Robert Koenigsberger on Emerging Markets

called Grammarcy Funds Management. UH. If you're interested in what it's like investing in emerging market debt, how that part of the investment from it has changed over the decades as the world itself has changed. Uh. He began in South America and Latin America UM, before investing in places like Russia and China and Turkey. UM. Fortunately for them, they were out of Russia long before the most recent

invasion of Ukraine happened. Uh. It's just a fascinating conversation about looking at the world from both bottoms up and top down, as well as thinking about what valuations are like, how likely our macro events to impact you getting not just a return on capital, but, as his famously said,

in fixed income, a return of your capital. It really is a very, very different approach than what we think of as as typical equity investing, and and it not only has the advantages of uh there being inefficiency, so there's a potential to generate alpha, but if you do it right, it's pretty non correlated with probably the rest

of your portfolio. I found it fascinating and I think you will also, So, with no further ado, my interview with Grammarcy Funds Managements Robert Kohonensberger, let's talk a little bit about your background. You you get an MBA in Warton and then a master's in International Studies in Latin America. Your graduate thesis was on the origins and implications of the Latin American debt crises. It seems like you were built to trade distressed em debt built and lucky quite frankly,

you know. Um, I actually go back to undergrad where I did political science and history of of Latin America, and I was asked to do a similar thesis on you know, to do a thesis, and my parents told me I had to find a job at the same time, and so I try to put the thesis and the job searched together. And the only issue in Latin America, which was my major back in eighty seven was the Latin American debt crisis. So I did my study on that, and I got fortunate enough to meet a gentleman who

had been the finance minister of Peru. He had been the head of Wells Fargo International. He lent it, he borrowed it, he defaulted on it, and had this he had this great boutique out in California. So um, I feel really fortunate to uh to have spent thirty five years doing the same thing in emerging markets. And you know, the gentleman I worked with was just a great professional.

So late eighties, early nineties or a VP for an advisory firm that leads some sovereign debt restructurings and transactions in both South America and Central America. Tell us what that experience was like during that period. Emerging markets in the late eighties was very different than the emerging markets of two. I think it's fair to say it was a bit of the wild West. Um, you know, go back, you know the entire you know, it was the last decade, right,

theties was the last decade. And in Latin America, Mexico defaults in eighty two. Virtually the entire regions in default by by the end of the decade. So what it was like was, you know, putting Humpty Dumpty back together again and dealing with countries that had defaulted debt and taking them through what's now known as the Brady debt restructuring and having these bonds that nobody really understood come out of it. And that, quite Frankie, was was the

beginning of the asset class. And I remember, like, you know, even like we were doing, you have countries that that were shared borders, that couldn't talk to each other, that one of the other, and you can get in the middle and do some sort of of debt swap or a buy back or what have you. And so one of my fond memories was like Guatemala, I think it was in the nine and I didn't know what FX was, I didn't know what letters of credit were, and I

had to go get a letter of credit. I had to go to Guatemala, I had to present it and then we did a buy back. But we got paid in cansalis, which was the local currency. And so my job for basically two weeks was to get up, go sell as much f X or by as many dollars as I could, and then go back to the hotel and ship by the pool. That's not a bad gig. It was great. So so you go from that onto Mother Meryl for three years where you traded distress d M.

Then you're a VP of Lehman Brothers. And this was late nineties, not the Lehman Brothers we kind of a familiar with from the financial crisis. What was it like at those big shops Mery Lynch and Lehman Brothers doing distressed E M debt? Sure? I mean that, first of all, they were They were great experiences because you know, I started in a very small, boutique, boutique environment. And again I'm on political science and history major prior to to

graduate school. So to actually get experience in finance, to lead the bank's efforts in investing in sovereign debt restructions, and to bring our clients along was was a great experience. Um. You know, I got to learn a lot about about how markets function or not UM and I got to get his feel for Wall Street politics, which I found out really weren't for me, and and all the conflicts

of interest that one finds in Wall Street. You mentioned earlier that the late eighties early nineties were very different than the state of EM debt today. Um, how has the industry changed? How is E M distressed debt today different than it was thirty years ago? So distressed as different and EM is is different. You know, i'd start with break it down. You know when when I got to Maryland, Um, and you looked at the trade blotder

of who you were trading with. It was basically banks trading with each other and every so often a client would come by. So it's a tremendous amount of proprietary trading. You know, hedge funds in the back book, a little bit, a little bit of a front look. So I would characterize it as a bit of a bazaar, unless of a market, because you know, I was at Meryl and I would call JP Morgan and I would sell something to them, and they would call Chase and they would

call Naman. It was just a roundabout and then the market would drop five points or what have you. So musical chairs the last one holding got got stuck with it. Yeah, and um, so you know I tend to have create a lot of volatility. You know, if if everyone wanted to buy herself the same thing at the same thing, same time. Today the markets massively larger. You know, it was predominantly a sovereign market back then. You know, um, now it's sovereign, quasi sovereign, U S dollar local corporates,

high yield, etcetera. What's quasi sovereign? Sorry, like state versus national or something and so so usually and I usually talk about quasi sovereign and sovereign adjacent. So sovereign is

just the dead obligation of the country. Quasi sovereign is typically an entity owned by the state that issues GSC or like take pan X in Mexico as opposed to Mexico right, Um, and then sovereign adjacent are interesting as well because they're not explicitly owned by the state, but they're so important that there's some sort of nexus between the sovereign and that and that corporate. But you know, today the markets, you know, think about now there is a buy side e t F S four jacts. The

by side is so much larger than the street. It used to be just the street street had a lot of balance sheet um. Today, if you take emerging market corporates as an example, there's go back five years, ten years. Emerging market corporates are five times larger today than they were back then. Go back to right after two thousand and eight, every bank made markets, every bank had had balance sheet. Today you have less banks, less balance sheet,

less market making, and a really big buy side. So you have inelastic you know, in elastic supply when people want to buy, Like if you have a dollar there there'll be someone in emerging markets that wants to issue a bond and take that dollar from you. But when there's outflows, you don't have an elastic demand, and that's where you tend to get this this volatility and dislocations

that we've seen. So let me stick with sovereign adjacent In the US, as we learned during the financial crisis, the government sponsored enterprises like Fannie Mae and Freddy Mack and by extension um Sally. May you go down the whole list of these things, the U. S. Government's full faith and credit. Even though it wasn't obligated to these quasi publicly traded, quasi private entities, the U. S. Government still ended up standing behind them for systemic reasons. So

