Michael Israel introduces us to the IVO EM Corporate Debt Fund

Michael Israel serves as the Chief Investment Officer (CIO) and Lead Portfolio Manager for the entire suite of funds at IVO Capital Partners. He is responsible for defining and steering the investment strategy across all funds, as well as supervising the management team. In addition, he also sits on the Investment Committee for the firm's private debt activities, where his strategic insights and deep understanding of credit markets help shape the firm's investment and risk management practices.

In this interview, Michael Israel talks about the main features of the IVO EM Corporate Debt Fund, IVO's flagship UCITS strategy.

How would you define the IVO EM Corporate Debt fund?

IVO EM Corporate Debt is our flagship UCITS strategy, dedicated to capturing the most compelling credit opportunities across emerging markets through hard currency corporate bonds. With over €800 million in assets under management and a 10-year track record, the strategy blends disciplined bottom-up selection with active risk management to deliver consistent, risk-adjusted performance. It's designed as a resilient building block within a global fixed income allocation.

What is the fund’s investment philosophy?

Our philosophy is grounded in a simple yet powerful concept: many high-quality EM corporates are mispriced because of their sovereign ceiling. We call this the "Zip Code Discount." We seek out companies with robust fundamentals – hard-currency revenues, global operations, and strong governance – that trade at spreads misaligned with their true credit quality. Our goal is to systematically capture this market inefficiency. Our approach is built on strong geographical flexibility. The second pillar of our strategy is the carry, which lies at the heart of our approach to managing volatility and delivering outperformance.

How is the portfolio constructed and what advantages does it bring to an investment portfolio?

Our portfolio is built through disciplined bottom-up credit selection, underpinned by rigorous internal analysis of fundamentals, legal structures, and ESG considerations. Out of a universe of over 1,700 issuers, we selectively hold 80 to 120 bonds, strategically diversified across regions and sectors. The fund is fully hedged to EUR, with actively managed duration, targeting an average BB rating and offering yields currently above 10% in USD. For investors, it provides resilient carry and complementary credit exposure beyond developed markets. The advantages offered to investors through their international credit exposure include:

1. Higher yields
2. Lower credit risk
3. Sector diversification

What key characteristics set this fund apart from others in the same category?

What truly sets us apart is that we're not benchmark-constrained. That gives us full freedom to allocate based on risk-reward rather than index weight. We overweight markets where we identify significant mispricing, Latin America being a prime example, while avoiding regions or sectors where returns fail to justify the risk. Our approach combines geographical flexibility, the use of sovereign spreads as a proxy to identify credit opportunities, high carry as a risk management tool, and a focus on fundamentals rather than short-term 'mark-to-market' fluctuations. We also leverage our proprietary quantitative multi-criteria Z-score model as a support tool for investment decisions.

Which diversification does it provide?

The fund provides robust diversification across geographies, sectors, and even business models. Spanning over 40 countries, our portfolio captures exposure to critical sectors like infrastructure, natural resources, and utilities - including industries you rarely find in developed markets, like large-scale mining or frontier agribusiness. On the credit front, we focus on lower-leverage profiles, enhancing portfolio resilience and unlocking differentiated return streams. The value of a less leveraged balance sheet becomes more evident when the economic cycle turns. EM corporates are generally better positioned than their developed market counterparts in a ‘higher-for-longer’ interest rate environment or during periods of slowing growth, due to their structurally lower leverage. However, this fundamental advantage was partly offset between 2009 and 2022 by the artificially low cost of capital, particularly in developed markets. The current paradigm shift should now bring this advantage into sharper focus.

How does the current macroeconomic situation impact corporate bonds?

With U.S. rates remaining higher for longer and credit risk being repriced globally, EM corporates now offer elevated yields, even among high-quality names. Market dispersion is widening, with certain bonds trading at deeper discounts despite strong fundamentals. This creates attractive entry points, especially for an active manager. In this environment, selectivity is rewarded, while passive exposure is penalized.

How does the fund take advantage of the opportunities in the current environment? And how does it minimize risks?

We capitalize on market dispersion by rotating into names where spreads have widened without a fundamental reason. At the same time, we maintain strict discipline around liquidity, duration (currently at 4.1), and FX risk, which we hedge entirely. Every position undergoes comprehensive credit, legal, and ESG due diligence. This rigorous framework enables us to protect capital while positioning for upside as market conditions recover. The beauty of bonds lies in the fact that perceived risks - whether from interest rates or credit spreads - translate into higher yields, which in turn enhance portfolio protection. The higher the yield, the greater the portfolio’s capacity to absorb volatility. Moreover, volatility risk is not the same as credit risk, and in the bond market, volatility tends to be temporary, thanks to the 'pull-to-par' mechanism.

How would you define IVO Capital’s research and investment strategy?

Our approach is fundamental, hands-on, and 100% internal. Our analysts are region- and sector-focused, executing a process that blends bottom-up credit analysis with macro views, ESG integration, and legal structuring. Every investment idea is vetted through formal team discussions and we maintain systematic direct contact with issuers. We believe this level of depth and discipline is crucial for navigating EM credit markets effectively.

What advantages does the management team’s experience bring?

We've been managing EM corporate credit for more than 15 years, across multiple cycles. Our team brings deep expertise in restructuring, private credit, and global EM fixed income. This diverse background allows us to assess risks beyond ratings and maintain discipline under pressure. Our performance over time reflects this approach, consistently outperforming the market through rigorous bottom-up credit selection, carry, and geographic flexibility.