Pictet Asset Management added a new fund to its offering. With the launch of PTR Phoenix, a market neutral fund, they offer investors access to Asian stock markets.
Led by James Kim, Tai Panich and Jing Wang in Singapore, the sixth total return fund at Pictet follows a top-down investment strategy, combining long and short positions in search of alpha.
The Ucits IV-compliant fund, offers weekly liquidity as well as daily pricing. It is registered for sale in Great Britain, Luxembourg, Singapore, Spain, France, Belgium, Italy, Netherlands, Austria, Portugal, and Germany.
Emerging markets have experienced several years of relative underperformance. In 2016, they will face considerable external headwinds such as China’s slowdown and rebalancing, weak commodity prices, higher short-term US interest rates, and possibly further US dollar appreciation. Countries will react in different ways to these pressures depending on the extent of any imbalances and their own economic and institutional characteristics.
In the latest update of the Standard Life Investments emerging markets heat map, chief Economist Jeremy Lawson and Emerging Market Economist Nicolas Jaquier highlight important differences in their risk ratings of individual countries:
Jeremy Lawson said: “In May our heat map proved to be a useful indicator of subsequent asset price movements. Countries like Hungary, Korea and Russia showed relatively low risk and generally fared better than those at the higher end of the spectrum such as Brazil, Turkey and Peru. Looking forward, widespread currency depreciation has helped to reduce external imbalances in many countries, although domestic imbalances remain widespread and will take much longer to be addressed.
“Venezuela and Egypt, with pegged or inflexible exchange rate regimes, remain the countries where our heat mapshows risks are highest. Brazil and Malaysia have lowered their risk score after seeing their basic balances improve during the year, though risk is still high. Turkey’s external vulnerabilities are unchanged broadly, despite the benefits of the drop in oil prices.
“Whilst Colombia’s external variables improved marginally, this was offset by rising domestic imbalances. The outlook for fiscal balances has deteriorated notably in Latin America and Russia, and a marginal worsening of domestic balances led to a slight increase in risk for India, Indonesia, Mexico and The Philippines.”
As part of the Montréal Carbon Pledge which it signed as first asset management company in Austria in September 2015, Erste Asset Management has for the first time published the cumulative CO2 footprint of its equity funds. At 70.6%, the footprint falls nearly 30% short of the benchmark index, the MSC World (as of 30 October 2015). “Erste Asset Management sees itself as pioneer in sustainable investments”, says Gerold Permoser, CIO of the company in Vienna. “The climate conference in Paris reminds us how important the curtailing of the emission of greenhouse gases and a sustainable economy are in general. By publishing this key figure, we show to what extent our investments contribute to the emission of greenhouse gases.”
As Austrian market leader in the area of sustainability, Erste Asset Management offers three sustainable flagship equity funds, the CO2 footprint of each of which is even lower than that of the overall portfolio, as compared to the MSCI World index: Erste Responsible Stock America (45.4%), Erste Responsible Stock Global (40.7%), and Erste Responsible Stock Europe (39.9%). This way Erste Asset Management clearly demonstrates that a sustainable and ecological investment approach and yield are not mutually exclusive, but instead, complement each other. “We apply stringent criteria in the share selection and orientate ourselves on the basis of the environmental friendliness and sustainability of the respective companies,” as Permoser points out. This is also reflected by the impressive numbers of Erste Asset Management’s CO2 footprint.
After the assessment of the status quo, the next goals are expansion and optimization
By measuring and especially publishing the footprint, Erste Asset Management is taking another step towards strengthening its position as market leader in the field of sustainability. “To us at Erste Asset Management, sustainability also always means transparency. Therefore, there was no long discussion about whether or not to sign the Montréal Carbon Pledge.” At the moment, the company is preparing its next step. In the future, as soon as a sufficient reservoir of reliable data can be guaranteed, additional asset classes may be taken under the umbrella of the Montréal Carbon Pledge, such as corporate bonds or government bonds”.
