Fidelity rides investor charge into Asian fixed income

Asian retail and institutional investors and, increasingly, their international peers are looking to allocate more resources into the regional debt, to both take advantage of relatively appealing yields and escape poor returns and volatility elsewhere.

This is driving up opportunities for fund houses to service them, and has helped Fidelity International, traditionally an equity-focused fund house, build its fixed income business in the region.

The firm said its Asian bond assets had grown by some 50% over the past 12 months and expects them to at least double within five years to account for 25% to 30% of its Asia-Pacific assets under management (AUM), up from around 10% now. Fidelity declined to reveal its global or regional fixed income AUM. 

“The emergence of an Asian investor base as well as core investors in Asia debt outside the region is absolutely critical. It’s a huge underlying trend that is really supporting the market and the industry,” Olivier Szwarcberg, head of Asia fixed income for Fidelity, told AsianInvestor.

His colleague Bryan Collins, portfolio manager for Asia fixed income at Fidelity International, added that there is a growing appetite for income-type products in the region, particularly in the more affluent parts of Asia, such as Hong Kong and Singapore. This trend is rising as investors get wealthier and pension funds and insurers look to match their liabilities, he told AsianInvestor. 

Another trend helping Asia’s bond market to develop is the rise in more strategic, long-term allocations to the asset class. Ten years ago, Asian fixed income – especially credit – was often a tactical play, perhaps for an emerging-market strategy out of London or New York, noted Collins.

“But over the years we’ve seen an evolution whereby our investors are now largely based in Asia, with a growing base of institutional and other investors elsewhere who want to allocate to the region as part of a strategic allocation, perhaps as part of an income or balanced equity/bond strategy.”

This is a healthy trend, because it reduces some of the volatility of tactically driven flows, he argued.

Collins also expects to see growing demand from international investors – particularly out of Europe and the UK – give that they are faced with very low – in some cases, negative – yields. The US 10-year Treasury yield stood at 1.76% on October 11, and the 10-year German Bund had a yield of 0.069%, whereas 10-year China government bonds had a yield of 2.74% yesterday and Indonesia's domestic 10-year bonds had a yield of 7.12%, according to Investing.com.

International investors also face other concerns, such as around the fallout from Britain’s vote to leave the European Union.

“They’re looking to bring some of that capital across into US dollars to some extent, but also looking for yield and income,” noted Collins. “And Asia still offers a very attractive yield compared to, say, US markets.

“That marginal investor dollar is now more inclined to make its way towards Asia,” he added. It’s a trend that has been visible both leading up to and post-Brexit. “It’s a multi-year theme, not a short-term phenomenon.”

Hiring and product plans

Fidelity is seeking to take advantage of the rising interest among institutional investors for Asian debt by building its fixed income AUM in the region.

“We’re growing this part of our franchise faster than other asset classes [in Asia] and, we believe, faster than some of our competitors,” said Szwarcberg.

Fidelity’s Asia fixed income investment team has grown by about 15% over the past two years to comprise of around 30 professionals. Szwarcberg said he expected this growth to keep pace with the development of the business.

The firm has made a senior hire this year in the form of Luc Froehlich. He joined in May as head of investment directing for Asian fixed income to replace Gregor Carle, who left in early 2015. Froehlich was previously Singapore head of fixed income at Manulife Asset Management.

Collins expects Chinese debt to play a huge part in the growth of Fidelity’s fixed income business in Asia in the longer term, as international investors start to allocate more to renminbi-denominated bonds.

In the near term, however, he saw greater potential in dollar-denominated investment-grade, high-yield or income-oriented strategies. “This is an area that more investors are becoming aware of and where there are strong track records already in place.”

Collins cited Hong Kong and Taiwan as two markets where he particularly expected to see demand for such products.

Szwarcberg said Fidelity has a couple of new Asian products in the pipeline, but declined to give more specific details.

AsianInvestor will shortly publish another extract from this interview with details of Fidelity’s strategy around China’s bond market.