countries such as South
Korea. The Hong Kong
government bond market
is also growing, although
Harte believes that at some
point the Hong Kong dollar
will need to change its peg
from the US dollar to
the renminbi.
On the corporate side,
there are opportunities
available, says Harte: “Corporate
governance in Asia is
a lot better than it used to
be and continuing to
improve. While many local
firms tended to borrow
directly from the bank,
some are now of a suitable
size that they issue debt in
their own right.”
l Avoidable debt risk
Some might consider that
investing in Far East bonds
means taking on currency
risk, but Howse points out
that since most external
debt issued by Asian countries
is denominated in dollars,
there is not necessarily
a need to take this on.
Alternatively, an investor
can invest against a local
currency benchmark such
as the HSBC Asian Local
Bond Index.
For Harte, currency
exposure offers a positive
potential source of returns.
“You really approach
some of the Asian markets
with currency opportuni
asia Pacific ex Japan bond funds – 3-year performance
efits from structural changes
in Asian bond markets as
sovereign governments
strengthen, and the potential
for currency appreciation
for domestic issues.
“Asian government and
corporate bonds, either
domestic or dollar issues,
will normally reflect the
underlying fundamentals
of both the Asia Pacific
economies as well as of
M’star Fund Curr 1-year 3-year 3-yr ann 3-yr ann 3-yr ann 3-year Launch Dom
Rating size (£m) return return Sharpe Sortino alpha ann beta date
Schroder ISF Asian Bond A Acc HHHH 1,254.13 $ 13.06 3.67 -0.43 -0.46 0.27 0.36 16 Oct ’98 Lux
Sch’der Sel New Mkt Ser Asian Bd A HHH 107.24 $ 12.59 3.23 -0.49 -0.51 -0.21 0.35 27 Apr ’04 Lux
BGF Asian Tiger Bond A1 $ HHHH 27.71 $ 5.76 0.82 -0.55 -0.57 -0.88 0.49 2 Feb ’96 Lux
ABN Amro Asia Bond Fund Class A HHH 21.16 $ 2.27 0.26 -0.59 -0.6 -1.11 0.52 27 May ’98 Lux
First State Asian Quality Bond I Acc H 198.08 $ 7.12 -0.03 -0.87 -0.88 -3.11 0.37 14 Jul ’03 Ire
CAAM Funds Asian Income C Acc HHH 8.08 $ -2.48 -2.03 -0.86 -0.87 -3.6 0.5 1 Apr ’87 Lux
Parvest Asian Bond C Acc HHH 5.96 $ -13.17 -6.26 -0.65 -0.65 -3.42 0.86 3 Nov ’95 Lux
First State Asian Bond III Acc HH 9.1 $ -15.82 -6.54 -0.74 -0.74 -3.64 0.88 3 Sep ’03 Ire
First State Asian Bond I Inc H 3.43 $ -18.54 -9.5 -0.86 -0.86 -6.39 0.91 21 Nov ’03 Ire
Source: Morningstar
ties and can make some
money from them. We
have used Asian currencies
such as the Singapore
dollar aggressively to get
returns,” he says.
The Baring Directional
Global Bond Fund, which
Harte manages, predominantly
uses this approach
of exposure to government
bonds and currencies.
There are undoubtedly
risks attached to investing
in Far East bonds.
“Looking at the economic
side of the risk,”
says Harte, “for a lot of
these countries it is very
good. But one aspect
sometimes played down
by proponents is: what are
the political risks? For
example, we had issues in
Thailand after the coup.
But with a bias towards
Asian markets in particular,
you should be okay.
“What is important in
choosing these funds is
what you want to achieve.
The biggest potential
danger is that themes
become fashionable;
people jump on the bandwagon.
You need to look
for people that have expertise
in these markets.”
It is important you do
your homework on fund
providers, he says.
On the flip side, there
are many diversification
benefits. These, says Howse,
include exposure to rapid
GDP growth of just under
10%; exposure to Asian corporate
fundamentals and
Asiaspecific themes such
as the emergence of China
and India’s middle classes
and commodity plays;
higher yielding bonds that
are attractive on a riskadjusted
basis relative to
other global bonds and
potential for capital gains as
credit ratings improve; ben
Comparison of credit rating breakdowns
% 40
80
60
20
0
BB1 BB2 BB£
Source: Fidelity
December 2008 [www.portfolio-adviser.com] POrTFOLIO ADVISer
B1
B2
individual firms across the
region,” says Howse.
“As economic prospects
improve across the region,
there is the potential for
ratings upgrades both at
the country and individual
company levels that would
drive positive performance
in the bonds.
“We have seen dramatic
growth in the issuance of
Asian bonds and have seen
the category legitimately
B3
CCC1 CCC2 CCC3
FIXED INCOME Far East
Asian high yield
European high yield
US high yield
develop into its own subinvestment
category. Total
issuance of dollar Asian
bonds is over $120bn and
for domestic currency
issues is over $1trn.
“Asian investment grade
and highyield bond indices
are well established
and widely followed by
investors as evidenced by
funds focusing specifically
on the region.”
C
CC
sUMMarY
To date, the emerging market
investment story has been an
equity one with even global
bond indices having a low
single-digit allocation to
the Far East.
Compared with UK bonds, Far
East bonds offer UK investors
the potential for higher yields,
capital appreciation,
diversification and currency
appreciation in domestic
Asian issues over the medium
to longer term.
More bond funds are being
issued based on the region
that offer UK investors a fixed
income alternative for their
asset allocation as well as
sector calls.
45
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