A specialized fund focused on high-risk bonds has significantly outperformed its rivals by heavily investing in Ukrainian corporate debt. Amid ongoing conflict with Russia, Ukraine has become the largest country allocation for Arkaim Advisors’ $470 million Emerging Markets Corporate High Yield Debt Fund. This fund has achieved a 12% return this year, outperforming 99% of its competitors, according to Bloomberg data.
The fund’s portfolio includes debt from major Ukrainian state-owned enterprises such as Naftogaz, Ukrainian Railways, and the mining company Metinvest. These investments have delivered exceptional returns, with Naftogaz rising 73%, Metinvest gaining 52%, and Ukrainian Railways increasing by 19%. This performance contrasts sharply with the average return of 9.4% for junk-rated bonds, Bloomberg data reveals.
Dimitry Griko, Chief Investment Officer at Arkaim Advisors, highlighted the security of these investments due to the assets these companies hold outside Ukraine. “These companies have assets abroad that can support their business and provide significant recovery in case of default,” Griko explained.
Naftogaz recently restructured its debt and secured funding from the European Bank for Reconstruction and Development. Metinvest has utilized its surplus funds to repurchase bonds, gaining favor among investors, while Ukrainian Railways is under a payment standstill agreement until January 2025.
Previously, Argentina was the fund’s largest allocation, but as of October 2023, Ukraine has surpassed it, representing over 10% of the portfolio, Griko noted. The fund had allocated 8% to Ukraine at that time.
Arkaim Advisors is also planning to launch a hedge fund dedicated to investing in distressed and defaulted debt, with a focus on emerging markets.
Last month, Ukraine reached a preliminary agreement with creditors to restructure over $20 billion of international debt, a move expected to aid its ongoing resistance against Russian aggression.
Griko’s investment approach, which involves purchasing bonds from robust companies in economically distressed countries, has proved successful. “This case demonstrates how separating sovereign risk from corporate risk can benefit investors,” he said. “Clearly, the sovereign situation is challenging, but corporate bonds from these companies remain strong.”
