Chorus builds for local currency bonds

Asset Class in Focus

Managers of the JP Morgan Asian Total Return Bond Fund have joined others in highlighting the attractiveness of local currency Asia bonds.

Jason Pang, JP Morgan Asset Management

The firm’s Asian Total Return Bond Fund invests in both corporate and government bonds, in both local and US dollar currency denominations. It is also one of the first products launched in China via the Hong Kong-China Mutual Recognition of Funds scheme.

With the US dollar strengthening last year, emerging market currencies were hit, resulting in negative returns in both equity and bond markets in the region.

However, despite weaker currencies, Jason Pang, co-manager of the fund, said his hedging strategy helped his positions in local currency bonds.

“What we basically did is we hedged some of the currency, so we mitigated some of the foreign exchange pressures coming from the US dollar,” he told FSA in a recent interview.

Pang noted that the outlook for local currency bonds in Asia has become positive because spreads have narrowed since the sell-off of riskier assets in Q4 2018.

Other asset and wealth managers, including M&G and Pictet Wealth Management, were also optimistic about local currency bonds in the region.

Pictet AM in an April client note wrote that emerging currencies are still 25% below fair value versus the US dollar.

Tilt to China 

The local currency allocation of the JP Morgan product is around 17%, with onshore and offshore renminbi bonds (4.1%) leading, according to the fund factsheet.

In terms of geography, China accounts for the largest exposure of the fund at 41.2%. Shaw Yann Ho, co-manager of the product and head of Asian fixed income, explained that the allocation is a result of opportunities the managers are seeing in the country, noting that the product does not have a benchmark index.

Ho became head of Asian fixed income early last year, replacing Stephen Chang, who decided to leave the firm. Both Ho and Pang also took over the Asian Total Return Fund from Chang.

Shaw Yann Ho, JP Morgan Asset Management

“For China corporate bonds, which constitutes a material portion to our China exposure, most of them are rated single-A with more attractive valuations when compared to similarly-rated corporates in the region.

“Earnings also remain healthy and companies are able to maintain their leverage and at the same time expand their businesses,” Ho added.

Ho noted that companies are in different business cycles, with some needing more working capital than others to maintain operations.

“So when we do our bond selection, we pay a lot more attention to how a company would generate enough internal cash flow to meet their obligations. It is this operational cash buffer that is utmost important to us when we make our assessment.”

Chinese government bonds are also attractive, Pang said, adding that they are not correlated with the global government bond market.

“Last year, for example, US Treasuries sold off to some extent, but Chinese bonds actually rallied, which is a case for diversification [in a regional or global portfolio],” he said.

Malaysia accounts for 5.9% of the fund’s portfolio, according to the fund factsheet. Pang said Malaysia is an importer of commodities – but to a lesser extent than most other regional countries.

“Asian countries are all commodity importers, so it is good to balance that with some countries that import less, as it gives you more diversification,” he said.

 


The JP Morgan Asian Total Return Bond Fund versus its sector in Hong Kong

Source: FE. In US dollars.

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