that's here in the United States. Do you have similar situations in Latin America and elsewhere or is it just country by country it's all completely different. First of all, let's unpack that. I mean, emerging markets is not this home much any asasset class. So almost anything and I could talk about it would be different. You know, there'd

be dispersion of of of factors. But when you think about you know, bailouts of corporates, UH, sovereign at Jason or what have you, we've certainly seen it in emerging markets, and I would say the most you know, the greatest example right now is in China property. If you've seen what's going on there. So it started as a crisis for ever Ground, right and I think the Chinese government wanted to kind of isolate Evergrand and then insulate the

rest of the sector. And now what we've seen is that it contaminated, you know, the Everground just poured over to even the best names like a country garden or what have you. And so right after the Party Congress, we've just seen massive amounts of aid. I would argue that that what we're witnessing today is the TARP program in China for for for the property sector, and you can see, you know, assets have gone. We were buying

performing bonds at eight cents on the dollar. Wow, that you had to pay for a crude right, which is which is a weird concept to pay for a crew. So so it's it's a crude interest. So maybe it's got four points of interest on an eight cent bond that typically when something trades to eight, people don't think it's going to keep paying. Um. And then once the program came out this Chinese tarp, if you will, Um, all of a sudden, eight cent bonds were trading at

thirty two this morning. They're like sixty Wow, just on this this this bailout notion. How do we get me some of those? That sounds very attractive and we'll talk later. So I was going to ask you what trades or deals stand out is especially memorable that seems to be fairly recent memorable Anything from the uh wild West days that sticks out is I mean, I love the idea of just going out buying dollars and then sending pool

side for the rest of the day. It was, um, you know, Margarita's or whatever they the local drink was. What else really stands out? You know, if I go back to the to the late eighties or early nineties, and you know, you're asking about distress then versus distressed today. And you know, I think one of the most interesting things in distresses when people are throwing away the keys,

you want to be there to catch them. And I remember one one time, and I think it was eighty nine or ninety, We're right at the end of the you know, the Lost decade and emerging markets, and all the banks are basically not all the banks, but a few of the banks are is like just getting out of Latin America and one of them just get me out.

Just that's it, full capitulation, that's right. So one example that was a lot of fun, I think was eighty nine or ninety Bank of America decided they wanted to sell their branch in Lima, Peru, and they the price tag was a million dollars. I'm like five years old. My boss, as gentleman mentioned, had been the finance Minister pru He's like, I need you to go down to Prue and and take a look at the bank due to diligence, right, twenty five years old. So I don't

know if you've ever been to Lima. But in in in the center of Lima and santing Cerro, there was a retort, no, like a roundabout, and one big tower. On the top of the tower it says Bank of America. We didn't have cell phones or whatever you so I got to run back to the hotel and I said,

you know, Carlos, is the building included? So yes, I said, it's got to be worth a million bucks, right, So we paid a million dollars for that made three million dollars trading facts before we sold it, and it was sold for fifty million dollars three years later, and that became the beginning of one of the largest groups in in Prue today. And so fast forward after after graduate school, I'm having lunch with a friend from school and Eric says he's working for Bank of America. And I said, Eric,

what do you guys? What are you guys doing? Is Oh, we're thinking of opening a branch in Lima, Peru. Oh do I have a building for you? And you know another one real quickly. You know, Russia has been so much in the news these days, and I remember the wild wild West, and Russia was the Yelts era, the nineties, the era of default. And I remember going there with a group of investors in it was nine June. Their

defaulted debt was trading at six cents. And we go into this conference room at Vanessa conam Bank, which was the Thebligor, the Export Import Bank of Russia, and this trader walks in and he's completely disheveled and he goes, I want to know who's buying back my debt. You guys are getting in my way. I'm trying to buy back my debt. Greatest buy signal that any of us

that I've seen the problems. We don't have cell phones, right, so it's like race back to the hotel to see who can call their training death fast enough to buy Russian And if you look on your Bloomberg screen today, on that day, the asset went from six cents to twelve cents, just on this meeting. That's amazing. I love this quote of yours, which now I understand much better.

I've been doing emerging markets since before they emerged. Yeah, I mean, um, you know, that's that's oftentimes when I talk with clients about because as you know, if you go back to the nineteen eighties, um, it was. I wouldn't call it an asset class. It was a bunch of bank loans in default. Um it was submerging at the time, right, And it was, I guess, you know, unpolitely called the Third World debt crisis lesser Developed country debt crisis. But no one was thinking about putting an

index around a bunch of defaulted bonds. So I was fortunate enough to be there as we transformed defaulted loans to performing bonds. And then when JP Morgan made the index in part, I think that was really the beginning of emerging markets debt as an asset class. Quite fascinating. So so let's talk a little bit about Grammarcy. What led you from big shops to launching your own firm? Um? Well, and were you always international debt focused? Yeah? A few things.

I mean, Um, I started in a boutique environment, and I never really thought that I was gonna stand Wall Street for a long period of time. I always wanted to do something entrepreneurial. Obviously I wanted to stay invested and have a career in emerging market debt UM. But so you know, the factors behind starting Grammarcy were a few. Um, one, you know, I mentioned conflict of interests on Wall Street, and when you are going through a sovereign debt restructuring,

that's just a negotiation. I'm sitting there representing the bank, and I'm sitting across from the senior debt negotiator from the Russian Federation or wherever it may be. And I remember at the banks, you know, on my sides would be someone from investment banking, someone from corporate relations. And so I'm just pushing to get the bank and our clients paid, and these guys are thinking about the next the next trade in Russia or whatever it may be.

