There is much that seems a little improbable about MYM Capital. It is the product of an unlikely link-up between Paris-based asset manager Matignon Investissement, Yu Ming – a Hong Kong-listed investment firm controlled by the scion of one of the founders of the Sun Hung Kai empire – and Fabrice Jacob, a French ex-investment banker turned local Hong Kong fund manager. That means that MYM is far from being an average asset manager. Even its portfolios make strange bedfellows.
Jacob has spent many years running a tiny equity fund investing in smaller Chinese and China-focused companies. He has done rather well: the fund was up 65% in 2003.
"It's extremely volatile," says Jacob, "but we're consistently outperforming our benchmark by 20% per annum."
Running a small China fund in Hong Kong may make the blood course a little faster when the market leaps about but it is not the stuff on which lasting reputations are built.
MYM Capital's latest fund might be an altogether different proposition. Launched in September 2002, the MYM High Yield Bond Trust boasts total assets so far of just $26 million yet finished 2003 as the world's fourth best performing bond fund, according to Bloomberg. What is more the bond is fully leveraged and is completely open-ended.
"This really started back in 1998," Jacob says. "When the Asian crisis hit, I started buying high-yield bonds for Yu Ming. Everything was collapsing around us and we saw the bonds collapsing too. We built a portfolio just as everyone was selling. We've made an average of 32% per annum year on year since."
With the new fund, the portfolio has shifted to one dominated by European and North American fallen angels as yields have fallen in Asia in an already shrinking pool.
Profiting from nightmares
"Look at our portfolio," Jacob says. "All of these names have had a nightmare over the last 12 months. We made good money in Ahold, Invensys and Swire. We bought British Airways bonds as soon as [UK prime minister] Tony Blair decided to join the party in Iraq."
The list continues: "We bought massively into the German banking market when some people were saying Deutsche Bank and Allianz might go bust. You had headlines like that because people were panicking. We are very event-driven – we only buy when something's happened and it's only going to be bad. Downgrades are top of our list."
The Enron debacle was a seminal moment for the fund. "We're making money out of others' fear," Jacob says. "We're taking advantage of the automatic downgrades as a result of Enron: it was still rated BBB two days before it went into Chapter 11, so it was investment grade until the last minute. S&P and Moody's were heavily criticized for not reacting earlier."
Jacob says Enron has meant ratings agencies have a hair trigger response to downgrades. With big sums in investment-grade bonds held by fund managers of institutions mandated to hold only high-rated paper, any swift downgrade triggers a sell-off that feeds on itself, intensifying losses and, for MYM, compounding possible gains.
Profiting from such events sounds simple, which raises the question why more high-yield bond funds are not making such good returns.
Jacob claims that while some fund managers in the US and Europe follow the MYM strategy, most are investing in a different cycle of the same bonds – in what he calls the tail of the yield cycle, when companies are out of intensive care but still recovering.
Buying too late
"The normal high-yield bond fund is buying the tail, buying the companies that are almost out of the woods, where there's limited upside," he says. "It's no longer event-driven: it's a credit quality issue and it becomes very sensitive to interest rates.
"We buy at 12% to 20% yield to maturity and we sell at 7%. We never hold to term. The beauty of a bond is that it never goes to zero. As long as the company has assets, there are always some crumbs left on the table at the restructuring. Look at WorldCom: the ords went to zero, but the bonds trade at 35% of nominal value."
It does not always work out that way. Jacob recently invested in Parmalat bonds, prior to the company's recent bankruptcy filing. He admits getting the call badly wrong.
"We thought Parmalat was another Ahold," he says, alluding to the Dutch retailer that briefly flirted with disaster only to recover. "We thought there were assets there. Now we don't know where the money has gone. We bought into the convertibles at approximately 85% of redemption price. It's quite a hit," he says ruefully. "Our bond fund has come down a bit – between 5% to 6% off our peak. As of today the hit is 3%."
The doleful tone soon lifts however. "You know, it's the most impressive fraud ever perpetrated in Europe," he says, laughing. "It's bigger than Enron, they've been getting away with it for 15 years and no-one noticed." There is a touch of awe in his voice.
"It shows once again that bond holders are in a much safer position. The shares in Parmalat are suspended, never to return. The bonds are trading at 20% to 25% of face value."
He pauses and shrugs. "Our loss is capped and who knows what will come back. The numbers are staggering."
If the Parmalat fiasco ever gets sorted out, Jacob and MYM may have the last laugh. In the meantime, this maverick fund manager sees no shortage of new angels waiting to fall. "Situations like this happen all the time," he says. "You don't need a good or bad environment to see companies in trouble. That's the way the world is."