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HSBC readies bond funds for onshore investors

The HSBC Asia High Income Bond Fund is one of three similar products which the firm plans to distribute via the MRF scheme.
Alfred Mui, HSBC Global Asset Management

The fund is the first of the three products to be launched in the mainland, and it will initially be sold through HSBC Bank (China), and subsequently by other onshore distributors. HSBC Jintrust Fund Management, the firm’s Shanghai-based joint venture with Shanxin Guoxin Investment Group, will act as the master agent for the fund, according to a statement by HSBC Gam.

“We are looking to launch the other Asian fixed income funds in mainland China under the MRF scheme in May,” a spokeswoman told FSA.

HSBC Gam applied to the China Securities Regulatory Commission (CSRC) to sell the Asia High Income Bond Fund via the Hong Kong-China Mutual Recognition of Funds (MRF) in March 2019, and submitted applications to distribute two other fixed income products, its High Yield Bond Fund and Asian Bond Fund the following June.

The CSRC gave its approval for the sale of all three funds last February.

The MRF between mainland China and Hong Kong is a scheme jointly created by the CSRC and Hong Kong Securities and Futures Commission in July 2015. Under the scheme, eligible mainland and Hong Kong funds can be distributed in each other’s markets.

HSBC Gam’s first and only other MRF northbound product is its Asia Pacific ex Japan Equity Volatility Fund which was marketed to mainland retail investors as a way to gain access to a diversified portfolio of stocks with low correlations to each other in order to reduce volatility.

But, since its launch on 12 February, the fund is down -18.53% with annualised volatility of 19.53%, compared to an average fall for the Asia-Pacific ex Japan sector of -7.94%, with slightly higher volatility of 20.80%, according to FE Fundinfo data.

Steady performance

The Asia High Income Bond Fund was first available in Hong Kong in February 2017, and its AUM reached about $1.3bn at the end of February 2020. However, like most funds across all asset classes, it took a severe hit last month, and its AUM on 14 April had plunged to $1.03bn, according to FE Fundinfo.

Managed by Ming Leap and Alfred Mui in Hong Kong, the fund has generated a 5.19% three-year cumulative return, outperforming the average return of its US dollar high yield bond category (2.38%), according to FE Fundinfo. It has also done better than the average Asia-Pacific fund (4.89%), but has performed less well than the widely followed JP Morgan Asia Credit Index (10.72%).

However, its three-year annualised volatility of 5.74% is much lower than the average US dollar high income product (8.76%), which indicates some defensive qualities — although its sub-investment grade bond exposure likely explains its higher volatility than the JP Morgan Asia Credit Index (4.17%).

“Recently investment markets have been characterised by elevated volatility and uncertainty, resulting in significant credit spread widening in the high yield space. However, the fundamentals of Asia credit remain relatively solid. Significant policy easing from central banks coupled with the global search-for-yield should continue to be supportive of Asia credit in 2020,” said Mui, who is also the firm’s head of Asian credit.

“For investors who wish to seek income against the backdrop of unforeseen market volatility, [the fund] is well positioned to generate a potential income stream to meet their needs,” he added.

The latest annualised dividend yield of the USD share class is 4.86%, according to the statement.

China bet

A minimum of 70% of the fund’s net asset value is invested in a diversified portfolio of Asia fixed income securities, with up to a maximum of 45% in sub-investment grade issues (that is, rated below BBB-/Baa3). The portfolio has exposure to developing Asian countries such as China, India and Indonesia as well as developed markets, such as Singapore and Korea.

The fund’s most recent factsheet, published on 29 February, shows a 41.35% allocation to China compared with a 22.50% weighting in its benchmark, made up of 65% JP Morgan Asia Credit Diversified Investment Grade Index and 35% JP Morgan Asia Credit Diversified Non-Investment Grade Index.

It also has a small overweight to Indonesia, and its biggest country underweights are South Korea, Hong Kong and the Philippines — although a sovereign bond issued by the latter is the fund’s single largest holding.

In terms of sectors, the fund is overweight property by 8.84% and basic materials by 2.78%, and it is underweight government issues by 9.73%.

There have been some portfolio shifts to contain risk during the recent market turbulence.

“[The managers] have implemented some risk mitigation tactical positions in the fund during the unfolding market volatility, including reducing credit exposure through credit default swaps and taking outright short positions in Asian currencies — and these trades have now been closed at a profit,” said the spokeswoman.

“Meanwhile, they continue to be highly selective in all sectors, with particular attention to India, Indonesian and Chinese property names,” she added.

Several asset managers, including HSBC Gam, as well as Invesco, JP Morgan Asset Management, Pinebridge, T Rowe Price and UBS Asset Management, have remained positive about Asia fixed income, even as markets experienced sharp declines in March.

HSBC Gam intends to launch a “range of Asian fixed income funds in China, not just high yield”, according to the spokeswoman.

Northbound funds sold under the Hong Kong-China Mutual Recognition of Funds (MRF) scheme saw inflows of RMB 1.03bn ($145.3m) in February, after experiencing outflows of RMB 407.1m in the previous month.

Last year, net sales for northbound funds sold under the MRF scheme reached RMB 7.16bn and since the programme began, 27 products from 15 firms have been approved by China’s regulator.

HSBC Asia High Income Bond Fund vs US dollar high yield sector average

Source: FE Fundinfo. Three-year cumulative returns in US dollars.
*Data for specified benchmark unavailable (65% JPM Asia Credit Diversified Investment Grade Index and 35% JPM Asia Credit Diversified Non-Investment Grade Index).

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