So one is you know, I really, I really wanted to have a conflict free, mission driven firm, and our mission is really simple. All we do is focus on investment management. We want to focus on the well being of our clients, our portfolio investments in their communities, and our team members. That's it. And that's hard to do at a big, big shop on on Wall Street. Um. You know, obviously, eat what you kill. I wanted a meritocracy, and Wall Street is quite frankly anything but a meritocracy

because of all the politics and what have you. Um. I remember the day I made up my mind to start Grammarcy was at the end of the ninety seven bonus year early. Now go back to Lehman. They almost blew up in Mexico. We were basically I went to work there right after that. We had had no aspirations

for p l in n very little aspirations. Is like, just don't lose money, right, that was emerging market debt for for for Lehman, and so what is it just a service for the banks that and and don't take a lot of risk and make a lot of money supposedly, right. And so I go into ninety seven. My book, the restruction book has a five million dollar what do you call it? Budget? Then they raised it to ten, then they raised it to thirty, and then they raised it

to forty. So I walked into my bonus discussion in January February and it starts with, well, we almost made it, right. So they were trying to trying to basically say, since you didn't get to the forty, you know you shouldn't expect to get paid very well. So I said, well, we'll wait a minute, just stop right here, this conversation is over. I'll come back tomorrow. You put a different number on the piece of paper, and that was the moment that I said I wanted to start the firm.

And you know, we're purely there for our clients, and if our clients do well, we do well, and that's all that matters. I have heard variations of that precise story. I've experienced that precise story over and over again. Sometimes the short sightedness of upper management on Wall Street is shocking. Um, you just see all of these super profitable firms with the most successful traders. I am genuinely shocked when people say, yeah, then that's just not it's just not worth it. I'll

tell you another story. I remember when I when I left Mary Lynch so fed started raising rates ninety four. We've got the the tequila crisis in Mexico and I resigned and my boss has Venezuelan and the big boss is Cuban, and the Venice one was like, well, you gotta go talk to the to the Cuban. And so they start talking in Spanish in front of me, and they go, you bi lingual and bilingual. But they didn't don't know that I speak a little Turkish to it

out of my wife. My wife's Turkish as well. But so I go upstairs and meet with the big boss and they start chatting in Spanish and they go, you know, you told me that there were no other jobs out there that we didn't have to pay these guys, right, So then he turns to me, he goes, Robert, you know what can I tell you? And I answered him back in Spanish, I said, I just heard everything. Thank you very much. By the way, how can you do

emerging market debt? I mean, I know everybody everywhere more or less speaks English, but isn't it an enormous advantage to be able to speak in the local language. Absolutely? First of all, I mean a lot of places we go, UM, English isn't necessarily spoken well um, even at the most senior levels of government. So to be able to um speak, seek information, um persuade others in their language is is

very helpful. And I'm not gonna say I do it as well in Spanish as I do in English, but that's very helpful to you know, Emerging markets is all about assessing people, right, So we have to think about credit risk like everybody else. But the end of the day, emerging markets risk is about credit culture people. How do they behave in times of durest in the past, predict how they're going to behave in the future. It's helpful to be able to assess that prediction in that in

that language. So on the equity side, some people say you don't really need boots on the ground and emerging markets. I'm I don't know how true that is, but it really sounds like it's not true. On the debtor or credit side, especially a distress circumstance. Now, I mean boots on the ground is is essential, and I would say both internal boots and external boots. Right. So we have our own people, we have our own platforms. We have offices in Argentina and Turkey and Mexico and what have you.

And those people are really important for sorcing. Do is doing due diligence on deals, doing due diligence on on people, you know? Quite frankly, Um, one of our biggest strengths is in in our on our website. It's it's all the relationships we've had for thirty five years with people in different countries that can give you good information on people, you know. I remember a story in Thailand a few years ago. We were getting ready to buy the debt of a country, of a company that had come out

of debt restructuring. And you know, we are research guys did their work, the traders did the work. We like the value, we like the entry point. Well, then we went out to our network external lawyer who had sat in the debt restructuring conversations, and the lawyer says to me, Robert, before you invest, let me tell you what the debt restructuring looked like. It's great. So it was a patriarch, former military guy, had the discussions at his house, not

a law firm. You were escorted into the conference room through three levels of security, and the gentleman starts the negotiations. He goes, um, let's have a toast. Here's to my wealth and to your health. You just have to have people on the ground to that's just that's just bad. Now. Is that a local custom or is that a subtle threat? What? What is that? I mean? I think it was. I think it was a subtle threat. And again, you know, I want I wouldn't We're not so subtle. I wouldn't

make that blanket statement, you know, throughout emerging markets. But quite frankly, you know when I see some kid in their twenties or thirties started business and you know there are three or four people around their Bloomberg screens and they don't have the internal analysts, and they don't have the external network. I don't know how they think they can do it. That's really quite quite uh quite fascinating. You mentioned, um your shop, you have offices around the world, right,

what countries do you have offices in? So we're based in Grenich, Connecticut, we have offices in Latin America, in Mexico, Peru, Argentina. We have a lending platform and office in Turkey, Brazil. Done some stuff in Africa as well through a lending platform. And and you know, getting back to the local presence, you know, the having having a platform, having your own team in the market, you know, has all the obvious benefits, but also it gives you the ability to get depth

and breadth. And you know, our our business, you know, particularly private credit business. You know where we're doing asset back lending in a country. Um And I remember a friend who does domestic private credit told me once, you know, Robert is just as easy to do a four million dollar loan as a forty million dollar loan. And so what we're trying to do with these platforms is get

depth and breadth in the different regions. So if I go to Mexico, for example, where we're lending to the suppliers to pemm X, people who lay pipes, people who build build the platforms. If you do it on a

one off basis, you can't really scale it. But if you have a platform of dedicated people to that too and the controls, it gives you the ability to depth and breadth in Mexico to look at other industries not maybe we can look at real estate, but also think about the same industry in a place like Columbia or whatever it maybe. So I think I know the answer to this, but I have to ask you are long only?

