HEAD-TO-HEAD: Pimco versus UBS

Fixed income has endured a difficult few years to say the least, although one curiosity has been the relatively strong performance of high yield. The Bloomberg Global High Yield Corporate index has recorded a return of 4.05% year-to-date compared with -1.03% for the Bloomberg Global Aggregate Corporate index during the same period. Even last year, when the negative correlation between bonds and equities famously broke down, the Bloomberg high yield index still outperformed, returning -12.65% compared with -15.28% for the broader index. This outperformance is despite everything from the yield curve to money supply are flashing red, which ordinarily would be worse for high yield than investment grade credit because of the greater risk of defaults ensuing. Explanations for this outperformance have included the fact that the number of issuers has shrunk and at the same time as the primary market has effectively ground to a halt. Regardless, insofar as they are still interested in allocating to fixed income, most asset allocators now favour investment grade, arguing that the spreads on offer for high yield do not currently compensate them for the risk. In Asia, the situation is more nuanced largely due to the spectre of China’s real estate sector. Indeed, high yield has actually fared worse than investment grade this year, with the JP Morgan Asia Credit Investment Grade index returning 0.87% compared with -2.03% for the JP Morgan Asia Credit Non-Investment Grade index. Insofar as there is any appetite for fixed income, asset allocators in Asia favour investment grade at the moment and even high yield fund managers are going off benchmark to the extent that their mandates allow them to do so. Against this background, FSA asked Arvind Subramanian, Morningstar’s senior analyst for manager research, to compare two high yield funds. He chose the Pimco GIS Asia High Yield Bond fund and the UBS Asian High Yield Bond fund.

	Pimco	UBS
Size	$2.56bn	$762.1m
Inception	2019	2012
Managers	Stephen Chang, Abhijeet Neogy, Mohit Mittal	Smit Rastogi, Lewis Teo, Raymond Gui
Three-year cumulative return	-8.42%	-15.88%
Three-year annualised return	-8.61%	-16.26%
Three-year annualised alpha	2.40	-2.49
Three-year annualised volatility	11.98	16.18
Three-year information ratio	-0.28	-0.98
FE Crown fund rating	*	*
OCF (retail share class)	1.55%	1.45%

Investment approach

The Pimco fund aims to achieve a return of 75bp-125bp over the JP Morgan Asia Credit Non-Investment Grade index. The fund’s investment approach comprises a mixture of top-down analysis with bottom-up credit picking. Similarly, the UBS fund aims to generate a return of one or two percentage points per year higher than the JP Morgan Asia Credit Non-Investment Grade index over a three-year period and also employs a mixture of top-down and bottom-up analysis. Subramanian noted that the Pimco fund is defensively positioned and the managers have increased their stake in off-benchmark developed market credits and cash from 21% of the fund’s overall allocations in July last year to 25% this year. The Pimco fund is also now materially underweight real estate, with the sector now accounting for around 13% of its assets compared with 16% in July last year, reflecting the difficulties in China’s property sector. In contrast, Subramanian noted that the UBS fund had been caught out by its exposure to China real estate and the managers have responded by reducing their portfolio concentration and also trimming their overweight in the sector to neutral at the start of the year. As a result, overall real estate sector weightings have fallen from 25% of assets in July last year to 15% in July this year, while holdings of financials and sovereigns/quasi-sovereigns have increased as a result. Much like other high-yield strategies, both funds have also been increasing their holdings in Macau gaming and off-benchmark Korean bonds. Fund characteristics Country allocation:

Pimco		UBS
China	17.9%	China	20.3%
India	15.9%	India	15.7%
USA	13.7%	Hong Kong	14.2%
Macau	12.9%	Macau	8.7%
Indonesia	7.3%	The Philippines	4.8%
Hong Kong	5.7%	Korea	4.7%
Korea	4.6%	Thailand	4.1%
UK	4.5%	Sri Lanka	3.9%
The Philippines	4.4%	Pakistan	3.6%
Sri Lanka	3.5%	Indonesia	3.5%
		Others	16.5%

Sector allocation:

Pimco		UBS
Gaming	12.9%	Financials	26%
Real Estate	9.9%	Consumer Services	13.8%
Banks	9%	Real Estate	12.9%
Electric Utility	7.8%	Sovereigns	11.1%
Financial Other	6.1%	Utilities	10.6%
Metals & Mining	5.1%	Quasi-sovereigns	4.6%
Diversified Manufacturing	2.7%	TMT	4.1%
Technology	2.7%	Metals & Mining	3.6%
Transportation Services	2.6%	Diversified	3.3%
Metals & Mining: Coal	2.4%	Others	10%

Top five holdings:

Pimco		UBS
Periama Holdings	2.2%	Industrial & Commercial Bank of China	3.96%
Sands China	2.1%	Greenko Dutch	2.69%
Standard Chartered	2%	Islamic Republic of Pakistan	2.06%
NWD Finance	1.5%	NWD Finance	1.84%
Melco Resorts Finance	1.5%	Huarong Finance	1.69%

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Performance

Subramanian noted that the Pimco fund has performed broadly in line with its index, although this has been enough to outperform most of its peers given the fund’s relatively cautious positioning versus China’s beleaguered property sector. In contrast, the UBS fund has not fared so well. “The UBS Asian High Yield’s performance track record has been severely dented by its dismal performance in 2021 and 2022, attributable to its overweight exposure to the hard-hit Chinese property sector and poor credit selection,” said Subramanian. “Under the leadership of newly appointed lead manager Gui, the strategy’s performance over the past one year has improved, landing near the top quartile of its Asian High Yield Bond Morningstar category.” However, Subramanian noted that this upturn in performance has been largely down to higher risk positions, which benefited from the credit rally during the final quarter of last year and as concerns about China’s property sector have re-emerged this year, the strategy’s performance has suffered.

“Overall, given the Pimco Asia High Yield’s defensive positioning currently, the fund should outperform during periods of risk-off when there is a flight to safety and credit spreads widen,” said Subramanian. “On the other hand, for the UBS Asian High Yield, despite a more neutral positioning to the Chinese property sector, the fund’s higher credit beta within the sector (holding a higher proportion of lower-priced, more-distressed bonds) is likely to support performance during credit market rallies but could drag during risk-off periods.” In terms of volatility, unsurprisingly, the UBS fund has had a far tougher time than the Pimco fund, although Subramanian applauded the efforts the UBS team have made to de-risk the portfolio. Fees are fairly comparable between the two funds with the UBS fund charging 1.45% compared with 1.55% for the Pimco fund. Discrete calendar year performance

Fund	YTD*	2022	2021	2020	2019
Pimco	-5.84%	-14.01%	-10.31%	5.2%	n/a
UBS	-7.25%	-25.49%	-18.26%	4.24%	14.09%

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Manager review

In terms of their resources, Subramanian prefers the Pimco fund. Subramanian notes that the Pimco fund is led by a stable and experienced team helmed by Stephen Chang, who has run the fund since its inception and has 27 years of investment experience. He previously ran JP Morgan’s flagship Asian bond total-return strategy. In his current role, he is supported by co-managers Abhijeet Neogy and Mohit Mittal, both of whom Subramanian singles out for their experience. In contrast, the UBS fund has experienced some flux lately following the departure of Ross Dilkes, the fund’s former lead manager, who left the Swiss firm in January last year. Since August last year, the fund has been managed by lead portfolio manager Raymond Gui, alongside Smit Rastogi, who was named co-manager in January last year. Further changes occurred in April this year when UBS’ former CIO for emerging markets and Asian fixed income, Hayden Briscoe, joined the multi-asset group and was replaced by Shamaila Khan. “While the strategy’s new stewards are well qualified for the task at hand, these new joiners are still settling in and it will take time to observe how they work together,” said Subramanian. Subramanian also prefers Pimco’s credit research team, which comprises 10 members with an average 15 years investment experienced compared with UBS’ seven-strong bench, which averages 14 years of investment experience.

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Conclusion

Subramanian does not equivocate when asked which fund Morningstar prefers. “We prefer the Pimco Asia High Yield Bond which distinguishes itself with an experienced portfolio manager lineup, deep supporting cast and a robust investment framework backed by sound risk management,” said Subramanian. “On the other hand, we are still gaining conviction in the UBS Asian High Yield given the recent personnel changes and relatively short track record under the new leadership.” “Time is still needed to observe how this strategy’s new management team settles in and whether recent tweaks to risk guardrails result in lasting improvements.”

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