“As China recovers from the Covid-19 outbreak and economic activity resumes, now is a good a time to highlight the attractions of the fund’s mandate,” Shaw Yann Ho, head of Asia fixed income at JP Morgan Asset Management (JPMAM), told FSA.
The China Bond Opportunities Fund was incepted in January and as an SFC-registered fund is now being promoted to retail investors in Hong Kong, as well as to institutional investors in the territory and in Singapore.
The Luxembourg-registered Ucits is distributed through leading banks in a bid to raise its AUM from about $20m to an optimal size of $100m, according to Ho, who co-manages the fund.
“Historically a small part of China’s bond market, foreign participation is now growing on the back of Bond Connect and index inclusion,” she said.
Other fund managers are also positive about China fixed income, including Blackrock.
China state-owned-enterprise (SOE) bond issuers are supported by government policies and a recovering domestic economy, and offer attractive yields, while the better quality, non-investment grade property companies will benefit from a recovery in sales and recourse to diversified funding channels, the firm’s head of Asia credit, Neeraj Seth, told a media briefing recently.
The primary objective for the JP Morgan fund is to generate income “in a low interest rate environment across developed markets,” said Ho.
The product aims to pay out monthly, and has an annualised distribution yield of 6%.
The fund can invest in all three of the subsectors of China’s $14trn bond market: onshore RMB-denominated bonds (CNY), offshore RMB-denominated bonds (CNH or “dim sum”) and offshore US dollar-denominated bonds.
However, its current allocation to the CNY market is small at just 1.6%. Its renminbi exposure is overwhelmingly to CNH bonds, comprising 50.6%, while 47.8% of the portfolio’s holdings are US dollar-denominated securities.
“At present, the CNH market offers a wide range of corporate issues paying superior yields to those available in the CNY market,” said Ho.
“Also, the market is more liquid because there is greater analyst coverage of individual credits than in the domestic market,” she added.
The average credit rating of the total portfolio is BBB, which includes a significant weighting to Chinese government and policy banks (17%), according to Ho, but about 46% is allocated to high yield corporate bonds, which is a sector dominated by real estate issuers.
“State-owned banks have ‘de facto’ government support and provide diversification benefits for the fund,” said Ho.
“Meanwhile, private real estate companies have access to capital, helped by recent stimulus measures by the government and the central banks,” she added.
Currency exposure is “actively managed”, according to the fund’s co-manager Jason Pang, and at present
“The main risk to the strategy is an escalation of Sino-US trade tensions, which might lead to renmimbi weakness, and the fund is underweight renminbi,” he said.
“However, official liquidity injection measures should allow Chinese companies continued access to private funding,” said Ho.
Source: Fund factsheet, 30 April 2020
