The lead manager for the LionGlobal Asia Bond Fund shares her views on the outlook for Asian bonds and tells us more about the Fund.
Asian bonds had a stellar year last year, but LionGlobal Asia Bond Fund's lead manager, Ms. Veronica Ng, cautioned that the exceptional performance is unlikely to be repeated this year, although she remains positive about the outlook for the asset class.
She tells us why investors should have some representation of Asian bonds in their portfolios.
Why Asian bonds?
Ms. Ng, a 20-year veteran in the banking and fund management industry, feels that investors who are positive about Asia's prospects should consider devoting a portion of their investments to Asian bonds to enjoy the benefits of diversification.
She admits that Asian equities can offer potentially higher returns, but from a risk-adjusted basis, Asian bonds are still an attractive proposition relative to equities.
Ms. Ng said that although credit spreads (the difference in yield between a bond and comparable U.S. Treasuries) have narrowed, valuations of Asian bonds are still attractive and expects Asian credit fundamentals to improve as the macro outlook for Asian countries is good.
Asian economies not only have the potential to outperform their Western peers, they also have superior economic balance sheets and balance of payment positions. Foreign exchange reserves of Asian economies are on the rise while external debt ratios are poised to improve, which are good news for Asian bonds.
Asia's stronger fundamentals also augur well for the region's currencies. Monetary policy in Asia is likely to be tightened ahead of the West. This coupled with capital inflows into Asian equities and the likelihood of China revaluing the Renminbi means that local currency bonds in Asia offer the prospects for currency gains as well.
Emerging market portfolio managers are also expected to allocate more money into Asian bonds as Asian credit papers offer relative value compared to developed markets. The improving Asian economies will also translate to falling default rates and credit upgrades which will benefit the region's bond markets.
Said Ms. Ng: “Demand for U.S. dollar denominated Asian bonds has been strong. Non-Asian investors continue to support new issues and 65 per cent of recent issues went to U.S. and European accounts.”
While Ms. Ng agrees that bond yields are likely to rise given the artificially low interest rates, she highlights that the coupon carry from higher yielding Asian bonds will help to offset the rising bond yields.
“The story for Asia bonds over the next 3 years would be their coupon carry, which is actually quite decent at an expected 4 to 6 per cent per annum over a 5 year period,” Ms. Ng said.
While credit spreads have tightened significantly last year, contributing to the strong performance of Asian bonds, Ms. Ng thinks that there is more room for further tightening given Asia's superior macroeconomic backdrop compared to the West.
“The pace of tightening started to taper off in the fourth quarter of last year but spreads are still above the pre-crisis level, so we believe there is room for further tightening, which could help to offset the negative impact when the current record-low interest rates start to normalise,” said Ms. Ng.
More about the LionGlobal Asia Bond Fund
Incepted on 1st December last year, the Fund uses the JACI as its benchmark and tracks it closely.
It has the mandate to invest in U.S. dollar Asian credit, local currency debts and derivatives.
As at the end of last year, about 77 per cent of the Fund was invested in corporate debt while about 12 per cent was in sovereign debt, reflecting the preference for credit exposure over sovereigns.
The Fund is underweight duration to minimise interest rate risk while it has also invested in floating rate notes to hedge against rising bond yields.
In terms of bond selection, the Fund is slightly overweight high yield bonds versus investment grade bonds. This is because Asian high yield bonds offer a better buffer against interest rate risk compared to investment grade bonds.
A significant 40.6 per cent of the Fund was invested in the financial sector at the end of last year, and in terms of country allocation, South Korea took the lion's share of 27.7 per cent because it is the biggest U.S. dollar debt market in the region.
According to Ms. Ng, her team will also take positions in local currency debt, so as to enjoy currency gains, although there is a self-imposed limit of 10 per cent per currency for such trades.
Aside from the Peso and the Rupiah, Ms. Ng and her team of 2 credit analysts and a currency manager favour South Korean bonds and the Won due to the nation's improving current account status.
Why Lion Global Investors?
Lion Global Investors is one of the largest fixed income managers in Singapore, managing about S$15 billion fixed income assets as at Dec 2009.
The fund management company also has a dedicated and strong investment team of about 50 professionals that Ms. Ng and her team work closely with.
Key risks
Ms. Ng cautioned that the Fund's investment returns could be hampered by default risks, as 30 percent of its benchmark is made up of high yield bonds.
“This is why the selection process is critical, and we adopt a rigorous framework for decision making” said Ms. Ng.
Sudden changes to policies - like Indonesia imposing onerous logistical requirements on offshore holders of Indonesian papers or Taiwan disallowing foreigners from placing time deposits - could also pose hurdles down the road.
Important Information
Lion Global Investors Limited
This publication is for information only and does not have regard to your specific investment objectives, financial situation or particular needs. You should read the prospectus, available from Lion Global Investors Limited (“Lion Global Investors”) or its distributors, before deciding whether to subscribe for or purchase units of the Fund. Investments in the Fund are not obligations of, deposits in, guaranteed or insured by Lion Global Investors or any of its affiliates and are subject to investment risks, including the possible loss of the principal amount invested. The value of units in the Fund and the income accruing to the units, if any, may fall or rise. Past performance of the Fund and Lion Global Investors and any economic or market predictions, projections or forecasts, are not necessarily indicative of future or likely performance. Any opinion or view presented is subject to change without notice. Lion Global Investors shall not be liable for any losses or damages of any kind howsoever arising from you acting on any information herein. You may wish to seek advice from a financial adviser before making a commitment to purchase the Fund. In the event that you choose not to seek advice from a financial adviser, you should consider whether the Fund is suitable for you.
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