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Bond valuation worry grows in Asia, says GAM

Look for investors in Asia to increasingly tilt away from their global bond and credit allocations, said Rossen Djounov GAM’s head of Asia.

 

Hong Kong-based Djounov believes the sentiment may be turning as “an increasing number of investors are growing concerned with valuations in bond and credit markets”.

A sign of this shift in sentiment is the trend in Australia, where he said that GAM has been winning investment from superannuation funds. He mentioned an absolute return bond strategy that pulled in capital from the $6bn Australian pension fund Energy Super last month.

Djounov said the client is funding the allocation from a reduced exposure to international fixed income and credit strategies.

“Many of our existing Australian and Japanese investors have been increasing their exposure to the same strategy this year,” said Djounov. He believes the underlying reason for the shift in sentiment is a continuing deterioration in the outlook for sovereign and developed market corporate bonds.

But he added the firm is yet to see the same move on the part of Asian institutional clients (ex-Japan and Australia).

“In contrast, wholesale channels in the region have been very strongly increasing their allocations to specialist fixed income, including floating rate bond funds, mortgage-backed securities and catastrophe bond funds,” he said.

Earlier this year, the Commonwealth Bank’s A$10bn ($7.88bn) Group Super scheme, following a lengthy review of their asset allocation, decided to introduce liquid alternatives into the mix and awarded GAM a A$500m alternative risk premia mandate, Djounov said. 

Djounov also sees demand for absolute return strategies being underpinned by investors’ desire for liquid alts as opposed to hedge funds, and a realisation on their part that they no longer need to be paying 2% and 20% fees for owning alternative strategies.

Investors are “becoming increasingly sophisticated when it comes to judging investment managers’ claims of alpha”, said Djounov.

“Many now know that a lot of the alpha that they used to be happy to pay 2 and 20 for in their hedge fund allocation is actually nothing more than ‘hidden beta’ – even if it is the kind of beta that cannot be generated with long-only investment techniques.”

However, absolute return funds have underperformed major indices largely because volatility has remained low. According to FE data, the Singapore absolute return mutual fund sector had a cumulative three-year negative return while major indices soared:

 

 

Part of Mark Allen.