02 March 2019, News Wires — JPMorgan has retained dollar-denominated debt issued by Venezuela and its state-run oil company PDVSA in a key emerging market bond index as part of its monthly rebalancing, according to two fund managers.
Investors have been concerned about the status of debt issued by Venezuela and its oil firm after Washington imposed sweeping sanctions earlier this year.
With the curbs, trade in Venezuelan debt has ground to a halt, leaving some investors concerned the price is not reflective of the assets’ true value and making it harder for passive funds to accurately reflect the indexes.
JPMorgan, which declined to comment on its monthly rebalancing, had sent out a survey to its clients ahead of the rebalancing asking more specific questions about Venezuela, Tina Vandersteel, Boston-based head of emerging country debt at Grantham Mayo Van Otterloo & Co, told Reuters.
“JPM had launched a survey, which I’d completed, about what to do about VENZ. The feedback I gave them was, per their index liquidity rules, while the sanctions prevailed, they should be removed,” Vandersteel said in an email.
Investment managers’ willingness to support the eviction of Venezuelan debt from the indexes is also influenced by the flexibility of their funds’ investment mandates.
A leading exchange-traded fund from BlackRock, the iShares JPMorgan USD Emerging Markets Bond ETF, for example, is allowed to invest up to 20 percent of its assets in securities not in the index, its prospectus showed.
Yet making changes to portfolios in reality is not easy.
“To actually exit the exposure is nearly impossible – especially for larger funds – as there is no trading,” said Uday Patnaik, Head of Emerging Market Debt at Legal & General Investment Management.
“Placing the country weight to 0 percent while freezing the price of the securities makes the most sense,” he added.
At the end of January, PDVSA had a weight of 0.53 in JPMorgan’s EMBI Global Diversified index while Venezuela Republic bonds were at 0.66, according to the index provider.
Reuters did not have access to February index weight data.
Venezuela – the country with the largest oil reserves in the world – has defaulted on most of its $63 billion of debt as it has spiraled into its worst-ever economic crisis. The International Monetary Fund has forecast inflation will hit 10 million percent this year.
Since the start of the year, bonds issued by Venezuela and PDVSA chalked up steady gains amid weeks of protests that saw pressure mount on President Nicolas Maduro.
However, trading in bonds ground to a halt after Washington imposed a swathe of sanctions, including a ban on U.S. investors from trading in the secondary market, other than divestment.
JPMorgan communicates any changes of index constituents to its clients on the last trading day of the month. The EMBI Global index includes $24.1 billion of dollar-denominated PDVSA debt, according to the index provider.