And I would imagine there are all sorts of opportunity knees on the short side where you could see something starting to circle the drain and make a bet to the down side. I have to ask, why long only when there's so many opportunities on the down side. Yeah, and let me clarify. We we have UM. So we have four major strategy groups within the firm. One of them is long only UM, and we do you know, four subsets there. The other is alternatives where we can

do long short, alpha shorts, what have you. The third one is what we call capital solutions or private credit or asset back lending. And the last one is special situations. So I agree with you sometimes, you know, in long only, you know, the only way you can express negative view

is to not have any exposure. Sit on your hands, right. Um, But when we start thinking about our our alternative group, we can think about relative value, We can think about long short, we can think about doing things with derivatives that give you kind of you know, a call on the left tail, so to speak. So is that more of a hedge or what I'm hearing is three of your four strategies seem to be primarily long and one strategy has that opportunity to go short if it you

want downside. So our Special Situations group, we do a lot of litigation finance, right. So, and in litigation finance, you know, the most the most difficult thing to predict is the outcome of the litigation. Sure, right, we can

actually hedge that we can actually buy insurance. Right there's insurance companies that will you know, offer you insurance for maybe you know, you know, if it's a eight hundred million dollar claim and you can buy insurance for ten million dollars to insure the ten million dollars litigation, and it costs you three million dollars um, that's pretty good asymmetry in terms of you know, if you lose, you lose the three but if you win, you're in free

hundred hundred million dollars. So we use hedging, and but that's not the same as you know, just I am making a directional bet that country X is Dad is going to get cut in half. That's right. Um. And look, there's two different ways to do it and long only, and it's it's risky to do it long only, right, And so it seems like long only is the less risky. You know, you're you're going up against an index, and oftentimes these industries have very risky proxies in them. I mean,

let's talk about Russia and Ukraine this year. R so, um, we you know, we had the good fortune to have no Russia, no Ukraine in February. Our analysts walked in in January said I think there's a fifty percent chance that there'll be some sort of invasion and the assets will drop a little like, well, Petar, you got the first part right, but if there's an invasion with the capital I or small eye, Ukraine has gone from eighty to twenty and Russia has gone from part of part

part of fifty. That's great. We missed February. February, we're out, but it stayed in an index for two months, right, And so one of the riskiest things we had to do is sit there and watch Russian debt trade up and down while we have zero exposure. So even though you know you can't short it when you don't own in the index, um, you actually um, it's it's not riskless, right, um in our alternatives, you know, more traditional hedge funds.

To your point, we can do alpha shorts. We can say and look, we were long protection against Russia in February. That was an alphabet for us. It was like, you know what, we think Russia has asymmetry, asymmetric downside, and we can express that um in that vehicle. And I assume that that worked out pretty well, worked out pretty well. So so let's stick with Russia for a second. You know, I look out and I have no idea what the endgame is here. Can can Putin ride this out? Can

Russia survive with Putin? And when will that country become investable again? It seems like they're not. They haven't been for a while before the invasion. It's hard to imagine anyone wanting to put up a lot of risk capital with them. Yeah, I think you need to look back at the past, at the last time there was regime change in Russia to be able to trialogy At And what I mean is, you know, yelts part of me. Putin has been around for so long, right that you

got to go back to the Yeltsin era. And I've read and heard so many times that you know, if if Putin just leaves, everything will be fine. But I have no idea what's behind Putin in Russia. And I remember being in, you know, in Russia in the late nineties, and you know, I would get a call in the middle of the night. It's like Yeltsin's in the hospital and you'd have to triage which hospital one was for cardiac, for heart attack, and the other ones he was just

drunk and sanatorium. And it made it and it made a big difference, and it mattered because none of us knew what would happen if yelts in past, right, um? And so I'll take that to today. It's like if if Putin weren't here tomorrow, I can't tell you what the politics look like there. And I also, how is Russia going to be treated on the other side of this, right? Is it gonna be treated like Germany after World War One? Or Germany after World War Two? Right? Um? You know,

will it be? Will will be embraced in that. You know, Putin was a bad guy who led good people astray. And let's have some sort of reconstruction of Ukraine and Russia. Or is it going to be more like Germany after World War One where that's still a prize state? Huh? Really quite fascinating. Let's talk a little bit about the state of em today. Valuations, at least on the equity side, they're the cheapest we've seen in a couple of decades. What do you see when you're looking at the debt

and credit side of emerging markets? Some something similar? And you know, I think what we have observed, and again we're all credit not equity, but um is over the twenty five years we've been together for a team there's been eleven major dislocations in emerging markets around the world, different countries, eleven times, and I would even call them systemic like we've seen today, and they all have kind

of looked the same, which is peak to trough. It's taken about five months, they drop about eight months later, it's up like seven and twelve to twenty four months later it's up thirty pc. So with that kind of top down historical framework, UM, it's easy to see that there's cheap valuations and emerging markets. But you know, we also have to think about where we came from, you know, like really low interest rates, a lot of liquidity, what

have you. So we also have to prove out with the portfolios that we build that those same type of expected returns are there. And you know, one of the beautiful things about fixed income versus equity UM is we have contractual coupons. And so if you can pick good credits that pay their coupons that roll roll down the

curve to par um, the mathematics work, right. That's why after these big dislocations, if you can pick a subset of credit that has coupon, we'll keep paying and roll down the curve towards par, then you're going to get these types of extraordinary returns. And I think we're in that type of environment today. Now, of course, um there's a lot of altility, and I think one needs to be you know, respectful of that baltiy today. But you know, I continue to think that, you know, the expected returns

in the destination weren't what maybe a bumpy journey. So given those sorts of numbers, the pullbacks, recoveries, what sort of correlations are there with other types of of at be it performing or distressed equities and other asset classes. It sounds like this is a fairly non correlated group of investments. Yeah, And I think you can create lack of correlation depend on about how you construct the portfolio.

And I think if you pick one return stream and emerging markets and stick with that return stream, you're going to find a lot more correlation to markets. What I really like is on top of these four return streams that we have, we kind of have a multi asset dynamic acid allocation process, and that's where you're able to create alpha, and that's where we're able to have really

low UM correlation to to the markets. UM and you know, one day markets are you know, at all time highs, so not that interesting to want to buy ACCU, SIPs or public debt at that point, and then you have

a dislocation. Relative value has changed. Now most folks don't have the governance, don't have the staff, et cetera to be able to make the I'm going to sell A and buy B. I remember like UM during COVID, and you know, we wrote at grammar Sy that we expected there could be a dislocation in the fourth quarter two

thousand nineteen. Markets are really tightly wound and people should batten down the hatches, but get ready for the dislocation because when it comes, that's when the extraordinary opportunities come. So we call everyone in March and April. Remember we

talked about this. We didn't know what was going to break the camera's back, but but it's broken, UM, and these we expect a U. You know, we don't sure if it's gonna be a V shaped recovery at W shaped recovery, but we believe they'll be a strong recovery. And we would talk to our clients and prospects and they say, well, let's see, it's March or April, um, I might be able to get you into the October board meeting, right and so sorry, we don't have that

type of I need an answer by five. So that's what with our with our multi asset strategy, we wanted to solve for that problem, which is i'll call it a governance problem, you know, acid allocation. I think in emerging markets one being dynamic isn't just convenient, it's necessary. And that's how you create the lack of correlation, and that's how you create off of really really quite interesting. So so where are we in the present emerging market cycle that this seems to be lots of UM different

cycles in the space. Should we be optimistic about EM here or should we be worrying about EM here? Look, I think we are cautiously optimistic UM, and we know we've had that call for for for a few months. I would probably say after a ten percent rally that we've had over the last five six weeks, maybe a little more cautious, but still optimistic in the in the

medium term. The reason that you know we have this optimism goes back to the mathematics after these dislocations, right that and then this isn't a blanket statement about all emerging market debt. But if you can pick good and just like stocks, right, if you pick if you can pick stocks, well, um, you can significantly outperform and an index. And you know, if I showed you a chart of the dispersion of the returns within the Jape Morgan Emerging

