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“The strategies of the two funds have much in common, which is unsurprising because the Asian credit asset class requires a significant degree of top-down analysis,” said Poole.
“They both aim to generate alpha relative to their benchmarks,” he said.
Blackrock’s Asia credit strategy combines top-down and bottom-up analysis. Lead manager Neeraj Seth first sets a top-down view and then decides the risk level across several alpha sources, including duration, spread, and yield-curve positioning, and also the allocation between investment-grade and high yield.
“A strong macro perspective is an essential component of the approach at the outset of the investment process,” said Poole.
The strategy is benchmarked against the JPMorgan Asia Credit Index, but has the flexibility to make off-benchmark investments, including a small exposure to local currency debt (10%).
Co-managers Artur Piasecki and Ronie Ganguly choose individual credits based on the issuer’s balance sheet, capital structure, management quality, competitive position within the industry, and relative valuations.
The team added to investment-grade issuances over the past year, particularly within the primary market, which included off-benchmark Qatar and Abu Dhabi sovereigns, according to a recent Morningstar report.
Nevertheless, the fund remained underweight investment-grade issues relative to the JPMorgan Asia Credit Index. Conversely, it overweighted Chinese high-yield property and Indian renewables names because of their strong balance sheets and government support. China, at about 50%, is the biggest country exposure.
Meanwhile, the Fidelity Asian Bond Fund is benchmarked against the ICE BofA Asian Dollar Investment Grade Index.
It aims to outperform the index by 100 basis points (bps) gross-of-fees on a three-year rolling basis, with a targeted tracking error range of 100-150bps a year.
“The managers have a very clear macro approach, which determines their choice of sectors and credit ratings,” said Poole.
Leader manager Eric Wong and his team use a five-stage investment framework called MASTR (market, allocation, selection, transaction, and risk), which is adopted across several Fidelity Asian fixed-income products.
First, the team assesses the macro environment, sentiment, and technical issues, before making risk-allocation decisions in terms of duration and spread. For each country, the credit analysts conduct fundamental research while also considering relative value and technical support.
The fund’s mandate allows the managers to make up 30% off-benchmark bets, including unhedged local currency exposures and 10% in high yield.
“Active selections have added alpha, but have sometimes contributed to volatility,” said Poole.
Main country allocation is to China (30%), and its top holding is a Huarong Finance bond issued by China Huarong Asset Management, a state-owned firm which fell out of favour a couple of years ago.
The fund’s other major country exposure is to Indonesia.
“The key difference between the approaches of the two funds is that the Fidelity product is less restricted in its ability to move off-benchmark,” said Poole.
|Average Credit Rating||BBB||BBB|
Source: Factsheets, 30 September 2020
Top 10 holdings:
|China Development Bank||1.29%||Perusahaan Listrik Negar||3.87%|
|Tencent||0.96%||Thaioil Treasury Center||3.66%|
|Saudi Arabian Oil||0.78%||Hyundai Capital America||3.22%|
|Sinopec||0.78%||CNAC HK Finbridge||2.80%|
|LLPL Capital 6.875% 2039||0.76%||CMB International Leasing||2.65%|
|Perusahaan Penerbit SBSN||0.71%||Indonesia Asahan Alumini||2.61%|
|Horse Gallop Finance||0.69%||Longfor Properties||2.33%|
|Hyundai Capital America||0.67%||BOC Aviation||2.22%|
|Wynn Macau||0.62%||Semiconductor Manufacturing||2.00%|