Establishment of the CO2 footprint
Erste Asset Management establishes the CO2 footprint of its portfolios in a multi-step process: external rating agencies calculate the greenhouse emissions for all securities in the respective fund. Then the weighted average of the emissions of the securities held are calculated for each fund portfolio. The experts establish the total footprint of the measured equities held by Erste Asset Management by assigning weights across all funds, with the weights resulting from the share of the respective fund in terms of total assets under Erste AM’s management. The CO2 footprint accounts for the emission of all six greenhouse gases as defined by the Kyoto Protocol. The emission of the various gases is translated into a carbon dioxide equivalent (tCO2e: tons of carbon dioxide equivalent) to ensure the different gases are comparable in terms of their harmful effects on the climate at one glance. In order to facilitate comparability between companies of different sizes the emission of the carbon dioxide equivalent is related to sales in millions of USDs. This standardization is defined as CO2 intensity.
Montréal Carbon Pledge
The Montréal Carbon Pledge was launched on 25 September 2014 at the “PRI in Person” meeting in Montréal. This initiative is supported by PRI (Principles for Responsible Investment) and UNEP FI (United Nations Environment Programme Finance Initiative). The goal of the Montréal Pledge is to compile a list of signatories that manage assets worth in excess of USD 3,000 billion by the time of the world climate conference in Paris in December 2015. The Montréal Pledge tries to facilitate a higher degree of transparency in connection with the carbon footprint of equity portfolios and wants to contribute to its reduction in the long run.
The global law firm Dentons announced that it will be establishing its first physical presence in Latin America and the Caribbean, with the news that it is considering combining with Colombia’sCárdenas & Cárdenas, and Mexico’sLópez Velarde, Heftye y Soria (LVHS). The announcement follows Dentons’ recent high-profile pivot to the Pacific Rim, in which the firm announced a combination with both Australia’s Gadens and Singapore’s Rodyk, and the formalization of its historic combination in China, which made Dentons the largest law firm in the world.
“Comprised of vibrant, opportunity-filled economies, the Latin American and Caribbean region is of significant import to our clients,” said Joe Andrew, global chairman at Dentons. “Entering the region with a presence in two of its top four economies, and with firms that are aligned with the high level of service and quality that our clients expect, is key to delivering on our strategy to have seasoned, local talent, wherever our clients need it.”
“In addition to the leading position that each of these elite firms hold in their respective markets, they add substantial experience across our practices and sectors,” said Elliott Portnoy, global chief executive officer at Dentons. “Many of our clients are already doing business in Mexico, Colombia and throughout the region, and a combination with Cárdenas & Cárdenas and LVHS will bring more than a century of experience in the community along with valuable knowledge in key areas.”
Bernardo Cárdenas, managing partner of Cárdenas & Cárdenas, said, “Having been a leading law firm in Colombia for the past 100 years, and as one of the first firms to work with foreign investors in the country, we are ready to take the next step. We firmly believe that the globalization of legal services is a reality and that joining such a prominent and large firm as Dentons is the right decision. This combination will provide us with a global reach and expertise that will benefit all of our current and future clients, while maintaining our tradition of high quality service.”
Rogelio Lopez-Velarde, chairman and founding partner of LVHS, said, “After almost 20 years of being the leaders in legal services in Mexico in the energy, infrastructure, telecommunications and other industries, we are convinced that joining with the world’s largest law firm, which so quickly has taken such a prominent position in the legal market worldwide, will significantly enhance our capabilities and allow us to continue providing excellent service in Mexico for international clients, and for Mexican companies wherever the Dentons global footprint reaches.”
Dentons first signaled its serious commitment to the region last year, when the firm appointed Jorge Alers as its chief executive officer for Latin America and the Caribbean. Alers, who came to Dentons after serving as the general counsel and general manager of the legal department of the Inter-American Development Bank, has been focused on helping the firm meet its goal for whole firm combinations in Mexico, Central America, South America and the Caribbean.
Schroders has launch the UK’s first volatility controlled equity fund with downside protection, designed specifically for UK institutional investors. The Schroder Volatility Controlled Equity Fund has been structured to offer investors equity exposure with downside protection, enabling clients to keep on track with their long-term goals.
The fund aims to give Schroders’ clients and investors exposure to global equities while maintaining a protected approach to volatility. This is achieved through exposure to a volatility targeted global equity index, with downside protection gained through a rolling program of monthly put options.
