By Julie Wernau and Ira Iosebashvili
Argentina's ailing currency and stock market are pounding funds managed by some of the world's biggest investors, including Fidelity Investments, T. Rowe Price Group Inc., and Morgan Stanley, reversing some of the outsized gains they enjoyed last year.
These investment firms often own Argentine stocks through specialized funds that invest in some of the world's least developed countries, known as frontier markets, or through Latin American funds. Since Argentina's stocks represent about 19% of the benchmark MSCI Frontier Markets Index, even money managers that have positions at less than the index weighting still have significant exposure to the country's stocks and have taken a beating.
Frontier markets funds at T. Rowe Price, Morgan Stanley and Ashmore Group PLC have 17% or more of their portfolios in Argentine stocks, according to Morningstar data. Their funds have suffered declines between 5% and 8% over the past month, Morningstar said. Emerging markets and Latin America-focused equities funds at Fidelity, BlackRock Inc. and Eaton Vance Corp. are also down between 2.5% and 5%, in large part because of their holdings in stocks Argentina.
The Argentine peso's sudden collapse this year seemed to catch even longtime investors off guard.
"We went into a meeting, the peso was down 1%, we come out and the peso is down 5%," said William Pruett, portfolio manager for the Fidelity Latin America Fund.
The dollar rose nearly 9% against the Argentine currency on Monday. The peso rebounded a bit on Tuesday but is down 16% against the dollar since last month, when the country began intervening in currency markets.
Many investors decided to sell before the central bank tried to roll over about $30 billion in short-term, peso-denominated securities known as Lebacs, on Tuesday as any signs that government was having trouble refinancing this debt would further rattle investor sentiment and punish Argentina's financial markets. The government said late Tuesday that 100% of the expiring debt was successfully covered.
Many of the big investment firms increased their bets on Argentina's stocks and bonds last year, when investor optimism surged with the new, business-friendly government led by President Mauricio Macri.
Argentina resolved a 15-year-long dispute with creditors in 2016 and returned to markets with a $16.5 billion bond offering, which at the time was the largest ever debt sale for a developing country. Last year, the government sold 100-year bonds last year with a yield of only 7.9%.
The country's stock market rose 77% in 2017, while local currency bonds offered yields of around 20%.
Those returns attracted investors who didn't normally invest in frontier markets but they did so in Argentina near the end of last year, following capital-market reforms and midterm elections that reaffirmed support for Mr. Macri.
Many of these investors also were betting that MSCI would elevate Argentina to its main emerging-markets index, which includes more advanced developing countries and would likely bring more money into Argentine stocks from investment firms that follow the index. Those new inflows caused the country's proportion of the MSCI Frontier Markets index to balloon to 24% last year, as stocks surged.
Now, some dedicated frontier managers say, the more opportunistic investors are fleeing as quickly as they came in.
"They don't follow the country closely enough and now they're panicking, " said Oliver Bell, a frontier-markets portfolio manager at T. Rowe Price, who has 20% of his portfolio in Argentina stocks.
Many investors have been spooked by a series of emergency interest-rate increases that began last month, Argentina's central bank moved rates up to 40%. Argentina said last week it is in negotiations with the International Monetary Fund for an emergency loan to shore up its finances, as the country faces looming inflation and a possible slowdown in growth.
"The country is doing everything right," Fidelity's Mr. Pruett said, adding there has been a "crisis of confidence that's weighing on the currency."
With 4% of assets invested in Argentina, his fund has fallen more than 7% over the past month. Mr. Pruett said he hasn't changed his exposure to the country because he believes the administration is making the right moves to stabilize the selloff.
Argentina's woes may be a harbinger of more trouble to come in emerging markets as higher global yields lead investors to turn away from riskier assets in favor of rising yields inside the safety of developed countries, said Robin Brooks, chief economist at the Institute of International Finance.
Turkey, another country that relies heavily on outside financing, also is experiencing stress. Over the past month, the yield on its 10-year government bond has spiked to 7% from 6%, as investors have singled out for sale markets with lower currency reserves.
While the rise in longer-term U.S. yields this year is roughly half what it was in mid-2013, many emerging markets' currencies have weakened as much or more than in 2013, he said, a sign that underlying vulnerability to rising global rates is high.
There is also a limit to how high Argentina's monetary authorities can safely raise interest rates, some analysts said. While higher rates can help arrest a currency's fall and combat inflation, they also make it more difficult for the government to service its local debt.
"The Argentina situation will not be sustainable if the government raises its debt burden much more," analysts at Exotix Capital wrote.