Staying invested in Asian fixed-income
AberdeenÆs Asian credit specialist says the Asian dollar bond market presents a compelling investment opportunity for those who have a medium-term horizon.
Scott Bennett is the head of Asian credit on the Asian fixed-income desk at Aberdeen Asset Management Asia. He joined Aberdeen in 2008 from ABN Amro Bank where he was a director and a trader of fixed-income instruments. He shares with AsianInvestor his views about the fixed-income market in the region.
How has the US credit crisis affected Asian fixed income markets?
Bennett: The Asian dollar bond market is intertwined with the US bond market so we will tread the same path which means our markets have been and will continue to be volatile and spreads will also widen in general. I donÆt expect decoupling to occur though this question is often raised.
How have you been dealing with the impact of the credit crisis in the US, in terms of managing your Asian fixed income portfolio?
AberdeenÆs fixed income philosophy is to invest in solid companies with sound operating fundamentals, and that is what we have been doing and will continue to do. As a result of this, our investment portfolios are performing relatively better than the market so we are outperforming. But what I have been doing for the past few months is reducing exposure to longer dated bonds in favour of buyer shorter dated bonds by the same issuer.
What has been the impact of the credit crisis in the US on Asian currencies?
Asian currencies over the last year or so have in general strengthened against the US dollar, but lately that trend has been reversing for some countries. Slowing economies, growing current account deficits and mounting fiscal deficits have started impact Asian currencies. The Indian rupee and the Korean won are two currencies that have weakened significantly in the last couple weeks. We hold dollar-denominated assets in our portfolios so the weakness in these currencies hasnÆt directly affected our investment strategy.
What has been the impact of the credit crisis in the US on Asian interest rates?
US Treasury rates have in general declined this year and regional policy rates have been increasing all year with exception of Taiwan that recently cut its rate by an eight of a percent. We manage our portfolio on a duration neutral basis to the benchmark so we are less concerned with where underlying rates are and more focused on the issuerÆs credit quality.
What is your overall Asian fixed income investment strategy over the next 12 months?
My investment strategy over the next 12 months will be to continue identifying and investing in solid companies with stable to rising credit profiles which admittedly is harder to find in this current economic backdrop. But we constantly review our portfolio so the names that we dislike have pretty much all been sold. Since we sold many bonds in August, we will be spending the next couple of months putting that money back to work and we will focus on short dated debt of investment grade companies. I fully expect these borrowers to repay their bonds at maturity so this meets my aim of preserving the bondÆs price stability.
What is the mix of your overall Asian fixed income investments?
We search the entire our universe of Asian dollar bonds in our security selection process so Aberdeen will cover both investment grade and high yield bonds and consider all sectors. Right now about 55% of our bonds are investment grade with the rest virtually all double-B High yield. In terms of sectors, IÆd say about 30% our holdings are financials, 30% are sovereign or quasi sovereign, 20% are power, oil and gas and telecom companies and the remaining 20% are other corporates.
Do you have a preference either for short-term or long-term Asian fixed income instruments?
In most circumstances, I prefer short-dated instruments because spread duration risk has worked against the bondholder this year. I would say this stands true for investment-grade bonds and most high-yield bonds. The exception is single-B bonds where I would avoid maturing bonds, I simply donÆt want to take repayment risk.
Do you have a preference for either corporate or government bonds?
I wouldnÆt make a generalisation that I prefer government bonds over corporate bonds or vice versa. In this type of environment IÆm very name specific when it comes to investments. IÆll analyze a bond to derive its intrinsic spread and then compare that spread to the bondÆs market spread. I could find value in either one.
Do you have a bias towards investment-grade bonds, given the uncertainty in global financial markets?
At present, I prefer investment grade bonds because they are tending to outperform high yield bonds and I expect this relationship to continue. When the market improves and I expect it will, IÆll feel more comfortable taking on increased risk so IÆll increase the weighting of high yield bonds in my portfolio.
Do you have a stronger view towards a particular fixed income market in Asia?
When economic times were better, it would be easier to generalise which market or country I prefer. But in todayÆs crisis, where the markets are very volatile, bond technicals and bond fundaments may not move consistently. One really needs to look at each credit specifically to gauge how it should perform going forward.