Initial funding has been received from a UK final salary pension scheme under the advice of their investment consultant Redington. The Schroder Volatility Controlled Equity Fund will be managed by the Multi-asset Investments and Portfolio Solutions (MAPS) team.
Andy Connell, Head of Portfolio Solutions at Schroders, commented: “We have seen a lot of interest from clients wishing to invest in the Schroder Volatility Controlled Equity Fund and we welcome the increasing recognition of the techniques we are using. The recent market volatility further supports the importance of having the control capabilities in the fund to manage the downside risks.”
Dan Mikulskis, Managing Director & Co-head of Asset Liability Modelling (ALM) at Redington commented: “Achieving clients’ investment objectives drives our investment strategy work and recommendations. We believe risk control and downside protection are two powerful tools for keeping clients’ portfolios on track for those long-term goals. We wanted a cost effective equity pooled fund that was easy to access and had these characteristics.”
Oddo & Cie is launching a voluntary and conditional counterbid for BHF Kleinwort Benson Group, a Brussels-listed company, subject to approval from the banking regulatory authorities.
BHF Kleinwort Benson is a European financial Holding, which is primarily active in private banking and asset management, as well as on the financial markets and financing of businesses. The Holding, formerly RHJ International, is listed on the Euronext Brussels regulated market, and is mainly active in Germany, the United Kingdom and Ireland, via its three subsidiaries, BHF-Bank AG, the Kleinwort Benson Wealth Management Group and Kleinwort Benson Investors. As at 30 June 2015, the group had 58.5 billion euros in assets under management and its shareholders’ equity amounted to 793 million euros as at 30 September 2015.
Key points of the transaction
Oddo & Cie has filed a draft prospectus with the Belgian Financial Services and Markets Authority (FSMA) for all the shares of the company, at a price of €5.75 per share, which represents a premium of 15,2% compared to the opening market price on 26 November 2015 and of 40% compared to the average stock price between 24 July 2014 and 24 July 2015, the date on which Fosun Group launched a takeover bid at a price of €5.10 per share.
As a shareholder holding a 21,572% stake, the Oddo Group has signed a firm commitment with respect to the sale or the tender, respectively, with the Franklin Templeton Group, which holds 17.549% of the capital and with the company Aqton, a holding controlled by Stefan Quandt, which holds a 11.283% stake. Oddo & Cie is therefore satisfied that it will be in a position to acquire 50,404% of the capital.
The Oddo Group has reiterated its intention to expand in the eurozone and has thus decided not to maintain the private banking activities in the United Kingdom and in the Channel Islands. To this end and with a view to the transfer of these activities, the Oddo Group has negotiated a firm commitment from Société Générale, the price and main terms of which are fixed, to acquire Kleinwort Benson Bank Limited (United Kingdom) and Kleinwort Benson (Channel Islands) Holdings Limited (Guernsey), subject to a successful public takeover bid and standard conditions precedent, including the negotiation of a sale purchase agreement relating to the shares with BHF Kleinwort Benson.
Photo by GotCredit
. Repensando el riesgo en un mundo más incierto
Divergent monetary policy is creating a unique set of challenges for global insurers. While they have seen the positive effects of quantitative easing (QE) on asset prices and economic growth in the short term, they also fear the market imbalances and unsustainable investment environment it may create. Combine this with continued low interest rates in some regions and concerns of an interest rate hike in others, as well as a lack of liquidity in the fixed income market, and insurers face a quandary.
These complex concerns are driving changes in insurance investment strategies, according to BlackRock’s fourth annual survey of global insurance companies, conducted in July 2015. QE’s impact on asset prices is leading insurers to seek more risk, although fears of an asset price correction and a lack of quality opportunities in some asset classes suggest that insurers are taking a balanced approach to deploying cash—keeping their powder dry for when the opportunities arise. At the same time, more than two-thirds of insurers are planning to make greater use of derivatives and exchange-traded funds; one reason for this is the lack of liquidity in investment grade fixed income.
The key findings of the research suggest:
Insurers see positive short-term effects of QE and looser monetary policy-Almost half of insurers surveyed have made significant changes to investment strategy in light of QE and monetary policy, with asset prices and economic growth expected to be positively impacted in the short term. A similar number are making or are planning to make changes in the coming 12-24 months—a trend most pronounced among North American insurers.
