(Bloomberg) -- A fund focused on buying junk bonds has crushed just about all of its competitors by loading up on debt from corporations in Ukraine.
The Eastern European nation, which is battling a full-scale Russian invasion for the third year, became the biggest country allocation for the $470 million Emerging Markets Corporate High Yield Debt Fund run by Arkaim Advisors, which has returned 12% this year and beaten 99% of peers, according to data compiled by Bloomberg.
The firm holds debt from state-owned firms Naftogaz and Ukrainian Railways as well as from miner Metinvest. These companies have offered some of the biggest returns in emerging markets this year at about 73%, 52% and 19%, respectively, while the average for junk-rated peers stands at 9.6%, Bloomberg data show.
“These guys have assets outside of Ukraine, which can really support the business and in case of defaulting can provide us with enough recovery to feel safe,” chief investment officer Dimitry Griko said in an interview, referring to Metinvest.
Naftogaz restructured its debts and recently received funds from the European Bank for Reconstruction and Development. Metinvest has used spare cash to buy back bonds when possible, earning investors’ favor, while Ukrainian Railways remains in a payment standstill agreement through January 2025.
Among other big holdings are Colombia Telecomunicaciones and MC Brazil Downstream, both of which have delivered double-digit returns this year amid speculation on acquisitions.
Until May, Argentina, with its corporate and provincial credits, was the largest allocation in the fund, but now Ukraine has taken a larger share of the portfolio, according to Griko. In October 2023 the fund had an 8% allocation to Ukraine, and today it stands above 10%, he said.
Arkaim is now working to open a hedge fund to invest exclusively in global distressed and defaulted debt with a focus on emerging markets, Griko said.
Ukraine reached a deal in principle last month with some of its creditors to restructure more than $20 billion of international debt. The move will help the country finance its fighting against Russia.
Griko’s strategy in Ukraine is well known for corporate bond investors in emerging markets: scooping up debt from otherwise sound companies based out of countries facing economic turmoil. Most times, these companies, like those in the commodities sector, have hard-currency revenues or assets in other countries.
“It’s another case which proves that decoupling of sovereign risk really helps the corporate investor,” he said. “Because obviously the sovereign is really in a tough spot right now.”
Read: Where Defaults Loom, Bond Traders Scour for Safety and Win
(Updates returns in third paragraph. An earlier version of this story was corrected to clarify Griko’s attribution to Metinvest in fourth paragraph.)
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