Market Bond Index, you wouldn't believe it. I mean, things down fifteen, things up fifteen, oil and gas and on hand and you know, importers of energy on on another hand. So, um, we're we're cautiously optimistic. We see good returns in the medium term. Uh, one has to think about how do you protect capital after a long run like this. So we're raising a little bit of cashier thinking about hedge overlays and what have you. But you know, we're somewhere closer to the bottom of the you know, of the

cycle than the top. The next question is a bit obvious. We've seen a big uptick in in rates here in the US and around the world. How do you look at em based on how the central banks of the developing worlds are postured, like, I mean, I think that's that's an important question because I think historically, you know, when developed markets get sick, developing markets have gone to

the hospital. And I think that's a big part of you know, I would say what's happened to emerging markets in two has been predominantly an exogenous shock coming from raising the rates around around the world. That's that hasn't always been the case in emerging markets. You know, we have things called the Kila crisis and the vodka crisis,

and the Capoina crisis and the Tangle crisis. Those were indogenous crises created within emerging markets, but this one was you know, it's been about higher rates, less liquidity UM and markets. So that being said, you know, I think that the FETE has been signaling slower you know, slower pause on rates UM when we think about local rates

and emerging markets. UM. You know, we felt that once the dollar's strength went away, that it might be a good time to start leaning into local rates within within emerging markets. UM. You know, we saw we were looking for three things. You know, we have a top down every month, and we said, if the twos go to four fifty, if tens go to four, and the dollar Dixie goes to one fifteen, that's a pretty good place

to think about board in the flight. So check on four fifty, check on four and we hit one fourteen and three quarters about six weeks ago. UM. So you know, I think over the past couple of months that led us to kind of ad duration even though rates you were still predicted, and particularly low dollar price investment grade securities where you get a lot of convexy that if you get a snap back like we've seen in rates,

that you get to enjoy that right back up. Some people have been looking at at the strong dollar of the past two quarters is just a wrecking ball, wreaking havoc everywhere. How do you put the strength of king dollar into context? UM? And I could share some interesting stories about some of the crazy things I've seen on

my side of the street. How does it impact emerging markets when when the dollar is as just you know, as powerful as it's been this year and again within emerging markets, I think it's a it's a dispersion of responses based upon upon where you are. UM. But I think you know, generally, you know, higher rates, stronger dollar has been been a headwind for emerging markets. You know, interestingly, UM, emerging markets have had a lot less wiggle room than

the FED and the ECB and what have you. So quite frankly, whether it's Brazil or Columbia, would have they were kind of ahead of the curve in terms of raising rates. And I think that's what made US bottoms up a bit more constructive on emerging market currencies once

the dollar peaked. And again I think perhaps we we saw that at one fourteen and three quarters, Um, you know, might go back to one town on on Dixie or or what have you, Dixie being sorry the US dollar index, um, And you know, we were, you know, we were talking about potential vacations in Europe and in the summer, would have you and I think, you know, with the with the euro at at par and a hundred earlier this year, it was pretty pretty good time to preplay the hotel. Yeah. Absolutely. Um,

so let's talk about some specific countries. Um, we we already discussed Russia. How do you look at places in South America like Argentina and Venezuela, both which seemed to have a crisis almost on a regular schedule. Yeah, I mean, let's start with Let's let's start with Argentina, and that is a country that has been quite cyclical and the

returns have been cyclical UM as well. You know, for us, we've looked at Argentina much more on an opportunistic basis as opposed to somewhere that you want to be UM all the time. You know, if you go back when we started our business in Argentina was eighteen percent of the index, and we were talking earlier about about how risky indices can be. Right, So JP Morgan one of the stuff eighteen percent of our portfolio in Russia, part of me in Argentina right before it defaulted. Fast forward today.

You know, we have an election coming up in Argentina in October three. We just had a passing of the baton from Martin Guzman to Massa. UM. I think Massa is market friendly enough. I think he's done, UM you know what he needs to do with the IMF, and you know, we expect that Massa will be able to stabilize the markets before they start to climb the wall. We're going into the presidential elections in October three. So with you know, assets trading at twenty cents performing assets now,

they perform with very low coupons, but they're performing. UM. I can't really imagine a debt restructuring scenario. In the next regime, it's worth twenty cents. I can imagine training less than because of the liquidity and air pockets of of dislocation. But we're starting to focus more on you know, we think there's a light at the end of the tunnel. We think that's a you know, perhaps a change of regime, a new government that comes in with um markedly more

market friendly policies that the market will like. And Venezuela. Venezuela is more complicated. You know, first of all, it's under restrictions today, right, so US Treasury, the O fact restrictions. So Venezuela is more of a theoretical conversation. Now we were talking about Russia and Ukraine before. You know, it's interesting to note that Chevron's back pumping oil. Uh that's

a direct connection to Russia invading Ukraine. And I think it was within days of not weeks, that the US State Department was already in caraucas after the Russians had had had invaded, Meaning we're out looking for oil wherever we can get it to offset curtail and exports around the world. I mean, think about two images that came out. The first one was the fist pump with with Biden and NBS and then it was John Kerry shaking hands with Moduro. Right. So, um, like Venezuela has a lot

of oil capacity. You know, I think at their peak they were doing three million barrels a day. Um, they are probably averaged two point four million barrels a day during the Chavez era. Today they're like seven thousand barrels. They could probably easy Yet that's it. Well, you know, the bad news is they haven't had the capex. The good news is all they asked that's still under the ground. So you know, I think there's a possibility of a thawing.