Divergent monetary policy and the potential negative long-term effects of QEworry insurers -Just under half of the insurers surveyed cite the low interest rate environment as a major market risk, especially in North America and EMEA, although the risk of sharp rate rises also troubles many, especially in Asia-Pacific. A majority of insurers worry that QE and monetary policy create imbalances in markets that negatively impact the economy as well as an unsustainable environment for the insurance industry. Mike McGavick, chief executive officer of XL Group and chair of the Geneva Association, speaks for many insurers when he says that “a continued distortion of the market is what we worry about long term.” Against this backdrop, it is not surprising that our survey suggests most insurers want to see the pace and size of QE reduced and monetary policy tightened.
Insurers are planning to raise their risk exposure in search of higher yield-More than half of insurers are looking to increase risk exposure over the next12-24 months, compared to just one-third in last year’s survey. “Like many(re)insurers, our goal in increasing risk appetite on the investment side is toincrease yield,” explains John Tan, group chief executive of ACR Capital Holdings.
Insurers are changing the composition of their risk assets-Equities willbe given a smaller allocation as insurers reposition their risk exposures togenerate income. More than four in ten insurers are planning to reduce theirexposure to equities—especially in North America, where more than halfintend to do so. This may be driven by concerns around quantitative easing:the possibility of asset price corrections is seen as a major risk by one-thirdof insurers. The survey suggests insurers are turning to a broader range ofrisk assets, particularly income-generating alternative credit investments;four in ten insurers are increasing their allocations to commercial real estatedebt and direct lending to SMEs. Ian Coulman, chief investment officer at PoolReinsurance, explains that his company began diversifying risk exposure threeyears ago by reducing equities and adopting “a multi-asset credit strategy”,focusing on a “well-diversified risk portfolio.”
Insurers are struggling to find a good home for their increased cash holdings-Almost half of respondents expect to increase cash holdings over the next12-24 months specifically because of QE and monetary policy, and morethan one-third plan to increase cash holdings more generally. Importantly,this includes nearly half of those looking to increase their risk exposure.Shaun Tarbuck, chief executive of the International Cooperative and MutualInsurance Federation, says: “Finding homes for the money that are not going topenalize insurers from a regulatory viewpoint but give them a decent amountof return is an issue.” Mr McGavick confirms this view: “We’re holding cash aswe want the flexibility to be opportunistic.”
Challenged liquidity is making it difficult to access the fixed income markets-Approximately half of respondents wish to increase their holdings of qualityfixed income assets, with investment grade corporate bonds and governmentbonds the most popular choice. However, they are struggling to find what theyneed—over two-thirds of insurers say lack of liquidity is making it difficultto access fixed income investments and roughly three quarters believe thatliquidity is challenged relative to pre-financial crisis levels. According to oneinsurer: “Spreads on high-quality, investment grade fixed income are illogicallytight, so the supply is picked over, and what is available is less attractive.”Against this backdrop, lack of liquidity is encouraging the use of derivatives (seven in ten insurers agree); four in ten insurers are planning to increase theiruse of derivatives over the next 12-24 months.*
*Source: “Rethinking Risk in a More Uncertain World.” The Economist & BlackRock. October 2015.
This material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator in any Latin American and Iberian country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accurac
Foto por Freedom II Andres. La contracción en Japón no debe preocupar a los inversionistas de renta variable
Japan’s GDP for the third calendar quarter of 2015 showed weakness, much like the consensus expectation, but once again, this kind of negative result should not cause much concern at all for equity investors. Indeed, there were some good signs in the data, with personal consumption rising above consensus expectations and net exports rising quite smartly, which indicate a GDP rebound in the coming quarters.
As always, there are important things to know about GDP statistics in Japan:
These statistics are often heavily revised and it would not be surprising if the most recent quarter was revised up, especially as there were several anomalies in the data.
