Asia high yield funds are a differentiator in a world where global central banks’ successive rounds of quantitative easing have pushed the total amount of negative yielding bonds on global markets past USD 15 trillion (IMF, Global Financial Stability Report, October 2019).
Asia high yield. One part of Asia’s fixed income universe
High yield is one part of Asia’s corporate bond market, the other being investment grade. Sovereign and multilateral debt are the other two sectors.
Asia’s bond markets consist of USD-denominated debt (totaling approx. USD 945 billion in mid-2019) and local currency debt (approx. USD 14 trillion in mid-2019, according to HSBC, Asian Fixed Income Guide, May 2019).
Asia high yield offered yields of approx. 7% at the end of December 2019, compared with 3.6% for investment grade. This differential is similar to global markets, driven by ratings on company quality and default.
Asia high yield compares well to US & EU
Importantly, Asian high yield (7%) comes with higher rates than US (5.7%) or EU (3.9%) high yield. This mainly represents a ‘governance premium.’ Asian corporate governance standards – particularly around disclosure – are deemed inferior to Western markets, so investors look for compensation.
China dominates, real estate stands out
China accounted for approximately 63% of Asia’s USD-denominated bond markets mid-2019, for three main reasons. Firstly, China is the largest Asian economy; secondly, domestic regulations forced Chinese companies to look abroad for funding since 2013; thirdly, Chinese companies see USD-denominated debt as attractive, particularly as the RMB has appreciated against the USD during the past ten years.
China’s property developers are the most active Asia high yield issuers, accounting for 64% of total debt issued by companies included in the industry benchmark ICE Bank of America Merrill Lynch Asian High Yield. New regulations in China, such as the crackdown on shadow banking and tightening of corporate bond issuance, have pushed real estate developers into overseas markets, partly because these companies require steady credit to build their land banks.
These trends, coupled with the attractive yields on offer, offer investors a potentially attractive alternative to the low yields on offer in Europe and the US.
Given the variation in Asian markets and the need for on-the-ground insight, there’s a real opportunity for active managers to add value, and in the following we compare two leading actively-managed Asian high yield funds and analyze their value propositions for investors.
Fidelity Asian High Yield Y-Acc-USD
Fidelity Asian High Yield is the largest (assets under management [AUM]: EUR 5.07bn) and longest established (since July 27th, 2008) of the two funds profiled.
Hong Kong-based Bryan Collins has managed the fund since 2009, then joined by Peter Khan and Tae Ho Ryu in 2019, then by Terrence Pang in 2020.
Actively managed, tilted to China real estate
The fund is actively managed and benchmarked against the ICE BofA Asian Dollar High
Yield Corporate 20% Lvl4 Cap 3% Constrained Index, and has delivered an annualized return of 6.34% over a five-year basis.
By country, the fund is overweight China (54.7% vs benchmark (BM) 40.6%), with underweight allocations to India (10.5%, BM: 23.1%), Indonesia (3.3%, BM: 10.4%), and Hong Kong (2.3%, BM: 10.5%).
Real estate dominates the fund strategy (43.7%, BM: 18.3%), with China developers being prominent, accounting for six of the top ten holdings, all of which are overweight positions against benchmark (Fidelity Asian High Yield Y-Acc Factsheet, February 29, 2020).
Unsuccessful in generating active return
In the Fund Scoring of AsiaFundManagers.com* Fidelity Asian High Yield scores 51.33 out of 100. The fund ranks second in terms of returns, performance, and information ratio over one, three, and five-year periods.
Importantly for an active strategy, the fund’s information ratio has been negative over one, three and five-year periods, indicating it has been unsuccessful in generating active return.
UBS (Lux) BS Asian High Yield USD Q-acc
UBS Asian High Yield is second of the two profiled funds in terms of size (AUM: EUR 822m) and history (October 16th, 2015).
Managed on an active basis by Singapore-based Ross Dilkes and Evan Greenburg since September 2018, the fund has delivered an annualized return of 6.5% over a five-year basis.
The strategy is benchmarked against the JP Morgan Asian Credit Non-Investment Grade Index.
Key country allocations include China (46.9%), India (12.7%), Indonesia (7.0%) and Hong Kong (5.4%). Looking at sectors, real estate (42.7%), consumer (7.2%) and utilities (7.0%) are the largest sectors in the strategy.
Overall, UBS Asian High Yield scores highest of the two funds profiled, with 60.55.
The fund ranks first in terms of returns and information ratio over one, three, and five-year periods. Fee-wise the fund has the lowest management fee, but the second highest transaction fee.
To conclude, if you are solely interested in the top-performing fund over a one, three, and five year period and want a sustained track record of successful active investing, UBS Asian High Yield scores highest on both counts.
Additionally, UBS Asian High Yield offers a more diversified strategy across Asian countries and sectors, which may suit investors averse to concentration risks. Alternatively, if investors want a stylistic tilt to China real estate, Fidelity gives you the highest exposure to that sector.
Finally, UBS Asian High Yield has the lowest hurdle rate (no minimum investment, vs. USD 5,000 for Fidelity Asian High Yield) and comes with a lower management and transaction fee.
*About the Fund Scoring
To help investors find the best investment funds from a variety of registered products, the AsiaFundManagers.com team has developed its own quantitative fund scoring system. The Fund Scoring is based on current scientific findings on the quality of actively managed investment funds. An algorithm is used to weight different factors that provide information about the quality of the fund. The parameters include return, risk and cost ratios. The Fund Scoring calculates 8 sub-indices and an overall score, which is made up of the weighted sub-indices. Investment funds can achieve a maximum of 100 points for sub-indices and the overall score.