Hedge Magazine, May 2018. Original article p32-34.
Marcelo Saez, Investment Director at Argo Capital Management
Marcelo Saez uses the word “ideas” a lot when he’s talking about investing. “You have to have a certain degree of curiosity when you invest in emerging markets. A healthy dose of curiosity goes a long way to keep you abreast of developments in emerging markets. It’s not something you read about every day in the newspaper, but you know, if you dig enough around the place you can find good information.”
Saez is the Investment Director at Argo Capital Management, the alternative investment manager that focuses on emerging markets. We’re sitting in Argo’s offices in Mayfair, which is a modern space once you get past the marbled lobby. It’s a mild spring day a few days after the snow melted and Saez is in a blue suit and an open-collared light blue shirt. He’s calm and focused as he talks shop, equally comfortable discussing details as he is the big picture.
Established in 2000, Agro Capital Management operating an an absolute return policy. Saez is part of a half-dozen strong investment team and the way he describes it, there’s a fair amount of discretion: “We pick and choose our investments predominantly from our own research. We look at companies that are coming to the market issuing bonds, and there’s been an increasing wave of those. Last year was the biggest on record on the corporate credit side and this year is meant to surpass that,” says Saez. “As more resources are being devoted to emerging markets, you get a lot more exposure from companies that you may not have heard of before.”
Right now, Saez’s key investment interest is high volatile emerging markets and some of the frontier countries. “I think it’s interesting. You’re seeing a lot of issuance from these places, but in some of these countries you’re not getting a lot of information. There seems to be a big demand for emerging market issuance, and particularly these for names that no one’s heard of before. You have to run your analysis of these countries fairly thoroughly before you get comfortable.”
Emerging market investment have traditionally been more driven by political instability than mature markets, however recent events in Europe and the US have, to an extent, turned things on its head. “Paradoxically, some of the emerging markets have gone the other way round,” says Saez, noting how Argentina had been the “basket case” of emerging markets for the last 20 years until the country started reforms in 2015.
But still, there’s a trade-off between how much analysis you’d like to do and how much analysis you can do given the time limit – particularly for new issuances. “Given that we are seasoned investors with 20-plus years’ experience for most of the team members, you get to know pretty quickly which areas you need to focus on for a particular country.” Take Nigeria for example: “They used to run a current account surplus, but they’ve started to run a current account deficit since the oil price dropped and that tells us a lot. … The fact that they’re running a fairly conservative fiscal deficit and that their level of debts is very low by international standards, would make us confident that this particular economy has the ability to service its debts. There’s still a lot of challenges, but we got pretty comfortable that these were attractive investments.”
Keeping the promises of an absolute return fund that’s also deep into volatile territory requires a fair amount of diversification. The fund has 50-60 low-correlation positions across the corporate and sovereign sides. “10-20% of our portfolio is what we deem a liquid distress bucket, or ‘fallen angel’ investments – corporates where bond prices are dropping from 100 down to 80 down or even lower. We get quite excited by those low correlation opportunities.”
Saez’s favourite part of the job is putting together the portfolio – piecing together the different ideas. “For example, in February there was a big dislocation in the marketplace because of the VIX Index – it exploded. … At the time we were kind of scratching our heads. We had positions in place, but how could we make any value out of it?” The solution was to hedge the portfolio and go long on volatility. We saw some funds that invested in inverse volatility go from 100 to 4 in the space of a day, losing 90% of their value. “It cushioned our returns nicely. That kind of looking for ideas demystifies the market to an extent. Having the conviction to put those ideas in place is very satisfying.”
Saez was born in Chile, and the family emigrated to Australia when he was 11 and he grew up there. “I picked up the language quite quickly and I did all my high schooling and university in Australia. It set the foundations, which was a good opportunity as the educational system there is good.” Saez speaks in a hard-to-peg international accent, although the Aussie comes out every time he says the word “Australia”. Saez got his degree from Macquarie University: “I did economics and actuarial studies in Australia and soon found myself working for AMP, a big asset manager there. I was still on the actuarial path when the dot-com bubble happened. … You could see the raw power of the markets and how people were sucked into this trading environment. I decided then that I wanted to go into the investment markets.”
Saez joined a local asset manager called Equity Link, which led him down the fixed-income investment path. The company was taken over by Aberdeen Asset Management, which provided Saez’s introduction to the Latin American markets and eventually saw him move to London in 2003. He subsequently joined a hedge fund called Convivo Capital, which was started by an ex-head of emerging data at Aberdeen. “It was an exciting time to get into emerging markets. Local emerging markets was in the process of being developed, so it was a lot of hard currency stuff, and only a handful of corporates. … It was less benchmark-driven and you had the ability to use long and short positions and really take sides with a particular creditor if you liked it.”
Saez joined Argo in 2011 following a year’s sabbatical, having previously left the Swiss hedge fund Tell Investments. That fund was in the process of being wound down, and Saez figured it was a good time to pause – he was also in the process of getting married. “It’s good to take a break. Sometimes you get too enclosed in a particular market that you fail to take a broader view,” says Saez. “Sometimes the best ideas come when you’re not expecting them.”
Saez and his family live in Wimbledon with their two young children. “They’ve got very thick English accent!” He laughs. The family travels often to visit family in Australia and Latin America. Saez’s favourite thing about London is the multiculturalism and the dynamic. “There’s very few cities in the world where you have so much available.” Saez’s international background must provide a unique perspective, I suggest, and he nods – everyone should travel if they have the opportunity. “To be able to experience another culture opens up a whole new level of understanding, particularly for up-and-coming analysts or researchers. … Go to Latin America or go visit Asia for three months, and you get a whole new world of experience, and you become a better analyst for it.”
London is a good place to be to maintain a global view of investments, says Saez. He thinks he’ll stay here: “There’s a lot of exciting things going on in London. The biggest one is of course Brexit, which continues to have a huge impact.” Saez is diplomatic in his answer about how Brexit is impacting business, but: “If you slam the door on an opportunity or a market somewhere, it can be hard to open in new markets, particularly if you’re a smaller economy relative to the rest of the world. Unfortunately, we’re finding out that some of the UK’s allies may say one thing but do something entirely different when it comes to trade deals.”
For all its strengths, the financial system can also be pretty fragile – Saez learned that when he watched Lehman Brothers collapse. “Confidence permeates everything else. For all your reputation, if the market loses confidence in you, it can go south very quickly.” Emerging markets have been on a good run but it’s been largely beta-driven, says Saez, who thinks it’s time separate the wheat from the chaff. “People have been coming into the sector and not really been discriminating. A as 2018 develops I think you’re going to see a lot more divergence between countries and corporates. Being long-short as we are, we’re in a better position to disseminate what’s a bad credit from a good one.”