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Trade finance fund may be an answer as Fed, ECB prepare to unwind

Alternative funds are gaining prominence even as analysts are expecting turbulent times in stock markets, which have been hitting record highs

Gulf News

Dubai: As the US Federal Reserve (Fed) and the European Central Bank (ECB) prepare to unwind their easy money policy, which was in place since the financial crisis almost a decade ago, funds which are into trade finance among others may benefit.

With a rebound expected in global trade, and as banks become vary to finance companies in need of working capital, alternative sources like trade finance funds are gaining prominence even as analysts are expecting turbulent times in stock markets, which have been hitting record highs amid growing risks including geopolitical tensions and rising global debt.

“It’s a [Trade Finance] fund that will benefit from rising rates. In a rising rate scenario, equities and bonds take a beating, and this [trade finance] is an investment in the real economy,” said Doug Bitcon, head of credit strategies at Rasmala.

The World Trade Organisation feels that commerce is expected to grow by 3.6 per cent in 2017, well above last year’s figure of 1.3 per cent and also up from the WTO’s April forecast of 2.4 per cent. Global trade totalled $16.5 trillion, with 80 per cent facilitated by trade finance.

And the growth is coming from developing markets, whose merchandise exports share to 42 per cent in 2015 from 33 per cent in 2005.

“There is a strong growth in emerging market economies, and that growth will continue. The key there is to fund that trade gap. Trade finance growth could be a lot faster but it’s difficult to access capital there,” Bitcon said.

The opportunity has been thrown open to alternate financers as banks cut lending to finance to small and medium enterprises after the financial crisis in the last decade.

“Alternative financing remain an exciting opportunity for financiers and investors as well. We now have an opportunity to tap into an area which was earlier dominated by the banks. That opportunity won’t just be there for 2017, but that opportunity will exist for years to come,” Bitcon said.

Less volatile

Trade finance is a less volatile and predictable investment strategy, and offers diversification from volatile equities and commodities.

“Trade Finance has a low to negative correlation with other asset classes. They are often floating rate transactions set at a profit rate over LIBOR which limits the risks associated with a rising interest rate environment that may negatively impact the returns of other asset classes such as fixed income and potentially equities,” Danny Jones, fund manager of Trade finance fund at Rasmala said.

Rasmala’s Trade Finance Fund, which was launched in 2014, has an asset under management of $136 million.

The fund has a 150 transactions in the current portfolio, and diversified across geographies and across sectors. Metals and mining contribute to 23 per cent of the portfolio, while 22 per cent of the money is in agri-commodities, compared zero three months ago, in which the fund has done a lot of transactions.

“We have gone back to Brazil on the ago commodities side after the economy witnessed stability post turbulence due to political uncertainty. We are not looking at companies that are distressed looking at yields, but we are looking at companies that need expansion capital, and it has a physical presence,” Bitcon said.

About 44 per cent of the money has gone in companies based in the UAE, 9 per cent in South Africa, and 10 per cent in Brazil, which is in mostly agri commodities.

The fund has done around 706 transactions valued at $355 million spread across 28 different geographical location and 29 types of goods.

Trade finance gives a higher return, which is typically LIBOR plus 5 per cent, for a duration of less than 6 months, compared to the Dow Jones sukuk index’s yield to maturity, which is typically 3 years for 4.8 per cent.

However, the catch is in the cost or the management fees, which is 1.50 per cent.

“The cost of managing alternative investment strategies is typically higher than exchange traded or other financial instruments. These are real assets in the real economy and need to me monitored, maintained, secured etc. The volatility adjusted returns of these strategies (net of fees and expenses), would suggest that it is worth the extra cost,” Jones said.

 

Significant benefits

According to Rasmala, alternative investment strategies can bring significant benefits to investment portfolios through diversifying exposure away from traditional asset classes such as fixed income and equities.

Alternative investment strategies offer a wide range of possibilities, from commercial real estate, hedge funds, private equity, private placement debt to trade finance.

“Since they are non-traditional investments with low correlation to traditional strategies, allocations can improve the volatility adjusted returns of portfolios. For example, when traditional stock and bond investments underperform, alternative investments may be gaining or holding steady. Also, due to lower liquidity, alternative assets are often mispriced and so offer opportunities for arbitrage,” Jones said.

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