Volatility in the Asian bond market has dropped significantly in the past five years, due to central bank actions to maintain an ultra-low interest rate environment.
However, with negative interest rates and uncertainties in oil prices and China’s economic direction, voaltility is expected to return, Veneau said in an interview with Fund Selector Asia.
In bonds, duration is a source of volatility. As lead manager of the firm’s Axa WF Asian Short Duration Bonds, he holds paper with an average duration of under 2.5 years.
About a quarter of bonds in the portfolio have maturity under 15 months, he added, while the maximum duration of a bond is usually under 8 years.
The strategy aims to return 90% of the yield to maturity of its longer duration investment universe while generating less than half of the volatility, by investing mainly in high yield and investment grade credit.
“In general, even if you are above average duration in your tactical allocation, the incremental volatility is so great that it is very difficult to outperform a short duration strategy on a risk-adjusted basis.”
Credit risk is also easier to manage with short duration bonds, he noted. “You have much better visibility into their cash flow prospects.”
Veneau believes the strategy performed well in 2015, although relatively less so in the first quarter of this year when global markets tanked.
Instead of looking into sectors, the team now focuses more on individual companies and bonds. In partcular, he singled out Indonesian corporates as good value issuance.
The bond market in general is expected to be more challenging in the months ahead, Veneau said.
“The challenge in this market is that most people think the rates are going up, not down. Even though long duration bonds performed well, how many managers have the correct exposure?”
