Pheona Tsang, BEA Union Investments
“Despite continued market uncertainties [caused by the Covid-19 pandemic], the current valuation of Asian bonds is the most attractive for the past 10 years,” Pheona Tsang, fixed income CIO at BEA Union Investments told clients in a webinar last week.
She is encouraged by the raft of fiscal and monetary stimulus measures introduced by major governments and central banks, but believes volatility will persist until investors are convinced that liquidity in bond markets will normalise, and gain confidence in an economic recovery that might happen in the second half of the year.
“In the past, credit markets have usually recovered quicker than equity markets, evident in 2008 by three months and in 2018 by one month,” she said.
However, although she thinks “most of the negative factors have been fully reflected in the market sell-off”, Tsang is not yet ready to call a turn in the Asian bond market.
“We will adopt a more defensive approach by choosing higher quality and shorter tenor bonds which have lower price fluctuations. We will maintain the liquidity level of the fund at around 2% and increase the allocation to investment-grade bonds,” she said.
Tsang manages the BEA Union Investment Asian Bond and Currency Fund, which was a standout performer among fixed income funds during the last decade. It posted a 119.05% cumulative return between 1 January 2010 and 31 December 2019, the highest of all fixed income funds in any category available to Hong Kong retail investors for the full 10 years, according to FE Fundinfo data.
Managed by Tsang since 2012, the fund has been awarded the top rating of five stars by Morningstar and the equivalent five crowns by FE Fundinfo.
Its major geographical exposure at the start of this year was China, followed by Indonesia and India, with a hefty 94% allocation to non-investment grade bonds, including 49.3% to property companies, according to the fund’s fact sheet.
However, its previously successful strategy of generating high returns by moving down the credit curve has hurt performance significantly during the past month’s market turmoil.
The fund has dropped 18.36% since the start of the year, compared with an average decline of 6.32% by its peers, with most of the fall taking place between 8 March and 23 March. Although it has since staged a slight recovery, the fund has suffered a three-cumulative loss of -9.02% compared with an average +3.20% return by the sector made-up of 53 funds authorised by Hong Kong’s Securities and Futures Commission. Its 9.26% volatility is also much higher than the average 5.18% over the same period, according to FE Fundinfo.
But, perhaps the most stark indication of the fund’s recent travails is the plunge in AUM, which fell to $530m on 31 March from $937m on 1 January due to a decline in the value of its holdings and investor outflows.
However, the mark-to-market value should recover, because the forced selling due to investor redemptions from most retail fixed income funds has caused excessive falls in bond prices, according to Tsang.
She told FSA that the average credit rating of the portfolio is unchanged at BB-, although its average duration has shortened to 2.7 years. The sharp drop in bond prices has pushed the average yield-to-maturity of the fund to 14%.
China issues still comprise over half its country exposure, followed by India (13.8%) and Indonesia (12.5%). Property bonds make up 54% of the fund’s holdings, compared with 49% at the start of the year, and energy and utility issues account for 13% and 11% respectively.
“Among high yield issues, Chinese property bonds are on top of the list due to their attractive yields, low refinancing pressure, better-than-expected property sales, and stronger cash flow,” said Tsang, who has been enticed by the new issue yield premium of recent property bond launches.
She also likes “more defensive renewable energy in India”, but is cautious about the oil and gas sector.
“Although valuations are becoming attractive, their performance hinges mainly on the oil price movement,” said Tsang, who is also wary of China industrial bonds which “exhibit higher default risks”.
Yet, Tsang is otherwise sanguine about default risk in the region.
“The annual default rate of Asian high-yield bonds is expected to increase to 4% from 2%, a level significantly lower than the 8% in 2008. Many companies have taken advantage of low interest rates during the past two years to pre-finance maturing debt, reducing the pressure to refinance this year,” she said.
Moreover, risks of downgrades of investment grade bonds to junk (or “fallen angel”) status are small, because about half of total investment grade Asian bonds are sovereign, quasi-sovereign or state-owned enterprises, according to Tsang.
“Current yields have reached an attractive level for both investment grade and high yield bonds, and earn decent carry. Bond valuations will gradually normalise as liquidity in the market improves,” she said.
Tsang’s positive sentiment is shared by many fixed income fund managers who FSA has spoken to, even as markets were in freefall.
These include Aberdeen Standard Investments, HSBC Global Asset Management, Invesco, JP Morgan Asset Management, T Rowe Price, UBS Asset Management, and most recently, Pinebridge.
BEA Union Investment Asian Bond and Currency Fund* vs sector average