Firstly, real (inflation adjusted) inventories fell sharply, and if they had been flat, GDP would have actually grown 1.1% QoQ SAAR. Note that Japan has reduced real inventories for 23 of the 27 quarters since 2009 began, equating to a 55 trillion Yen (about $550BB using an average 100:USD rate) reduction in accumulated unit inventories since then, while the economy has meanwhile expanded 5%. It seems that Japan doesn’t have any inventories at all by this measure. So, this factor clearly understates GDP growth in our view and by comparison, the US has boosted real inventories by $812 billion over this period with GDP rising 12% despite utilizing similar technology to improve the efficiency of inventories.
Secondly, a major anomaly was the “discrepancy factor” (the difference between the sum of the real components and total real GDP) which remains at a very large negative number and indicates that GDP is likely understated.
Thirdly, GDP statistics have no correlation with corporate profits in Japan. As our Evolving Markets reports have long-shown, despite lacklustre GDP, Japanese corporate profits have surged during the last ten years, with the trend clearly continuing in 2015, evidenced by profit margins at historical highs. Of course, the weaker yen played some role in this recent trend, but service sector profits have been especially strong, which indicates that the economy is not as poor as the statistics suggest. Corporate governance improvements are also obviously a key factor to profit growth in Japan, greatly outweighing the effect of any economic softness and we expect this factor to continue, as it has now become deeply engrained in corporate culture.
As for the outlook, the Bloomberg consensus is for a rebound in GDP growth in the next two quarters, but the trajectory of growth has indeed been lowered, so we need to reduce our CY15 estimate to 0.7% from 1.0% (vs. the Bloomberg consensus of 0.6%), with 3.1% QoQ SAAR growth estimated in the current quarter. Within this, we expect:
Real inventories to rise to positive quarterly figures
The discrepancy factor to be reduced
Personal consumption to rebound more strongly in the 4Q
Net exports to decline mildly after their sharp 3Q increase
The consensus estimate for CY16 growth is 1.1%, which may seem meagre, but it is slightly above Japan’s natural growth rate.
In sum, as has long been our view, disappointing economic data should not worry investors in Japanese risk assets very much at all; indeed, TOPIX, driven by strongly rising profits, has risen quite smartly over the past year despite the weak GDP data, thus confounding those who concentrate too much on the macro-data.
Moreover, TOPIX has outperformed global equities this year in USD terms; yet, not only are equity valuations still much lower in Japan than the US and Europe, but earnings growth remains higher. Meanwhile, for Japanese investors, the relative outperformance of equities vs. other domestic assets has been crystal clear for several years and coupled with incentives created by Abenomics, an “equity culture” is finally flourishing, which should support the equity market in the years ahead and in turn support domestic economic growth via the wealth effect.
Opinion column about Japanese equity investing by John Vail from Nikko AM
Foto: Victor
. ¿Está la Fed cautiva del mundo exterior?
“In mid-September, the US Federal Reserve(Fed) justified its decision to refrain from launching a rate hike by referring to external economic risks.” Says Oliver Adler, Head of Economic Research, Credit Suisse.Which types of risks is the Fed most likely to be concerned about?
“The most obvious impact of the external world on the US economy is via demand for US exports.” He declares. Weakness abroad reduces the latter, slows US GDP growth and thereby depresses US inflation. If the USD appreciates as external demand weakens, the trade effect is amplified: US exports lose out to those of countries with weaker currencies and US imports rise while import prices fall, further dampening US inflation. Explains the expert.
The degree to which the USD appreciates in response to weak foreign demand depends to a considerable degree on the nature of the shock that has caused the foreign slowdown.“If, for instance, a foreign economy slows because its central bank has raised interest rates to counter economic overheating, the foreign currency is supported and the USD’s appreciation is limited. “He adds.
“Recent shocks were not of this nature. The most significant negative event, especially for a number of emerging markets (EM) has been the sharp decline in commodity prices.” Explains Adler. This has led to a sudden loss of income for commodity exporters and a sharp depreciation of their currencies. By default, the USD was boosted. Second, and in part as a result of lower commodity earnings, the risk increased that debts that were built up during the EM boom years would become unsustainable; currencies responded with further declines, again boosting the USD.
