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Frontier bond fund aims at high risk/return

As interest rates fall or go negative, Aberdeen Standard Investments is testing the water in Singapore with a high risk fund that yields 5.8%.

The Aberdeen Standard SICAV I – Frontier Markets Bond Fund is awaiting the approval of Monetary Authority of Singapore (MAS), according to the regulator’s website.

Once approved, the product will be available to retail investors in Singapore.

Frontier markets are considered less developed than emerging markets and therefore higher risk. Only one other such bond fund is available for sale in Asia — the Frontier Markets Fund from Global Evolution Funds, according to FE data.

Most of the ASI fund’s portfolio (82.6%) is invested is in single B bonds, rated by S&P, which the agency considers speculative as the company “faces major uncertainties” in meeting loan obligations. However, the reward has been an annual yield of 5.80%, according to FE data.

“Investors are seeking new sources of yield and diversification in the current low yield world. The growing pile of negative rates will be supportive for EM and the high yielders,” according to a spokeswoman for the firm.

“Frontier market bond yields are higher than core EM, have low correlation with US treasuries and other traditional fixed income markets and can help investors to enhance portfolio diversification,” she added.

“The diversification in the portfolio ensures relative downside protection. It’s also important to note that frontier markets have produced solid risk-adjusted returns while default rates remains muted.”

In terms of credit risk, she added that her firm’s emerging markets debt team, which has 50 people, has the experience to manage risk and avoid defaults and select the best issuers in frontier markets.

The product is expected to be launched in Singapore mid-November and the firm intends to bring it to Hong Kong’s retail investors “in the near future”, she said.

By region, the portfolio has the largest investment in the Middle East and Africa (50.6%), followed by the Americas (19.5%). Asia Pacific only accounts for 8.33%.

EM bond popularity

Looking at emerging market fixed income, earlier this month, ASI launched its first fixed maturity product, the Emerging Markets Bond Fixed Maturity 2023 Fund in Singapore.

“Companies across emerging market regions have improved their balance sheets in recent years, reducing leverage and increasing interest cover,” Donald Amstad, COO for distribution and head of investment specialists in Asia-Pacific at ASI told FSA earlier.

Other fixed income fund managers such as Western Asset Management, are also turning positive on emerging market bonds in general, highlighting the appeal of Asian bonds during a period of falling US interest rates, lower regional inflation and political stability in most Asian countries.

T Rowe Price also believes Asian credit offers an attractive risk-adjusted return profile compared with other fixed income categories.

Aberdeen Standard SICAV I – Frontier Markets Bond Fund and Global Evolution Manco Frontier Markets Fund vs category average 


Source: FE. Three years’ performance in US dollars. Aberdeen Standard SICAV I – Frontier Markets Bond Fund’s index is not available in FE. Global Evolution Manco Frontier Markets Fund does not have a specified Index.

Part of the Mark Allen Group.