FIXED INCOME Far East
Far East
asia high yield: country breakdown
Indonesia 26%
relative asia Pacific bond fund perf’nce
YTD 1 year 3 years 5 years 10 years
Asia Pacific ex Japan 0.94 5.45 0.9 1.6 7.75
Asia Pacific -0.83 2.83 3.17 2.21 3.69
UK corporate -11.87 -11.15 -3.42 0.37 2.54
Global corporate -0.85 3.05 1.83 2.19 2.76
US Corporate 3.32 7.57 0.72 1.18 2.32
Source: Morningstar
India 17%
Hong Kong 19% China 11%
As at Oct ’08. Source: Merrill Lynch, Bloomberg, Fidelity
asia Pacific bond funds perf’nce vs indices
%
30
20
10
-10
-20
0
-30
Nov ’05 May ’06 Nov
Source: Morningstar
MSCI World
Asia Pacific bond
funds ex Japan
May ’07
S Korea 2%
Macau 1%
Malaysia 1%
Nov
Philippines 6%
Pakistan 1%
Singapore 11%
Thailand 4%
Taiwan 1%
Asia Pacific bond funds
LB EM Asia Corporate
May ’08
Nov
Making a mark
Emerging market and Far East equity funds have
been the beneficiaries of huge inflows because of
their tremendous economic growth story. But as
investors move away from equities, is there a
Far East bond fund market ready to take advantage?
by NeAl UNderwood
Many Far East bond markets
are still immature
compared with Western
markets such as the UK.
But it could be that investors
who are not gaining
exposure to these assets
are missing a trick.
Anthony Michael, head
of fixed income, Asia, at
Aberdeen Asset Management,
says that while many
investors have bought into
the region’s longterm story
from an equity viewpoint,
most investors allocate no
money to Asia Pacific fixed
income assets.
“Even global bond indices,
such as the Lehman
Aggregate Bond, only have
a mere 2% allocated to the
region with, ironically, the
largest weightings given to
those countries most
indebted,” he says.
l The advantages
Andy Howse, fixed income
product director at Fidelity,
believes Far East bonds
44 PORTFOLIO ADVISER [www.portfolio-adviser.com] DEcEmbER 2008
offer UK investors a
number advantages over
their UK counterparts, in
particular the potential for
higher yields and capital
appreciation by accessing
one of the strongest growing
regions in the world,
diversification from other
global bond markets due
to different economic fundamentals,
and the potential
for currency appreciation
in domestic Asian
bond issues over the
medium to longer term.
Michael points out that
there are some quite large
bond markets in Asia,
which are by no means
fully developed but which
continue to mature.
“Returns have been
attractive, volatilities low
and diversification benefits
substantial,” he says. “On
the credit side, debt markets
have grown substantially,
with governments
issuing longerdated bonds
and thereby creating a reference
yield curve that
hitherto had been lacking
in many markets.
“Both dollar bond and
local currency issuance has
picked up and this reflects
the improving credit worthiness
of sovereigns and
corporates as well as relatively
low global interest
rates – which have reduced
the costs of issuance. That,
and the global search for
yield, has ensured returns
have been very strong.”
According to Howse, as
these markets mature further,
issuance is likely to
increase to service the
region’s growth needs.
“Domestic bond issuance
is also likely to expand
as governments and firms
look to fund in the domestic
currencies that match
their revenues,” he observes.
“The ability to access these
markets as they mature will
provide investors with an
increased opportunity set in
a region where fundamentals
remain attractive.
l Two sides of the coin
Colin Harte, director of
fixed income and currency
at Baring Asset Management,
says: “If you look at the
Asian market, the most
dominant countries are
Japan, Australia and New
Zealand, all of which are
fairly developed.
“When you get to
Malaysia, Singapore, China
and South Korea, for example,
a number of these
markets have certain capital
controls so you have to
buy the underlying instruments.
A fundtype vehicle
is a much better way to
access them.”
In terms of government
bonds, Harte notes that it is
possible to get tenyear
bonds in Singapore, and
six to sevenyear bonds in
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