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Abu Dhabi-based asset manager Invest AD launched a new Middle East and Africa focused on fixed income fund on Monday, seeking to tap potential for significant returns in the fast-growing emerging markets.
Despite a recent rally on emerging market bonds globally, where yields on some regional bonds fell to historic lows, many are still undervalued relative to the underlying credit quality of issuers, analysts say.
Based on relative value comparisons, debt instruments in the Middle East and Africa could offer up to 150 basis points of upside from current levels, Invest AD's portfolio manager Dilawer Farazi said.
"If rates stay low, there is still room for spread compression from where we are," Farazi said, adding that if spreads tighten a further 100-150 basis points, then the fund could see high single digit returns next year.
The new fund has a seed capital of $25 million and will invest mainly in dollar-denominated debt across the two regions, where the market is estimated at $180 billion.
Farazi said that both the Middle East and Africa benefit from lower default rates and higher recoveries which will make these regions attractive to bond investors.
Invest AD is owned by Abu Dhabi Investment Council (ADIC), which focuses on countries closer to home and is a separate entity from Abu Dhabi Investment Authority (ADIA), one of the world's largest sovereign wealth funds.
Sheikh Mohammed bin Zayed al-Nahyan replaces President Sheikh Khalifa bin Zayed al-Nahyan at the head of the fund
The investments will mainly target equity stakes in private companies as well as other asset classes including real estate or infrastructure.
Sufian Hasan al-Marzooqi took charge as CEO of the Abu Dhabi Tourism Development Investment Co in mid-September
Gains from financial investments failed to offset lower income from disposals and higher costs