partner content

Asian Bond Watch: Choosing the right investment vehicle

State Street Global Advisors' Asia Pacific head of fixed income, Kheng-Siang Ng explains why index approaches are gaining popularity among investors.
Asian Bond Watch: Choosing the right investment vehicle
Kheng-Siang Ng

More than 20 years have passed since the Asian financial crisis and we have seen the region’s local-currency bond market grow from $304 billion in 1998, to over $12 trillion in value today. This rapid ascent can be traced back to programmes such as the Asia Bond Fund (ABF) initiative developed post-1997, as a collaborative effort by the central banks in the Asia Pacific region, to encourage the development of local bond markets. These efforts aimed to curtail reliance on overseas funding capital and to tap into the region’s wealth as a way of insulating it from future economic shocks.

Of course, any government’s efforts would have been futile if investors had failed to participate, but the region’s favourable growth characteristics; a reduction in credit risk (as well evident in the upgrades of a number of Asian countries’ sovereign credit ratings over the past years); the prospect of relatively higher yields; and the benefits of portfolio diversification have all worked in tandem with these coordinated policies and have contributed to a boom in local bond markets.


Having decided to include an allocation of funds towards local currency bonds, investors are faced with two choices – should they invest in individual bonds or opt for a collective vehicle, such as a managed fund or an exchange-traded fund (ETF)?

If an investor has access to comprehensive and timely bond market research, direct investments would appear attractive as they can hand pick bonds that best complement their existing portfolio or those in which they have the most confidence.

This process takes time and requires skill and effort in researching individual bonds. So it’s not surprising that many investors, big and small, turn to external managers who have the capability and resources to identify individual bond opportunities, and who monitor markets closely, seeking changes in interest rates or currency movements and understand how these factors will impact bond performance.


In the past, adopting an active management approach was perceived to be the best way to invest in emerging markets debts (EMD), including Asian bonds, based on the assumptions that EMD is an inefficient market and there are some obvious weak segments that could be avoided by active management.

The reality is, however, very different. The majority of active managers fail to outperform their benchmarks over the longer term.

State Street Global Advisors has carried out a comprehensive study of the active managers in the Morningstar database tracking two flagship EMD indices: JPM GBI-EM Global Diversified Index (GBI-EM) for local currency, and JPM EMBI Global Diversified Index (EMBI) for hard currency.

According to our study, in the hard currency sovereign universe, 50% of active managers underperformed their benchmarks in a one-year period. Even more – 57% and 83% respectively – failed to outperform over three and five years1. Outperforming the benchmark seems to be even more challenging for active managers in the local currency universe, with 80%, 83% and 87% of active managers failing to outperform their benchmarks over one, three and five years1.

There is also some semblance of a correlation between market underperformance and active manager underperformance. This is especially the case in local currency where it often appears that the worse the index performs, the higher the percentage of active managers who underperform.

The inherently volatile nature of the EMD sector is likely to be one of the key causes of active manager underperformance. Returns are often misaligned with fundamentals, as they are driven by investor sentiment and political risk, which are harder to predict and often lead to binary outcomes.


Indeed, most assets in the Asian local currency fixed income space remain in managed funds. But the markets now offer much greater liquidity and diversity. More cost-efficient and transparent index approaches, in particular ETFs, are increasingly being seen as highly effective and are gaining popularity among investors.

ETFs offer a number of benefits to Asian fixed income investors. Because of their index-tracking structure, ETFs are generally cheaper to run than managed funds. This will, in turn, positively influence the fund’s overall return.

Trading like stocks on stock exchanges also allows quick and easy access to Asian local currency bonds, saving the hassle of dealing with many local bond market account opening and tax matters, as well as the hassle of executing bonds and foreign exchanges with different market hours and settlement practices.

ETFs can appeal to investors who wish to play an active role in the management of their money. Its liquidity access via primary and secondary markets and the flexibility in trading helps facilitate tactical and strategic asset allocation decisions.

Visit* for our latest insights and investment ideas for Asian fixed income.

1 Source: Morningstar. The universe is generated by selecting the 30 largest live funds as of 31 May 2018.


All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone. Past performance is not a guarantee of future results.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

The views expressed in this advertisement are the views of Kheng Siang Ng through the period ended 20 September 2018 and are subject to change based on market and other conditions. This advertisement contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

This document has not been reviewed by the Securities and Futures Commission of Hong Kong (the "SFC").

Singapore: State Street Global Advisors Singapore Limited, 168 Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore) • Telephone: +65 6826-7555 • Facsimile: +65 6826-7501 • Web:*

Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong •  Telephone: +852 2103-0288 •  Facsimile: +852 2103-0200 • Web:*

© 2018 State Street Corporation - All Rights Reserved. 2249081.1.1.APAC.RTL. Exp. Date: 09/30/2019

*This website has not been reviewed by the SFC.


¬ Haymarket Media Limited. All rights reserved.