Spies, KGB equipment and clearing houses: Eric Fine's path to investment

When you talk about bonds, it’s not usually accompanied by stories of riot squad raids or borrowing KGB equipment. But then, not many portfolio managers have Eric Fine’s background.

The portfolio manager for VanEck Emerging Markets Fixed Income funds has just the kind of pedigree to fit the investment version of James Bond, and he believes it has given him the ability to step outside of politics and see the opportunities in emerging markets.

Fine’s father was a WWII spy and his mother a diplomat. It’s just part of a journey that saw him set up the first Russian clearing house (aka where borrowing KGB equipment comes in). The same technology is still used in banking SWIFT transfers today.

He’s found himself speaking with senior government officials for countries from Brazil and China, let alone in developed markets.

So while it may seem appropriate that an ex-spy’s son is dabbling in the so-called riskier side of bond investing, emerging markets, Fine believes that’s a fallacy. He sees far greater concerns in developed markets.

“If I was going to capture it in a bumper sticker, it would be that EM is the new DM and worse, DM is the new EM. That’s where the risks are. The risks are in DM,” Fine says.

In this episode of The Pitch, Fine shares his journey to investing, his passion for emerging market bonds and where the big opportunities lie. And trust me, you won’t want to miss him recounting his experience at the Russian clearing house.

Please note this interview was filmed on Tuesday 7 May 2024.

Edited transcript

What led you to work in emerging markets fixed income?

You could argue it was how I was raised.

I was born in France and grew up in Switzerland and Thailand. My dad was a spy during World War II and then was Macarthur's economist when the US occupied Japan for eight years. My mother was a career diplomat and that was the global milia in which I was raised.

My dad was also a PhD economist, and so by the time I moved to the US, I was about 14 years old. That was my world. I didn't know the US. I was American, but I came as an outsider and it was very natural for me to look at the world, including my own country with distant eyes, with arguably some objectivity. 

I think that was really the start, and what I really enjoyed doing was analysing countries - how do they work, what does it mean? In emerging market bonds, you can make a living doing that. 

What have been some of your key career highlights to date?

The first thing I'd say is they weren't obvious highlights when I was going through them. In retrospect, they might look like that.

But, number one, in the early nineties, I worked for the US in Russia and I designed and built their first clearing system. So, securities clearing system, 33 cities, 13 time zones in about three years. Servers, communications, modems. We found a fibre optic cable system - we actually got it from the KGB. 

Now, this was a time when the US, you could argue, owned Russia. We were very involved and it was this weird moment where the US and Russia were very aligned and the policies we were implementing were mass privatisation. All Soviet Union property was state-owned. The US and the Russian government at the time agreed and issued 150 million vouchers to the citizens. Every citizen, any baby at six months old, got a certificate and you could turn it in and get shares in Gazprom or Lukoil. The issue with that is how do you do it? That's why we built the system. That was definitely a career highlight.

Now, my friends definitely did not think that was cool. Being in Russia in the early nineties was not. I really loved it and that's one definite highlight. The fun I guess - punctuation point on this - is it was the system onto which the SWIFT payment system and its messaging software were basically built. When the SWIFT payment system was being leveraged in Russia, my first thought was, "I wonder where they put that system?" And it dawned on me, that was our system. It's the only one. It's still being used.

It's been used for all sorts of things. It was physical infrastructure. So that was one, although I want to emphasise it did not seem cool at the time.

The second one is also related to Russia. Also, not necessarily an obvious highlight, but I'll put it this way, the generous way of describing me. After working in Russia for the US, I worked for Harvard and I worked for Morgan Stanley for 14 years and was the economist for EMEA, Russia, South Africa, those sorts of countries. The generous way of describing me is I became the world's leading economist on Russia. The accurate way of describing me was I was the world's only economist on Russia. What was fascinating about that is if you become an expert on one place, you learn how to become an expert on a place, and you just need to do that again and again.

The neat thing about big important countries is they correlate with all sorts of really important things - like oil prices. I can have a view on oil prices without really understanding Russia or other countries that are part of my world. So that was the second highlight. But again, didn't seem cool at the time. The cool kids were doing Germany, the big rich countries. I had no interest in those.

The third highlight is in my current role, I ended up running research at Morgan Stanley's EM economics and bond strategy. Then I ran the prop trading desk and felt like I knew EM and became a portfolio manager on the Buy side. I had an investment process and my teammates are my third biggest highlight. I thought my process was awesome. They made it 'awesomer'. They took huge ownership and it was a real validation in that they took enough care to make it better and they made it so much better. Those are three highlights.

How have you seen emerging markets fixed income evolve over time?

Better and better and better. Nothing but good news from the late nineties.

In the eighties and nineties, EMs were a lot like Australia. In the 70s, most of the debt was in US dollars. This became a problem because when your currency weakens, your ability to repay dollar debt worsens and you're in a vicious cycle. What Australia and many EM countries did, Chile being the most obvious, was incentivise or force domestic savings. You have that setup, have your debt in your own currency, you're much safer.

That was the basic result of all the crises - whether it's the Mexico tequila crisis or the Asia crisis in '97, the Russian crisis in '98 - they all figured that out. They all created domestic savings. It was incredibly painful. It involved fiscal austerity, truly independent central banks and it worked. 

For 20 years, EM hasn't generated crises. Its image is a crisis generator, but it hasn't happened for 20 years. The perception is still there. The returns definitely confirm it but I'd say that's the biggest development. If I were going to capture it in a bumper sticker, it would be EM is the new DM and worse, DM is the new EM. That's where the risks are. The risks are in DM.

What are the key opportunities and risks that you're monitoring in emerging markets fixed income at the moment?

The key opportunity in the EM space in general is that they have low debt that pays you more and a world worried about too much debt that doesn't pay you enough. That's number one.

Number two, it tells you that EM is where the opportunities are and where we see the greatest opportunities first is in EM in general - that's where the alpha is. 

In particular, commodities - exporters are on the winning side of what you could argue is a new geopolitical configuration. The new geopolitical configuration if you're in the US or Europe will be deglobalisation. But if you're outside of that world, the world is globalising. 

I'll give you a big fact that should be obvious to any investor that is completely ignored. At what price do China and India pay for oil? What I know is it's below the $83 I saw this morning on screen. $50-$60. This is a permanent positive terms of trade shock to China, to India, to basically most of the world. Russia's pipes of gas and oil are moving that way. The opposite characterises DM.

The last point is there are countries that are going to replace Russia as a big commodities supplier to Europe. We have small diversified positions, largely in Sub-Saharan Africa. Copper, oil - a lot of countries are stepping up. Then there are the big majors, mostly in Latin America- Brazil and Colombia. Brazil exports pretty much everything from iron ore to soybeans to oil to rights to oil. Those are the big general opportunities we're focused on.

And that's where almost everyone has their risk, as per my favourite Mark Twain quote which is: "It ain't what you don't know that's going to get you into trouble. It's what you know for sure that just ain't so."