CIO Demetris Efstathiou on what top international ratings for Blue Diagonal mean for Cyprus' fund managers

Blue Diagonal Emerging Markets Fixed Income Fund (Ireland), managed by Limassol-based Blue Diagonal Capital, recently received the top rating by Morningstar - five stars - for its 3-year performance in its asset class - Emerging Markets Hard Currency Bonds.

Morningstar also calculated the fund's 3-year excess return vs its asset class index or Alpha to 6.99% per annum - something that puts Blue Diagonal in the top tier of its asset class globally.

Soon after the achievement was announced, the company’s Director and Chief Investment Officer Demetris Efstathiou spoke to CBN about what the rating means, not only to Blue Diagonal Capital, but also Cyprus’ wider fund management sector.

“We have demonstrated that an independent fund manager, established in Cyprus, can achieve market leading returns for its investors in its asset class competing with major international peers,” Efstathiou underlined.

He continued that, when it came to Blue Diagonal Capital specifically, “The low cost-base offered by Cyprus enabled the accumulation of a 7-year track-record, while the Irish domicility of the investment fund provides access to the global fund market.”

Returning to the significance of the rating, Efstathiou pointed out, “The Morningstar Rating for funds is the global gold-standard for comparing funds relative to their peers, based on Morningstar's risk-adjusted return methodology. Funds are ranked within their categories and 5 stars are assigned to the top 10% of funds.” “This,” he continued, “means that the Blue Diagonal EM Fixed Income Fund ranks in the top 10% of funds globally in its category on a risk-adjusted basis.”

He acknowledged that, “This major milestone will enhance the profile of Blue Diagonal Capital and our fund internationally, and will substantially enhance our capital raising drive targeting institutional investors.”

It is worth noting that the company’s investment philosophy as executed via its EM Fixed Income Fund has also noted other major achievements including ranked no 1 out of 250 fund managers (99th percentile ranking vs peers) over the last 3 years by Citywire, UK, receiving Citywire’s top AAA rating, and Best European Credit Hedge Fund for EM Debt in 2023 by Hedgeweek, UK.

“We also note the consistency of our outperformance vs our benchmark,” Efstathiou noted, elaborating that this had included benchmark outperformance every calendar year since inception (7 out of 7) and beating the benchmark in 75% of all quarters (out of 28 quarters), irrespective of market direction.

Asked to elaborate on how these results were achieved, Efstathiou said Blue Diagonal Capital’s success was based on a number of pillars.

“First, we are laser focussed on independent thinking. We place strong emphasis on conducting our own independent research and building our own tools to analyse markets,” he said.

“Second, we apply a proprietary Risk - Reward assessment. In determining Reward, we apply our qualitative assessment and the output from our proprietary sovereign credit model, and determine the Target Return and expected Market Return for each asset. We also actively consider if uncertainty is sufficiently priced in by markets for each individual credit we consider, and more broadly for our asset class. In assessing Risk, we scrutinise for binary outcomes, the resilience of each credit under stress, and the willingness of borrowers to repay their debt when in distress,” he continued.

The third pillar, Efstathiou went on to note was that, “We employ both Absolute and Relative Value metrics. When we select investments we compare bonds within their credit curve, credits within the bond universe, and our asset class vs competing asset classes for relative value and opportunities. Understanding the Absolute value of a credit is the final test before a bond is selected for the portfolio.”

To achieve consistency, meanwhile, the company aims to take the best decisions through formulated processes, and apply its investment process with discipline.

“Our investment process has been developed over an extended period, complemented by our bespoke models that replicate our analytical thinking and market prognosis,” Efstathiou added.

Blue Diagonal Capital was founded in Limassol in 2017 with the aim of establishing a fund management business in Cyprus that can offer value-added regulated investment products to clients locally, and internationally.

“We are a CySEC regulated fund manager focusing on Emerging markets hard currency debt (sovereigns, quasi-sovereigns and large corporations). The two co-founders and senior management have a long track record in the investment banking industry in London,” Efstathiou added.