With an entrepreneurial mindset and a 5-star rating from Morningstar, Cesar Fernandez is well-placed to oversee our Fixed Income Emerging Markets Corporate Fund. Speaking from home office in London, he explains current trends in this area and what investors should look out for.
Education is clearly important to Julius Baer’s Senior Portfolio Manager Cesar Fernandez. His career includes a long-running professorship at the Universidad Carlos III de Madrid, mentoring underprivileged youth in Spain and the UK, and teaching clients about emerging markets and structured finance. “The markets humble me because I’m wrong several times a day,” he says. “I’m right many more times than I’m wrong, but I believe that you learn from your mistakes and I really like that I need to continuously improve myself in order to be better at my job”.
The value of an open and entrepreneurial mind
After graduating from economics at UC Berkeley, Cesar moved swiftly into his area of specialisation, starting out as an analyst for Standard and Poor’s structured finance emerging market group in the US. Though he studied economics, his real passion is finance: “Entrepreneurship is something that I am really driven towards and finance is extremely entrepreneurial. It’s a continuous learning process. There are so many moving blocks that intersect and it’s extremely mentally and intellectually challenging – and that’s the attraction.”
This entrepreneurial spirit is the reason that, upon returning to Europe with his wife to raise a family, Cesar launched an organic juice bar in Spain. Though the timing coincided with the global financial crisis and the business failed, Cesar considers the experience a success: “It was like a university crash course on how companies manage their business and manage risk. The people I admire most are entrepreneurs, and not necessarily the big names but the guy who started from scratch and now has two factories. I’ve been there, I tried to start my own company, and that was probably the most stressful and difficult time of my life. So, I really respect people who do that.”
Balancing risk with opportunity
Following his entrepreneurial adventure, he returned to the world of fixed income and emerging markets, moving to London during his ten-year stint with Deutsche Bank and then joining Julius Baer in mid-2018. Having focused for so many years on this asset class, Cesar finds its image problem annoying: While fixed income can be riskier in emerging markets than established ones, its greater potential for opportunity is often overlooked. “Many people have a preconception that emerging markets are super risky, but that’s a misconception,” he explains. “People are overestimating the risk while underestimating the potential. It is riskier and more volatile compared to other asset classes, but emerging markets hold opportunities long since smoothed out by central banks in developed markets.”
Over the last two decades Cesar has seen his sector switch from being relatively niche to increasingly mainstream. “A big difference is that both investors and companies are becoming increasingly sophisticated and that’s driving a lot of change,” he explains. “The market has boomed. It’s grown exponentially, more than any other fixed income market, because it was underutilised. Now people realise it’s a very efficient way to finance companies and countries compared with the banking system”.
The best approach: managing strategy and emotion
Cesar loosely defines emerging markets as “essentially everywhere that is not Europe, Australia, the US and Japan”. This means there’s huge diversity and some top performing economies, such as Singapore, are classified as emerging markets alongside underperforming ones, such as Argentina with its high levels of debt and history of defaulting. This complexity, plus the need to essentially ‘live’ monitor the market to optimise transaction timing, are two reasons why Cesar recommends working with a specialist investor on an active management approach.
When people are very positive about emerging markets, they just buy without thinking. It’s a little bit of an irrational exuberance.
Outsourcing fund management also helps minimise behavioural psychology risks, important in an asset class often perceived as riskier than in reality. “Regardless of the real effect, investors tend to sell whatever they deem as risky when there is a negative event,” he explains. “Then, when people are very positive about emerging markets, they just buy without thinking. It’s a little bit of an irrational exuberance”. On a larger scale, this results in a herd mentality that causes mass dumping or purchasing rushes. To keep ahead of this curve, Cesar’s team takes a pre-emptive approach and its results since Covid-19 first emerged speak for themselves.
The pandemic effect
While the asset class was hit with a drop only comparable to the global financial crisis, reaching a historical minus of 12-15 per cent market-wide, Julius Baer’s maximum low was minus eight. Excellent contingency planning saw the bank outperform the market substantially during the height of the pandemic in March 2020 and quickly bounce back to around 11 per cent as one of the highest performing funds in the sector.
On a personal level, Covid-19 means Cesar’s weekly commutes to Zurich are on-hold and home office is in London, where he lives with his wife and three daughters. Early-morning bike rides through empty city streets provide a balm to smooth the lockdown tensions and a chance to disconnect and unwind. This appreciation of stability amongst volatility is a good reminder of why Cesar chose to join Julius Bear, citing the trust of our investor base as a key reason his fund can consistently outperform competitors on volatility.
Trust, like education, is important to Cesar. “I work in an area of finance where it’s not about how many bonds are sold or presentations are made, but about experience that allows you to link knowledge across time and geographies,” he explains, adding that this only improves with age. “It’s actual goodwill you have built up. And it’s something you keep accumulating. To have experience but maintain an open mind, I think that’s the best combination.”