HEAD-TO-HEAD: Fidelity versus UBS

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Investment approach

The managers of the Fidelity fund execute a liquidity-conscious and bottom-up-driven credit approach, with duration and currency management playing a subordinate role, according to Ge.

They look for bonds offering higher than average income streams but that they think are fundamentally sound. “The managers are not afraid to venture into lower-rated areas of their market, and the fund’s exposure to more highly leveraged B and CCC rated debt is typically higher than its category peers’,” said Ge.

“However, one of the fund’s strengths is the team’s commitment to liquidity management by positioning the portfolio at the shorter end of the maturity curve and avoiding private debt that does not trade in the secondary market,” he added.

The strategy is benchmarked against a custom index – the BofA/Merrill Lynch Blended Index: ACCY, 20% Lvl4 Cap 3% Constrained, which limits sector exposure at 20% and 3% for issuers. The fund has been soft-closed since 2018, but allows exiting investors a quota.

Sector allocation is dominated by property players, which made up 37% of the portfolio as of August. Portfolio managers Tae Ho Ryu and Terrence Pang have conviction in the sector, arguing that it offers attractive liquidity thanks to Chinese developers’ ability to access both onshore and offshore funding.

“However, the managers remain selective in this space, opting for high-quality and sizable issuers,” said Ge.

Elsewhere, the portfolio has generally shown an overweight in single B rated issuers and an underweight in BB rated issuers relative to its peers, partly driven by the mandate’s income focus.

“This has led to higher-than average return volatility compared with peers,” said Ge.

Finally, Fidelity has put ESG investing at the forefront of its agenda and has made positive strides, but it would need to go further for a higher assessment from Morningstar, he noted.

Turning to the UBS fund, “portfolio manager Ross Dilkes executes a proven risk-conscious investment approach predicated on bottom-up analysis which has remained robust since inception,” said Ge.

The strategy, which Morningstar started covering this year, aims to beat the JPMorgan Asia Credit Non-Investment Grade Index by 1%-2% per year gross-of-fees over a rolling three-year period – a target it has generally met, according to Ge. Tracking error is managed within 2%-4% of its benchmark while other constraints include a 25% cap to investment-grade credits and a 20% cap on non-US-dollar currency exposure.

“Credit selection is expected to be the key alpha driver (70%), followed by duration (20%) and foreign exchange (10%), the latter two of which are used to help manage portfolio and downside risk,” said Ge. Specifically, the managers at times balance credit risk (duration times spread) with long duration and short Asian currency positions, which has been successful so far.

Macro views are set by at the quarterly fixed income investment forum while sub[1]committees meet twice a week to discuss sector specific opportunities.

From the bottom up, credit analysts combine issuer fundamentals, relative value analysis, and ESG risk assessments to arrive at credit recommendations, according to Ge. “This approach has translated to positive credit selection over time,” he said.

The UBS fund’s investment approach is similar to Fidelity’s, but is more risk conscious, according to Ge.

Fund characteristics

Country allocation:

Source: Fund factsheets, 31 Aug 2021

Sector allocation:

Source: Fund factsheets, 31 Aug 2021

Top 10 holdings:

Source: Fund factsheets, 31 Aug 2021

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