub-Saharan Africa and in the Middle East.
“A lot of investors who were long Argentina had to reduce risk [to other EM Sovereign bonds], so here it was more of a technical theme which lasted only about a month, but also helped us with our performance,” he adds.
Looking ahead, Mamai anticipates that this year may not be as strong in beta terms as 2019, but there will nonetheless be a wealth of idiosyncratic investment opportunities once again.
“It looks like the market is going to be reasonably supportive,” Mamai says of the broader investment backdrop for the coming 12 months. “You don’t have this big US treasury rally to back up a massive rally in EM credit, but towards the second half of the year we will get a lot of noise related to the US election.”
Specifically, the strategy will maintain its focus on Ukraine. As sovereigns rallied over the past 18 months, ProMeritum is now planning to broaden its focus to a much wider and varied “second layer” exposure there, predominantly in corporates along with some local currency exposure.
Other themes in the fund include Mozambique – a trade which stems from a potential IMF programme being put in place – and in Nigeria, where Mamai’s idea involves a carry-positive short trade which capitalises on rates going wider on the long end and a potential currency devaluation.
“There’s a little bit of convertibility risk, but we have essentially proportioned the trade in a way that mitigates that risk,” he continues. “At the market level, it’s often the case that the year after a very strong year is decent, though not as strong. But we still performed pretty well, and 2020 will be another year which should provide us with some opportunities to differentiate in our themes.”
While Promeritum has maintained impressive momentum in what has been a turbulent time for emerging markets (the fund is up over 50 per cent since inception), the company has also had to grapple with a rapidly-changing operational landscape, as the hedge fund industry continues to evolve and mature beyond the ‘two-men-and-a-Bloomberg-terminal’ model of old.
“When we started from scratch five years ago, in a small office with just three people, I would not have expected how institutional this business would become within five years,” Mamai reflects on the firm’s progress. “When I look back, we’ve made major, major efforts to institutionalise this business. It’s not bureaucratic – we’ll never be big enough to be bureaucratic – but with the aim of having a high institutional standard.”
Expanding on this point, he points to the growth of ProMeritum’s investor base, the expansion of its operational infrastructure and the continuing development of its investment processes.
“We’ve tried to always be one step ahead of what these investors demand, in terms of our systems, our processes, the way we operate,” he notes, as the interview draws to a close.
“We have found that our strategy’s risk return profile is very appealing to the highest quality investors – such as pension funds, such as endowments. These are the types of investors that you want, if you want to build a long-term business.”