Globally, fixed income funds have been registering strong net inflows compared with equity funds. Is this trend the same for Asian fixed income funds as well?
Earlier this year, this statement was definitely true. We saw billions of dollars chasing new debt issuance despite a cautious outlook, but now it is hard to say, however I think that the statement probably remains true.
Has the current turmoil increased the demand for Asian fixed income instruments?
Presently, with accounts from the US and Europe seeking to raise cash there has been more selling pressure of Asian dollar bonds. When this pressure subsides and this can be many months away I expect buying to pick-up again as these bonds represent an opportunity to invest in a solid company at generous spreads.
Where is the demand for Asian fixed income investments coming from?
Demand for Asian bonds is coming mainly from institutional investors within Asia and globally. In Asia accounts are real money Asian dollar bond dedicated accounts and global investors are diversifying into Asia. In the past few years, as wealth returned to Asia, private banks became a more significant portion of demand.
One of the most common criticisms of global fund managers is the lack of depth in secondary fixed income markets in Asia. How are you able to find value in the market under such conditions, which presumably has become tougher because of the current turmoil in financial markets worldwide?
Investment grade bonds tend to trade in $3-5 million clips and high-yield bonds tend to trade in $1-3 million lots so it has been difficult to build and exit sizable positions without affected market prices. This situation has become more difficult in recent times as liquidity as declined so it is now even harder to exit sizeable positions. But we manage closed-end money so we are not forced to sell bonds to raise cash.
What have been the main challenges you have faced in managing an Asian fixed income portfolio over the past 12 months?
The main challenge we faced in the last 12 months was the ability to trade in and out of names at reasonable bid-offer spreads. The markets have been illiquid and there has been a lot of pressure on brokers to be more profitable on smaller balance sheets so bid-offer spreads have been wider than normal. The ability to trade easily and cheaply enables us to make new investments and exit fully valued investments.
What do you see as the biggest opportunities in the Asian fixed income market?
The biggest opportunity this market has to offer now is simply to get involved. Spreads have not been wider for years and fundamentally Asian companies are still relatively stronger than their global peers. Not one bond issuer has defaulted, though we are seeing default rates rising in the US and Europe. For those who can invest in the medium term, the Asian dollar bond market presents a compelling investment opportunity.
The November edition of AsianInvestor magazine contains a feature on the Asian fixed-income market.
How has the US credit crisis affected Asian fixed income markets?
Bennett: The Asian dollar bond market is intertwined with the US bond market so we will tread the same path which means our markets have been and will continue to be volatile and spreads will also widen in general. I donÆt expect decoupling to occur though this question is often raised.
How have you been dealing with the impact of the credit crisis in the US, in terms of managing your Asian fixed income portfolio?
AberdeenÆs fixed income philosophy is to invest in solid companies with sound operating fundamentals, and that is what we have been doing and will continue to do. As a result of this, our investment portfolios are performing relatively better than the market so we are outperforming. But what I have been doing for the past few months is reducing exposure to longer dated bonds in favour of buyer shorter dated bonds by the same issuer.
What has been the impact of the credit crisis in the US on Asian currencies?
Asian currencies over the last year or so have in general strengthened against the US dollar, but lately that trend has been reversing for some countries. Slowing economies, growing current account deficits and mounting fiscal deficits have started impact Asian currencies. The Indian rupee and the Korean won are two currencies that have weakened significantly in the last couple weeks. We hold dollar-denominated assets in our portfolios so the weakness in these currencies hasnÆt directly affected our investment strategy.
What has been the impact of the credit crisis in the US on Asian interest rates?
US Treasury rates have in general declined this year and regional policy rates have been increasing all year with exception of Taiwan that recently cut its rate by an eight of a percent. We manage our portfolio on a duration neutral basis to the benchmark so we are less concerned with where underlying rates are and more focused on the issuerÆs credit quality.
What is your overall Asian fixed income investment strategy over the next 12 months?
My investment strategy over the next 12 months will be to continue identifying and investing in solid companies with stable to rising credit profiles which admittedly is harder to find in this current economic backdrop. But we constantly review our portfolio so the names that we dislike have pretty much all been sold. Since we sold many bonds in August, we will be spending the next couple of months putting that money back to work and we will focus on short dated debt of investment grade companies. I fully expect these borrowers to repay their bonds at maturity so this meets my aim of preserving the bondÆs price stability.
