The Highland Global Allocation Fund is designed to take meaningful positions in high conviction names generated from best ideas across the Highland Capital Management investment platform. The fund is designed to take advantage of a global unconstrained strategy. Given its relatively small size the fund has a broader investable universe than its larger counterparts. In 2013 the fund benefi ted from its investment in American Airlines equity which was an example of this advantage. In 2014 the fund initiated a position in Argentina which we believe is a good illustration of how a meaningful position in a high conviction contrarian value name can benefit the fund.
Argentina, A Wealthy Country With A Troubled Political History Is Nearing A Crossroads
The size of the Argentina equity market is approximately $50bn and the debt market is $50bn. The small size of the country’s capital markets makes it diffi cult for many large global allocation mutual funds to garner a position large enough to be meaningful to the fund.Argentina has a troubled history of erratic economic policies including the largest sovereign debt default at the time in 2001 and the expropriation of a Spanish oil company’s (Repsol SA) Argentine subsidiary. This has caused the country’s cost of capital to soar to over 17%. However, since 2005 Argentina’s national debt outstanding versus its GDP has declined from 127% to 46%, while the prevailing risk free rate jumped from 2% to over 17%. To put this into perspective over the same time period the Debt to GDP ratio in the United States has increased from 63% to 102% while the US risk free rate has gone from 5% to 0.30% (Exhibit below). This relationship is analogous to a corporation whose cash flows are increasing relative to their outstanding debt yet their rate of borrowing has skyrocketed due to poor management decisions.
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Argentina – A Fallen Super Power With Great Potential
A century ago Argentina ranked as one of the wealthiest countries in world, behind the United States, the United Kingdom and Australia but ahead of countries such as France, Germany and Italy. Its per capita income was 92% of the G16 average; it is 43% today.
In the 43 years leading up to 1914, GDP had grown at an annual rate of 6%, the fastest recorded in the world.4 Riches were made on ranching and agriculture.
However since World War II the country has been marred by a series of military coups starting in 1930; then again in 1943, 1955, 1962, 1966 and 1976. The election of 1989 marked the fi rst civilian presidential successor since the thirties. However, through poor leadership that lacked a long term economic policy strategy, the country has faced repeated recessions of the 1970s and 1980s, hyperinflation of 1989-90, and the debt default crisis of 2001. Price manipulation and massive subsidies to promote internal consumption has resulted in Argentina slipping from the world’s fourth-largest exporter of wheat in 2006 to tenth by 2013.4 This has resulted in an economy that experiences a mix of rising prices, wage pressures and the mistrust of the peso. It is this general malaise that will force the hand of the current regime to responsibly deal with the country’s debtors and begin the reparation process with the global financial community to bring some financial and social stability to a country with immense potential.
Not Likely To Repeat The Same Mistakes
In order to live up to its full potential Argentina must revert to policies that promote massive private investments to exploit its natural resources and adequate its aging infrastructure. Argentina has recently begun drilling on the 4th largest global oil shale reserve. Despite this, the country was wracked by power failures in December and January. The country’s price controls on the utilities and high cost of capital has prevented it from making the necessary upgrades to its energy infrastructure. This sovereign debt trouble is not likely to repeat itself. Argentina’s presidential primaries are set to take place in August of 2015. This is bringing substantial political pressure on the current regime to improve the country’s credit worthiness and reduce the cost of borrowing.
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