The potential for bond defaults in China is a top concern among foreign investors. China has had more corporate bond defaults so far in 2016 than all of last year, FSA reported earlier.
Yet onshore bond demand remains strong due to the relatively attractive yield.
As China continues to open its fincial markets, the bond market will attract more attention from foreign investors. The People’s Bank of China officially announced the full opening up of the interbank bond market to offshore institutional investors in February, with detailed rules governing how this might take place released in May.
According to UK-based Insight Investment, over time China’s bond market will become an important part of global bond allocations in the same way bond markets of other major economies are.
China has been gradually opening its financial markets to the world, and one result has been that it now has a more significant impact on global markets than it had in the past. For example, when China sprung a surprise currency devaluation in August 2015 it roiled global markets and caused a sell-off.
Against this backdrop, Fund Selector Asia compares two Chinese onshore funds, the China Merchants Antai Bond Fund and the UBS SDIC Stable Income Bond Fund.
Niki Wu, analyst at Morningstar China provides a comparative analysis.
Investment Strategy
Both funds fall into Morningstar’s “normal bond” category, and they have obtained approval from Hong Kong’s Securities and Futures Commission for sale through the Mutual Recognition of Funds scheme, Wu said.
The China Merchants Antai Bond fund was launched in April 2003, while the UBS SDIC product was launched in January 2008.
The two funds have a similar portfolio allocation, which includes “financial bonds” (mainly policy bank bonds), enterprise bonds, short-term commercial paper, medium-term notes and convertible bonds, she said.
The two funds both adopt a top-down approach. Asset allocation and duration are based on analysis of the macro-economic situation, the movements of interest rates, the demand and supply of bond market capital and credit spreads among various bond assets, Wu said.
In terms of structure, the two funds have investments in credit debt and mainly focus on holding to maturity. They also hold convertible bonds.
While the two products seem similar, Wu noted some differences.
The China Merchants Antai fund’s credit debt position makes up about 50% of its NAV, evenly shared between industrial bonds and city investment bonds, which are mainly classified as AA+ or AAA graded high-return bonds, and the selection involves mainly companies with steady-to-high earnings growth and stable cash flows.
By comparison, the UBS SDIC fund’s credit debt position makes up about 80% of its NAV, with urban investment bonds accounting for 70-80%. The manager has a tendency to invest in bonds that were issued in or before 2013, and mainly fall under the classification of AA graded bonds, she said.
Asset Allocation of the two funds as of 31 March
| China Merchants Antai | % | UBS SDIC | % |
| Financial Bond | 46.0 | Enterprise Bond | 85.9 |
| Enterprise Bond | 20.4 | Financial Bond | 19.7 |
| Short-term Commercial Paper | 17.7 | Medium-term note | 14.2 |
| Medium-term note | 11.1 | Short-term Commercial Paper | 5.9 |
| Convertible bond | 0.01 | Convertible Bond |
5.8 |
Source: Morningstar
Performance
The UBS SDIC fund has outperformed the China Merchants Antai Fund since the managers of each fund came on board in 2015, according to Morningstar (see chart below).
On a medium- to long-term scenario, when compared to peer funds, the China Merchants Antai fund has an average performance while the UBS SDIC fund performance is in the top quartile of its peers, Wu said.
However, given the relatively short track record of the two funds being managed by their incumbent managers, Wu said she cannot provide a thorough analysis of the reasons why the UBS SDIC fund is doing better.
Looking at the long-term, before the current managers came on board, the China Merchants Antai fund had an average performance versus peer funds while the UBS SDIC fund performance is in the top quartile of its peers, Wu said.
However, her analysis as to why one fund outperformed the other over the long term is limited. “In China, the information that we can obtain regarding onshore bond funds is quite limited compared to equity funds. We only have information about their asset allocation on a quartely basis. So it is not easy to do analysis.”
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The two fund managers have less than two years of history in managing the two products, and when looking at the period of their service, the China Merchants Antai fund shows an annualised return of 4.71%, and the UBS SDIC fund has an annualised return of 7.46%, Wu said.