You know, hopefully, UM, they'll take the path of moving towards a more democratic UM regime in the upcoming elections. And I think the U S could live with a a regime where the Chavista does win the current government, UM, if it's perceived to be democratic or at least more democratic UM. And we've seen that historically in Latin America, you know, where people that were ostracized that came in back through the democrat process. We're able to run. So

I tried desperately to avoid being a macro tourist. But it sounds like, man, if there's ever a country that has immense upside, talk about asymmetrical risks, what would it take to make Venezuela really investable and for them to become a little more integrated into the global economy. They're they're potentially such a success story if they could get out of their own ways. Yeah, I remember, go back to the nine seventies, the Concord used to fly to

Caracas just to just to put it in perspective. Um, and I think you're right. I mean the they have the largest proven oil reserves in the world, not not the largest outside of the Middle East, the largest are yeah, so more than Saudi Arabia. So now we know that you know, Saudi Aramco has done an I p O. It's worth a trillion dollars um. You know, could Pettibasa or viny A Ramco be worth a quarter of a

billion dollars? Should be quarter billion doll hours a go long ways to being able to create capax a trillion excuse quarter of a trillion. So there's a lot of a lot of potential there um and hopefully you know, the chevron is the first step towards a thawing of relations between Venezuela and the West, the US, and that UM that will have the ability to buy. You know, it reminds me of I Rack quite frankly, so, UM, before the Marines invaded Iraq, they were doing about a

million barrels a day of production. Today they're doing five million. Their GDP was twenty five billion a year. It's two hundred and fifty billion a year, ten x. That's just amazing. And we can't say that it's because it was such

a politically stable place, right. So you know, we could imagine a Venezuela on the other side where the seven hundred thousand barrels goes back to two to three, and that would make a difference today, and it would make a difference not only to the market, but quite frankly, UM, the Venezuelan people who have suffered immensely under this administration and under the current UM. So. So, so let's talk a little bit about China. UM, how do you approach China?

I'm I look at equity there. It's essentially flat since the early If you're an outsider, it seems like the Chinese Central Party has taken all of those gains for themselves. Um, is China investable? How do you even approach a country like that? So I think, Uh, when we think about investability, one has to think about price right, initial conditions. And so I'll start with historically in China, and for a long period of time, we've been massively underweight or no

exposure because it's been asymmetric in your face. And what I mean by that is we're we're we're debt, we're debt investors, right, So debt is a contract, right, And the contracts that Chinese companies had and the off shore was basically a piece of paper, no assets, and you had to rely upon the good faith and the willingness and a bill of this corporate to pay you and then and then to pay you to first to make a dividend offshore and maybe get China to approve that dividend,

and then and then to pay you. So that that sounds like a terrible setup for investment. Yeah, So for a dead investor thinking about China at par, trying to corporate a par made no sense to us. Now China property has gone from par. The home builders too, We talked about eight cents, ten cents five cents. So now

now you start to think about option value. And when I look at the China property sector today, it reminds me of a lot of emerging market UM corporates and sovereigns historically, where one has to tease out distress isn't something that's just cheaper than it used to be. It's cheap relative to an outcome that we think that we can catalyze. So when we look at an eight cents security, we're not hearing from the company we're not going to

pay you, and we're not seeing insolvency. We're seeing bandit center. We're seeing people FAMBI sent people frozen in in the headlight. And I remember one one CFO and China that we're talking. I remember there in lockdown, right, And so this poor um CFO is doing the conference code with us in his bathroom and the screen saver is a shower screen, right, And so what what what you're seeing as someone who

doesn't know how to do a debt restruction? And I, you know, go back to I remember Argentina two thousand and nine and meeting with the finance minister who not only didn't know finance, but didn't know how to do a debt restruction. So when we look at China property at five eight ten cents today, um, and we see these people who are expressing willingness to restructure, but a lack of understanding of how to do it, the option value seems pretty cheap. That that's really really quite intriguing.

We talked earlier about Russia. I've always looked askance at Russia because there's no respect for private property, for contract rights, for rule of law. Do you have the same challenges in China or are they a little more westernized in terms of if you cut a deal, they will honor it. Look at it. I don't want to talk in in large generalities or stereotypes, but you know, I think we saw the Chinese government plank as it relates to the

most important sector, that the property sector. And prior to the Party Congress, you know, if you read the risk in China was that they were going to take it all that the government. You know, they were just gonna like say you forget you to the to the offshore bond holders, what have you. But I think they blinked right that this is the GDP of the country, right. Um, So to just think that you can, um, have a

Lehman moment and just you know, let them go. They tried that with every grand quite frankly, like, let's just it didn't work. So, Um, I think it's a lot less risky today than it was eight weeks ago because we've seen the new government, the third has come in and we've seen that they kind of blinked as it related to this, and it's just massive support going to that sector. So does that mean I want to buy

a part security in China anytime soon? No? But do we get more comfortable at ten cents with a Chinese tarp and CFOs and CEOs telling us that they want to restructure. They just want to extend. They don't want to wipe us out, they don't want to equitize, they don't want to toss the keys. I think it's a

pretty good bet. What do you make at the we're recording this in the beginning of December, What do you make of the changes in the COVID policy over there and what might that mean for their economy and their DAT issues. Yeah, I mean, so there's there's a you know, there's a social element to to to that response, which is, you know, you can see that the population has been

fed up. I mean I go back to you know, my kids thought, you know, three months of being locked up in the house in the second quarter was worst thing that ever happened. I mean, this has been going on China now for for nearly three years. So, um, you have large numbers of people that have been very unhappy. And I'm not surprised again to see after the Party Congress them tact or pivot, which is everybody's favorite word these days, um, and start to open up the economy.

I'll take that back to you know, I think that's gonna create more what happened here, right, we had we had the big closure and then when the reopening and the reopening was slow and spotty, and now we're seeing that it's you know, the demands there and we're having difficulty with the supply side. I would expect something similar in China, but I think demand for housing is going to be there, the supports there, and that's a major,

a major part of their economy. Really quite fascinating. So let's talk a little bit about market efficiency and debt. It seems that e M is more complicated, less transparent, less efficient than developed markets. Is that part of the source from whence alpha is derived. Yeah, for sure. I mean, I think the the information asymmetry means that if you can organize yourselves in order to be able to capture information, and again that's outside the firm and inside the firm.

