Pheona Tsang, BEA Union Investment
Tsang, the manager of the Asian Bond and Currency Fund, has a positive outlook on short-dated bonds issued by companies in the property and consumer sectors.
“China’s property sector companies are growing sales steadily. But the growth driver is not increasing property prices, it’s lower land acquisition costs, which is more robust,” she said. She favours large property developers with the potential to expand marketshare.
She is also bulllish on bonds issued by consumer sector companies.
“The large-scale department store is most attractive because [the company] typically owns prime shop sites or other properties. It can give default protection to investors because the issuers can repay the debt by a disposal of their tangible assets.”
At the end of May, the fund had 42.5% of assets invested in bonds issued by property developers in the region and 3.3% in consumer discretionary, according to the fund factsheet. Nearly all the assets (94.5%) in the portfolio are allocated to US dollar bonds.
Expecting two more US interest rate hikes this year, Tsang said roughly 10% of assets in the portfolio are allocated to floating rate bonds issued by banks, which she believes will ease the impact of rising interest rates. The average duration of the portfolio is 3.2 years.
Jimond Wong, managing director and senior portfolio manager for Pan-Asia bonds at Manulife Asset Management, said that the trend of defaults in US-denominated bonds in Asia will likely exceed 3% this year, FSA reported earlier.
Tsang expects defaults on US-denominated Asian corporate bonds to climb to 2.8%, near the recent high of 2.9% in 2015.
But she does not see it as a major concern.
“Asian bonds historically have had a low default rate compared with bonds issued elsewhere. Defaults are not a big concern to bond investors because the company fundamentals [in Asia] are improving.”
She said the average debt-service coverage ratio (or net debt-to-operating profit) of Asian companies came down to 4x in 2017 from 4.8x in 2016. Moreover, in the first quarter, there was an uptick in Asian high yield bond upgrades from ratings agencies.
“Both are good signs for bond investors,” she said.
Tsang said thorough research into bond issuers is crucial to avoid default cases. Her team primarily assesses shareholding information and financial reporting transparency before investing.
“Low transparency issues happen mostly with Chinese industrial companies, which usually are not listed. Their bonds typically have low liquidity.”
She also takes into account the issuer’s level of short-term debt, cash coverage of short-term debt and company policy on receivables. The portfolio’s average credit rating is BB.
The BEA Union fund has a yield of 6.6%, according to the factsheet. It returned -4.2% year-to-date, compared to -4.4% for the sector, according to FE data.
Tsang attributed the negative return to a technical correction in the Asian bond market triggered by a high net supply during the first half.
“There has been more supply in the US-dollar bond space due to the low cost of issuance. The increase in supply brought correction pressure to the market.”
She said the supply of bonds will likely continue to increase, but overall net supply for 2018 should come down by the end of 2018 due to more bond maturity in the second half.