With that in mind, this week’s head-to-head focuses on Asian fixed income.
Fidelity Asian High Yield and Legg Mason Western Asset Asian Opportunities are two well-known funds that provide exposure to Asian fixed income.
While both funds mainly invest into debt securities in Asia, they focus on different aspects of the asset class, resulting in a deviation in their performance, said Luke Ng, vice president at FE.
Read further for Ng’s insights on these funds.
Investment process, strategy review
The Fidelity fund predominately invests into hard currency high yield corporate bonds with nearly half of the assets deployed in BB grade bonds. The average credit rating of the portfolio is BB-. The fund has a bias toward China and Hong Kong, which accounts for about 40% of the portfolio.
The Legg Mason fund mainly invests into local currency bonds, with over 60% of the portfolio allocated into sovereign securities.
Unlike Fidelity, the majority of the holdings are low quality investment grade bonds, with the portfolio having an average credit rating of BBB+. Top currency exposures are in South Korean won (22.86% weighting) followed by the Chinese RMB (16.82%) and the Singapore dollar (15.58%).
Performance Review
Fidelity fund benchmarks its performance against the BofA Merrill Lynch Asian Dollar High Yield Corporate Constrained Blended Index while Legg Mason fund tracks the HSBC Asian Local Bond Overall Index.
“Due to the differences among the two funds, these funds performed in different ways,” Ng said.
The Fidelity fund gained 43.41% for the five-year period to 30 September 2014. The Legg Mason fund returned 25.95% during the same period.
“Fidelity also outperformed over the past three-year and one-year horizon. However, by investing into lower grade bonds, volatility of the Fidelity fund was higher.”
“Worth to note, given the riskier features of Fidelity, the fund offered similar returns as equities in the region over the past five years.”
Taking the MSCI AC Asia ex-Japan Index as an example, the index rose 41.05%, 37.44% and 8.52% in the past five, three and one-year periods, respectively. The Fidelity fund’s returns were similar at 43.41%, 40.33% and 8.37%, respectively.
Conditions when the fund underperforms/outperforms
Since the Fidelity fund focuses on high yield corporate bonds with lower effective duration, performance tends to be tied more to Asian economic growth in general, noted Ng.
“As growth in the region remains on track, high yield corporate issuers should benefit due to a better business environment and therefore less likely chances of default. The fund is denominated in US dollars. So, it should continue to benefit if the dollar stays strong.”
The Legg Mason fund should be more sensitive to the interest rate movements of central banks due to higher sovereign exposure and effective duration.
“With a higher average credit rating, the fund should fare better during a market downturn. Meanwhile, investors are exposed to higher currency risks as holdings are denominated in local currencies in the region.”
The modified duration of the Fidelity fund’s portfolio is 3.2 years while that of the Legg Mason fund is 5.8 years.
Due to a stronger focus on higher-grade bonds than Fidelity, the Legg Mason product’s distribution yield is lower at 3.1% compared with 6.3% of the Fidelity fund.
Portfolio Managers
The Legg Mason fund did not reveal a lead manager, but the firm said the Western Asset Management team manages the fund.
The manager of the Fidelity fund is Bryan Collins, who has been with Fidelity’s Hong Kong office since 2006. He also manages the Fidelity Funds Asian Bond fund and Fidelity Funds China RMB Bond fund.
According to FE analysis, “Over a fairly lengthy track record, the manager has, period by period, consistently managed to outperform the peer group.”
Fees
The Fidelity fund charges an initial fee of 5.25% and an annual management charge of 1%. The initial charge on the Legg Mason fund is 5% while the annual management fee is 1.1%.
The total expense ratio for the Fidelity fund was 1.41% at the end of April while the Legg Mason fund was 1.40% at the end of June.
According to Ng, the fee levels are about average for the sector.
Conclusion
While both funds invest in Asian debt securities, they offer different risk/reward prospects for investors, Ng said.
“The Fidelity [fund] suits investors who prefer a higher income stream with a higher risk tolerance level, while Legg Mason offers better protection for investors. Given the backdrop of steady Asian economic growth, low default rate and anticipation of the US Fed rate hike next year, Fidelity is likely to outperform in medium term,“ Ng said.