You know, we talked a little bit about having platforms that can suck up that information from the regions, but also the way that we are organized an investment team for different strategy groups, all collaborating, all meeting every morning, sitting on an investment committee, sharing like what's going on

in public debt matters to private debt. You know, we talked about Venezuela earlier, like what our special situations team knows about litigation, litigation finance in Venezuela and O fact restrictions. Was helping our long onlymaging market debt team think about what it meant for Russia when those when those things came on. So a lot of opportunities in the way that we're organized to to be able to uh, to

create alpha. Um. You know, the other way to pick to really create alpha and take advantage of the information asymmetry is through the dynamic acid allocation that that that we talked about UM. You know my pet peeve as an investor who picks a return stream for ten years. And you mentioned before that you know, um inequities. You could argue with Chinese equities whatever it may be that

you know, maybe it's been lackluster returns. Well, UM, if you stick with something, whether it trades in a hundred, fifty or two, UM, you're just gonna get the average, you know. But if you're able to move around between value and relative value, I think there's a way to take advantage of the information asymmetry UM and create alpha. One of the things I've always wondered about the difference between emerging market and frontier markets. At first, do you

look at frontier markets? And second, how do you really distinguish between the two. We really try and put the labels aside, and frontier markets a bit more of a of an equity label than a debt label. To begin with that being set up, I would say that you know, most any country that was frontier we've invested in, traded, and traveled at some point in our careers, and things often go from frontier to emerging markets, sometimes they go back. We're much more interested in kind of the bottoms up

analysis and what it means. But you know, Bulgaria was frontier, it became investment grade shortly thereafter. Poland wasn't you know the same thing. It was frontier UM. So for us in the debt side, it doesn't really matter. Some frontiers have a lot of debts, some don't have any debt. How do you think about China? Are they still an emerging market or have they emerged again? I think it depends on how you define emerging markets. You know, in the in the textbook, you know, per capita GDP, it's

certainly still classified as an emerging market. UM country UM, second second largest economy in the world. Do they really an emerging market anymore? Exactly? UM? And again it depends on whether you're talking about UM from a from a political economic perspective, from a GDP perspective. UM. But you know, it's certainly hard to just compare to all other emerging markets. And as you know, on the equity side, it's not

only is it. You know, it's such a big component of the Emerging Market index, right, It's like when you buy when you buy the the e M equity index, you're basically buying China and a few others. Um, I'm not sure that makes a lot of sense going forward. No, I couldn't agree. More. Let's talk a little bit about your team. You're the chairman of Grammarcy is the former CEO of PIMCO, Muhammadalarian. What's it like to work with him every day? How did he end up as chairman

of Grammarcy. Look, it's been Uh, it's been been phenomenal. Um. Mohammed started with us as an investor first. UM, and as he got to know us, he kind of leaned in and and and and met the team, and UM, we had a conversation about him helping us think about how do we institutionalize the top down? How do we you know, we've been very much a bottoms up you know, stock picking shop and credit if you will, credit picking shop, and we wanted to make sure that we had a

good institutional framework. And quite frankly, myself as the as the c IO, I lacked the confidence to to go to other portfolio manage and say, look, my view is so strong and so right that you should get out of that country or what have you. So now with you know, Mohammed moved from an investor to an investor that UM was an advisor. He helped us really institutionalize the top down and then when COVID hit, he realized, you know what, I can have a real impact on

the business. I don't have to be there every day right in person. I can be there every day on Zoom. And so he's with us most every morning on on our daily call we have this top down call. And full full credit to him. He's been a whole lot more right than wrong on everything for UM, from emerging markets to inflation to rates. He seems to be on a hot streak these days. Look, he he is a brilliant top down decoder. He's an investor, right. A lot of economists can can talk to talk, but they can't

necessarily walk thetis they're not putting money. So he's brilliant as a top down decoder. He understands the investment implications of what he's just decoded, and he shares a passion for emerging markets with us. So it's it's a perfect fit. And and to your point, he was well ahead of the curve on COVID. Like I didn't know what he said to me one day, like you know, this is a sudden stop and you can't have a sudden start. Never really thought about that, right, but what are the

implications of a sudden stop and a slow start? Um? Supply bottlenecks? Right, Um, still waiting for semiconductors to get to new cars, so people didn't what are something in that weight? Eighteen months? Yeah? You know he I think he's well ahead of the curve on on inflation, right, And so it's been great. It's given us a lot

of confidence on the top down. Um. You know what I think differentiates us is we can take the top down that he's really helped us institutionalize and marry it with our strong bottoms up and be able to uh to differentiate. And you know, lastly, he's just he's just become a great friend. Yeah, he's really a fascinating, charming Um, gentlemen, I'm I'm I'm a big fan. Before I get to my favorite questions, let me throw a curved bowl at you a little bit. Um, tell us about Turkey. What

what's your relationship to the country. How often are you there? So? Um, Turkey is a place. My my wife is Turkish. We've been married for almost thirty years now. So I've been traveling to Turkey for for that long. Um My daughters both speak Turkish, so we spent a lot of time there in the summers and so, um, you know it's in the summers, you mean every summer for the past thirty years, pretty much every summer for the last thirty years. We wanted our our daughters to learn Turkish, so we

got an apartment there every summer. Uh. We love going to the beach down there, down in in in bodroom. Is beautiful water. Is that the medranean or the Asians. It's on the Agean side, so so that's spectacular, beautiful water, beautiful of great people, great hospitality, awesome food. So you know, I'm really enjoyed it. And you know, it's become an important part of our our business over the years too

because I spent so much time there. Although I'm a Latin Americanist by training, I've become very comfortable in Turkey as well. Huh, really really very interesting. Let's jump to our favorite questions that we ask all our guests. And I'm gonna have to retire this question one of these days now that we're mostly reopened, but during the lockdown, tell us what you were doing to stay entertained. What were you streaming when we were all stuck in the house,

