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Asian bond funds: picking the right exposure

Asian bond funds: picking the right exposure

After the 1997-98 Asian financial crisis, fixed income markets across the region have undergone significant structural reforms to facilitate depth and liquidity, and remove barriers for foreign investment. Today, Asian bonds are an asset class on their own. The region is home to over 60% of the world’s population and includes both developed and emerging economies. With solid fundamentals and reasonable relative valuations, Asian bonds might warrant a consideration for most diversified investment portfolios.

Several asset managers are well regarded for their track record in managing Asian bond funds. In this article, we look at three such funds, from Schroders, BlackRock and Fidelity.

Schroder International Selection Fund (ISF) Asian Bond Total Return

Schroder ISF Asian Bond Total Return is a total return, benchmark agnostic portfolio, that aims to provide income and capital appreciation. It offers investors exposure to local currency government and corporate Asian bonds. In addition to the traditional Asian countries, investment universe also includes Bahrain, Israel, Lebanon, Oman, Qatar, Saudi Arabia, Turkey and United Arab Emirates. The Fund was launched in 1998 and as of September 30, had $181 million in assets under management (AUM).

While the Fund is benchmark agnostic, it uses a blended benchmark of 50% Markit iBoxx Asian Local Bond Index and 50% J.P. Morgan Asia Credit Index to track its performance. Derivatives are used for risk management and to increase investment returns. Leverage is expected to be around 250% of the total net assets but could be higher in certain circumstances.

As of September 30, 46% of the portfolio was invested in local currency government bonds while 36% was allocated to corporates. Over 70% of the portfolio was investment grade, and China was the single largest country exposure at 32.4%. Top 10 holdings made up 31%, with Korean, Malaysian and Indonesian government bonds heavily represented.

The Fund is managed by two portfolio managers, Julia Ho and Chow Yang Ang, both based in Singapore. Both are CFA charterholders and have substantial experience managing Pan-Asian fixed income portfolios.

BGF Asian Tiger Bond Fund

The BGF Asian Tiger Bond Fund, launched in 1996, has more than $4.6 billion in AUM. It invests in fixed income securities of issuers domiciled or doing business in the Asian Tiger countries. According to Blackrock, country exposures is in South Korea, the PRC, Taiwan, Hong Kong, the Philippines, Thailand, Malaysia, Singapore, Vietnam, Cambodia, Laos, Myanmar, Indonesia, Macau, India and Pakistan.

BGF Asian Tiger Bond Fund uses J.P. Morgan Asia Credit Index as its benchmark, suggesting a portfolio tilt towards corporate bonds. As of September 30, China, Indonesia and India were the three largest single country exposures with a weight of 49.2%, 11.3% and 8.3%, respectively. The portfolio is well-diversified with the top 10 holdings accounting for just 9.2%. Nearly 70% was invested in investment-grade bonds, similar to the Schroder ISF Asian Bond Total Return fund.

Relative to the Schroder’s fund, Blackrock expects to have lower leverage level, at 150% of the net asset value. Derivatives are similarly used to hedge currency exposure as well as for efficient portfolio management.

The fund is managed by a team of three portfolio managers, led by Neeraj Seth, who is the head of Asian Credit. He is supported by Artur Piasecki and Ronie Ganguly. In its 2020 mid-year outlook, Blackrock turned neutral on Asian fixed income, highlighting the “renewed U.S.-China tensions and China’s relatively muted policy fallout” as risks.

Fidelity Asian Bond Fund

The last fund we review is the Fidelity Asian Bond Fund. Launched in 2011, the Fund had close to $2.5 billion in AUM as of September 30. It targets low volatility, attractive income and investment diversification from equity markets.

Relative to the other two funds, the Fidelity Asian Bond Fund offers investors exposure to USD-denominated, investment grade corporate bonds. While the portfolio invests primarily in USD-denominated securities, the team can allocate capital to local currency markets, if tactical opportunities arise.

As of September 30, 83% of the portfolio was invested in Asia ex-Japan ex Australia and almost 90% was allocated to investment grade securities. Top 10 holdings made up 29.7% and consumer cyclical was the largest sector exposure at 9.7%.

Eric Wong, Belinda Liao and Morgan Lauled are the portfolio managers responsible for the Fidelity Asian Bond Fund. The team employs a bottom-up security selection process with an emphasis on ensuring adequate diversification of the portfolio. Portfolio managers use inputs from the Fidelity fundamental credit research team as well as specialist traders, while also considering quantitative signals.

Multiple ways of getting exposure to Asian bonds

The profiled funds offer three distinct options of gaining exposure to the Asian fixed income market, from local currency government bonds through the Schroders fund to investment grade corporate credit allocation with Fidelity. Depending on investors’ circumstances and portfolio preferences, each fund can be a strong addition to an investment portfolio.