“However, it is our sense that financial stability concerns weigh more heavily in the Fed’s calculus than trade– after all, exports to all EM are only about 4% of US GDP. “ He adds. “Indeed, if US interest rates rise in a situation in which EM are financially fragile, then the USA as well as other economies can be negatively affected: most important, typically, is the impact via banks that are exposed to EM, but declines in asset prices can have added negative wealth, confidence and financing effects. While US banks are less exposed to EM than in the EM crisis period of the late 1990s, the financial linkages remain strong. “
“The most important concern for the Fed is arguably that China might “de-peg” its currency from the USD; that becomes more likely if US monetary policy tightens and boosts the USD. A weaker CNY would not only weaken US exports to China, but can also cause considerable financial instability, as the August episode demonstrated: depreciation expectations amplify capital outflows, and FX interventions are needed to stem them. This occurs in the form of sales of US assets, including US Treasuries, which tends to unsettle USD asset markets. With geopolitics suggesting that the USA is averse to seeing the CNY achieve reserve currency status too fast, the pressure for the Fed to consider China’s interests has increased,” concludes Adler.
Teresa Kong. Deuda asiática: un mercado con el tamaño y la profundidad adecuada pero ¿es el momento de invertir?
Latin America fully understands the challenges of investing in Asia, as well as its volatility. Used to 15% yields in the bond market, they also know that such returns come hand in hand with volatility more akin to equity market investing. In other words, Latin American investors are used to sleepless nights because of the markets. This makes Teresa Kong, lead manager of Matthews Asia’s, Asia Strategic Income Fund, feel more comfortable talking to a Miami or LatAm investor about her specialty, Asian ex-Japan fixed income, than to a typical domestic US market investor. In an interview with Funds Society, Kong reveals the challenges and opportunities of Asian fixed income, an asset class that, according to the expert, is under-represented in global fixed income portfolios.
How big is the Asian debt market?
If when investing in emerging debt, we trusted the indices, we would just basically invest in three markets: Russia, Brazil and Mexico. These are the three countries with most debt issued, but not necessarily those with better credit quality or better interest rates prospects and local currency developments. In fact, according to these parameters, Matthews Asia upholds the attractiveness of markets with much lower levels of debt and better credit quality, such as Indonesia, China, and Sri Lanka. Active management prevails.
The Asia ex-Japan local currency debt market was very small twenty years ago, but development has been immense, and its volume now equals three-quarters of the US Treasuries market. According to data from Asia Bond Monitor, in 2014, this market totaled US$8.2 trillion, compared with the US$447 billion it had in 1997. “With its current size, it’s not a market that can be ignored,” said Kong.
The size of this market, however, is not well reflected in the global benchmarks. For example, the Barclays Global Aggregate Bond index allocates only 3% to Asian fixed income ex Japan. “That is very small when you consider the fact that Asia accounts for a third of world GDP and half of global GDP growth.”
“Not only must we understand the magnitude of this growth, but also its quality,” said Teresa Kong. The growing middle class in Asia is an unstoppable phenomenon, and is accompanied by a boom in consumption, which is affecting various industries: insurance, real estate, automotive etc. These companies need funding in order to grow, which explains the extraordinary development of the Asian emerging market debt. “Furthermore, there is now also an internal institutional demand for sovereign debt in local currency. Local insurers need to invest their premiums on long-term debt instruments with maturities to match their obligations. Thus, we see how, Indonesian insurers, for example, have become natural buyers of sovereign debt in their own local currency.”
A market with volume and depth, but is it the right time to invest?
There are three sources of risk and return in the Asia fixed income market- interest rates, credit, and currencies.
Over the past three years, we have seen a strengthening of the dollar which in recent months has been accompanied by a rise in debt yields in the United States. As a result, the carry trade strategy (borrowing money in markets with very low rates, such as Europe and, until recently, the United States, to then invest in countries with higher interest rates, as in some emerging markets) has been losing steam.
All of this coincides with the bursting of the commodities’ “super cycle” for which China is partly responsible by lowering their growth expectations. “We’ll never see China growing at 7.5 % anymore,” said Kong. “We have to think of China more as a developed market than an emerging one, so growths of 5 % are far more plausible.”
For one thing, dependence on commodities by Asian economies is inversely proportional to its price. Unlike in Latin America, almost all countries are net importers of raw materials, so they have benefitted from falling commodities prices.
Linked to low inflation across most of Asia, Kong sees room for interest rates to continue to fall. And, at current credit spread levels, making a long-term investment in Asia credit has historically made sense.