So we were just talking about Turkey UM. And Netflix happens to have a great catalog of Turkish shows really so they're in Turkish with English English subtitles, really really good, UM, really good plots in drama and what have you. So it gave me the ability to learn Turkish language but also learned Turkish culture UM, and be really entertained in the process. Give us the name of the show. One of them that I just finished is called a tier

in Turkish, which means the gift um. And it has a bit of h I think about twenty four episodes and it's about um kind of archaeology and Turkey and and uh, really fascinating, really good act really good actors UM, really good scripts, UM, and really good cinematography. Sounds interesting. Tell us about some of your early mentors who helped shape your career. So, in terms of mentors, I mentioned my my first boss, Carlos Arriguez Pasteur, the boutique I

worked with in California. What was the name of the boutique CRP associates for for his initials um and I was very fortunate to work with Carlos. It was a very small boutique. Spent a lot of time with him on a one on one basis. Um, he had a great mind. He understood the intersection of politics and and markets. Um. You know, English was his second language, but I think he taught me English in terms of written English and

business English and and what have you. Um. And I'd say the other one, quite frankly, was my stepfather, who was a pilot for United Airlines for thirty five years. And you know, he had this checklist mentality which looks a lot like risk management, right, like always thinking about what can go wrong and how to avoid the the the catastrophic mistake, um in the nonrecoverable mistake. And so I put those two together and say they were great mentors.

I love the idea of checklist. It's it's pilots and surgeons want to make sure, um, that there aren't these silly little errors. It's avoiding mistakes more important than hitting the bull's eye. And maybe pilots more than surgeons because they're on the plane. That's that's the difference of pilot. UM. When a surgeon loses a patient they're sad. When a pilot loses a plane, he's dead. So it's a very different thing. Uh, tell us about some of your favorite books.

What are you reading right now? Went back to Turkey. You know, we we've got an election coming up in Turkey this year as well, so I've been doing some uh some some reading on Turkey and one in particular book called Turkey under Ardwang, and it kind of just gives you sense of what Turkey has been like over the last twenty years with there to on and maybe think about, um, some of the factors that might influence the potential regime change in Turkey and later this year,

what are the odds of that regime change happening? You know, they change every day and we all know that polls aren't as reliable as they never were. But when I was in Turkey this summer, I would have told you that the odds for him winning were quite low. And that's because if you spoke with you know, there's a bit of a misery index. You know, older retired people that were getting squeezed by high inflation um and and the currency devaluation, but then also young kids right that,

um that just felt kind of hopeless. And so when I left there and in August, I'm like, it's going to be really difficult for him to win. Um. Now we were there, you know, we had a team there two weeks ago. You know, their calls, it's like, UM, and I think, you know, there's a there's a real dispersion of outcomes that could come from whether he stays or goes. How he stays, how he goes. So it's

been interesting to to to read on that. And then of course, UM, I like the David Rubinstein books, the interviews you know, with the investors and and and and UM leadership. Yeah, he's he's a fascinating guy as well. So those are the two books you you just finished. Most recently, what sort of advice would you give to a recent college grad who was interested in a career in emerging markets? Opportunistic or distress that what's funny in

the post COVID era. I would start with saying that that presence matters and that they should go to the office. And there's a lot of young kids who, you know, just think they're as as efficient at home as productive at home, but they forget that you know, God invented trading desk for a reason. They're open architectures, there's information flowing,

and it's great training and great mentorship. So one, I'd say go to the office, um, and two i would say, you know, try and make your career more linear and fashion and logical. And I see a lot of young kids stays like, well, I'm gonna try and US banking and I'm gonna try tech. You know, whatever's hot. But if you're really interested in emerging markets or whatever it may be, then stick to it and evolve around that asset class. But don't hop but but but don't hop around.

And then last thing I'd say with with young kids today is we don't really care where your degree is from. We don't care about pedigree. We care about who you are, what you've done, and and how you compliment the team. You don't have to emulate the team. You can. You can be different, you know, and with you know, with diversity comes you know better outcomes. So don't don't just

try and be like everybody else. And our final question, what do you know about the world of emerging markets, distressed debt and investing today that you wish you knew thirty years or so ago when you were really first getting your legs under you. So when I left Lehman in uh in early you know, when you started an investment management in the emerging market debt, you know, it was basically you did a hedgephone, and you did a

credit hedgephone and that and that's what we did. You know, if I could go back to today when we started gramacy, I think real long and hard about maybe we want to do private equity structures as opposed to hedge fund structures, have long locked capital as opposed to short locked capital, and be able to think about multiples of capital over the long period as opposed to volatility and I r R in the short short run meaning meaning forced the clients to be longer term investors than Yeah, And I

don't want to use force, but partner with the clients and vehicles that are more. You know, over the years, we've even in our credit vehicles, we're having longer locked vehicles. That allows one. You know, if you're gonna make an asset back loan and capital solutions, you can't give ninety day liquidity, right, so it's got to be more like a quasi pe structure where you make a loan, you have three years to make the loan, you have three years to get it back and then return the capital

and in six or seven years. That makes a lot more sense than you know, how do you build a portfolio not knowing where that portfolio is going to still be with you in thirty days. That's challenging. Hey, an ink cole the a liquidity premium for nothing, right. The whole idea of tying up capital for X number of years means the short term either gates or liquiditly demands aren't relevant to the investment thesis. You know, the illiquidity

premium in emerging market debt. It's a really important concept because I see ce iOS, pension phones, whatever it may be, and they're like, we're gonna be three percent six percent emerging market debt forever. That's our that's our asset allocation. But they stick in liquid liquid in quotations T plus three. You know, get your money back in three days. And

I'll go back to the Mexico example. You know a year ago you could get three percent for a security for pemm X, or we could lend a pemic suppliers and it wasn't that a liquid it was nine to twelve months, So if you're gonna be there for ten, why not pick up that extra thousand plus basis points? That sounds like it's worth it. Thank you, Robert for being so generous with your time. We have been speaking with Robert Koenigsberger. He is the chief investment Officer and

managing partner at Grammercy Funds Management. If you enjoy this conversation, well, be sure and check out any of our prior four and fifty interviews. You can find those at iTunes, Spotify, YouTube, wherever you get your favorite podcast from. Sign up for my daily reads at Rid Halts dot com. You can follow me on Twitter at rid Halts. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Justin Milner is

my audio engineer. Paris Wold is my producer. Sean Russo is my head of research. Atika val Bront is my project manager. I'm Barry Hults. You've been listening to Masters in Business n Bloomberg Radio.