What is the mix of your overall Asian fixed income investments?
We search the entire our universe of Asian dollar bonds in our security selection process so Aberdeen will cover both investment grade and high yield bonds and consider all sectors. Right now about 55% of our bonds are investment grade with the rest virtually all double-B High yield. In terms of sectors, IÆd say about 30% our holdings are financials, 30% are sovereign or quasi sovereign, 20% are power, oil and gas and telecom companies and the remaining 20% are other corporates.
Do you have a preference either for short-term or long-term Asian fixed income instruments?
In most circumstances, I prefer short-dated instruments because spread duration risk has worked against the bondholder this year. I would say this stands true for investment-grade bonds and most high-yield bonds. The exception is single-B bonds where I would avoid maturing bonds, I simply donÆt want to take repayment risk.
Do you have a preference for either corporate or government bonds?
I wouldnÆt make a generalisation that I prefer government bonds over corporate bonds or vice versa. In this type of environment IÆm very name specific when it comes to investments. IÆll analyze a bond to derive its intrinsic spread and then compare that spread to the bondÆs market spread. I could find value in either one.
Do you have a bias towards investment-grade bonds, given the uncertainty in global financial markets?
At present, I prefer investment grade bonds because they are tending to outperform high yield bonds and I expect this relationship to continue. When the market improves and I expect it will, IÆll feel more comfortable taking on increased risk so IÆll increase the weighting of high yield bonds in my portfolio.
Do you have a stronger view towards a particular fixed income market in Asia?
When economic times were better, it would be easier to generalise which market or country I prefer. But in todayÆs crisis, where the markets are very volatile, bond technicals and bond fundaments may not move consistently. One really needs to look at each credit specifically to gauge how it should perform going forward.
Globally, fixed income funds have been registering strong net inflows compared with equity funds. Is this trend the same for Asian fixed income funds as well?
Earlier this year, this statement was definitely true. We saw billions of dollars chasing new debt issuance despite a cautious outlook, but now it is hard to say, however I think that the statement probably remains true.
Has the current turmoil increased the demand for Asian fixed income instruments?
Presently, with accounts from the US and Europe seeking to raise cash there has been more selling pressure of Asian dollar bonds. When this pressure subsides and this can be many months away I expect buying to pick-up again as these bonds represent an opportunity to invest in a solid company at generous spreads.
Where is the demand for Asian fixed income investments coming from?
Demand for Asian bonds is coming mainly from institutional investors within Asia and globally. In Asia accounts are real money Asian dollar bond dedicated accounts and global investors are diversifying into Asia. In the past few years, as wealth returned to Asia, private banks became a more significant portion of demand.
One of the most common criticisms of global fund managers is the lack of depth in secondary fixed income markets in Asia. How are you able to find value in the market under such conditions, which presumably has become tougher because of the current turmoil in financial markets worldwide?
Investment grade bonds tend to trade in $3-5 million clips and high-yield bonds tend to trade in $1-3 million lots so it has been difficult to build and exit sizable positions without affected market prices. This situation has become more difficult in recent times as liquidity as declined so it is now even harder to exit sizeable positions. But we manage closed-end money so we are not forced to sell bonds to raise cash.
What have been the main challenges you have faced in managing an Asian fixed income portfolio over the past 12 months?
The main challenge we faced in the last 12 months was the ability to trade in and out of names at reasonable bid-offer spreads. The markets have been illiquid and there has been a lot of pressure on brokers to be more profitable on smaller balance sheets so bid-offer spreads have been wider than normal. The ability to trade easily and cheaply enables us to make new investments and exit fully valued investments.
What do you see as the biggest opportunities in the Asian fixed income market?
The biggest opportunity this market has to offer now is simply to get involved. Spreads have not been wider for years and fundamentally Asian companies are still relatively stronger than their global peers. Not one bond issuer has defaulted, though we are seeing default rates rising in the US and Europe. For those who can invest in the medium term, the Asian dollar bond market presents a compelling investment opportunity.
The November edition of AsianInvestor magazine contains a feature on the Asian fixed-income market.
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