Looking forward, Kong suggests that Asian economies are much more geared to domestic consumption. “The middle class is a reality. In China, over the next ten years we will be much more focused on analyzing domestic consumption data, than that of either exports or inventories. In Latin America, or even in the Middle East, with commodity prices, especially oil, at current levels, it will be very difficult to create wealth.”
Local currencies have been oversold and are looking attractive
As for Asian currencies, although they have experienced depreciation over the last two years, Kong does not foresee a collapse similar to that of Latin America or Eastern Europe Asia because, “in general the current account balances are strong, and there is not a massive participation of foreign investors in the debt markets, with a few exceptions, such as Indonesia, where 35 % of the debt is in international hands, explaining the increased volatility in the exchange rate of the Indonesian rupiah.”
Asian currencies will not fall as much as Latin American ones, as the next 5-10 years will be much better for Asian economies than for those of Latin America,” said Kong.
The strategy led by Teresa Kong is unconstrained, therefore, depending on market expectations, they can move from US Dollar denominated debt to debt denominated in local currencies.
Until September, they held 70% of the portfolio in US dollar denominated debt, given the strength of the currency, but since then they have been increasing their exposure to certain currencies such as the Malaysian ringgit and the Indonesian rupiah, which have faced a punishment that the team considers excessive.
Worried about what Yellen might do? Asian debt offers de-correlation in relation to Treasuries
An additional feature of Asian fixed income, ex Japan, is its low correlation with US Treasuries. The beta of the asset class in relation to Treasuries is 0.50 -0.37 if we only consider the local currency debt- While US investment grade bonds have a beta of 0.70 in relation to Treasuries and the correlation of G8 bonds is even greater. “If you’re worried about the volatility that the Fed can generate in the coming months, the incorporation of Asian bonds in the portfolio, is a factor to consider when diversifying,” said Kong. “It can serve as a relatively safe haven against rate hikes in the United States.”
This strategy is worth considering to diversify a fixed income portfolio, but why opt for a fixed income fund focused on Asia ex Japan, instead of investing in one of global emerging debt? “Latin American investors normally already have a significant position in fixed income from their own region, often through direct investment in corporate bonds of Latin American companies. If they invest in a global emerging debt strategy, the result will be that they double their exposure to Latin America, which in the current market environment may not make sense. We believe it is more interesting to complement exposure to emerging market debt with a differentiated strategy that invests in the Asia ex Japan region,” explained Kong.
A yield-generating strategy, but with controlled volatility
The U.S. version of Asia Strategic Income Fund, domiciled in the United States, was launched in 2011, and in its Luxembourg version for offshore clients, was launched by the end of 2014. It was created with the aim of becoming an alternative to income generating asset classes, but with controlled volatility. “We are more similar to a U.S. High Yield that to an emerging debt fund,” said Kong. The strategy seeks to generate alpha from currencies, interest rates, and credit and to generate attractive risk-adjusted returns. Since its inception in 2011 the volatility of the US fund has been half to one third of that of the emerging markets debt indices.
Despite being an “unconstrained” strategy, it follows a series of parameters to manage portfolio risk: on the one hand, 80% of the portfolio must be invested in Asian debt ex Japan, leaving only 20 % for opportunities in which the team can opt for convertible bonds or even equity. On the other hand, no more than 15% of the portfolio can be concentrated on a single currency or interest rate regime, “introducing tighter control than what you have when investing in the index, which gives some currencies, such as the Korean, a weight of over 20% “.
The Asian fixed income team led by Teresa Kong consists of four people and has the support of 40 Matthews Asia professionals dedicated exclusively to the research and management of investments in Asia. “We sit next to the teams which follow Asian equities, and our exchange of ideas is constant,” explains Kong. They also travel with equity teams to visit both companies and institutions in the area, several times a year, leveraging the resources which Matthews Asia allocates to these markets.
Recently, Matthews Asia has launched its second fixed income strategy, the Asia Credit Opportunities fund, also managed by Teresa Kong’s team. This Luxembourg-domiciled fund focuses primarily on credit issues denominated in dollars in the Asia ex Japan region. Such issues make up 80 % of its assets.
