HEAD-TO-HEAD: Blackrock vs Legg Mason

Asian fixed income remains an attractive asset class, according to Luke Ng, senior VP of research at FE Advisory Asia. Asian bonds tend to have higher yields than developed market debt and the region’s continuing growth versus developed markets offers better long-term prospects for income and capital appreciation.

Fixed income funds and income-generating mixed-asset funds remained the most popular asset class among Hong Kong-based investors, as indicated by net fund flows of locally-domiciled funds.

However, the credit market in China is a concern due to the surge in off-balance sheet lending that some analysts say is a huge credit bubble, although so far the government appears to be managing defaults. Many investors justifiably worry about the quality of Chinese corporate bonds, but investors don’t need to stay away from the asset class, Ng argued. “We need to rely on professional investment managers to select credit in order to avoid unnecessary risk,” he said.

Active fund management has the potential to shine in the case of Asian or emerging markets fixed income funds. In these regions, financial reporting transparency is a concern, institutions tend to be weaker than in developed markets and credit research typically involving visits to management is crucial.

The differentiation of central bank policy between developed markets, in particular the US, which is on the verge of tightening, and Asia, where there is still room for more easing, makes currency considerations paramount. While in the long term the US dollar is likely to grow stronger, based on the expectation of an increase in interest rates, the short term will likely be more volatile, as the markets react to policy changes.

FSA looks at two Asian fixed-income funds registered for sale in Hong Kong and Singapore: the Blackrock Global Funds Asian Tiger Bond Fund, and the Legg Mason Western Asset Asian Opportunities Fund.

Data: FE, Morningstar