Australia
China
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
Amidst global macroeconomic challenges and significant market uncertainty, Asia’s investment grade (IG) bonds in 2023 find themselves in a favourable situation, navigating subdued growth, persistent inflation, and elevated interest rates.
This positive situation can be attributed to the renewed interest in fixed-income investments globally after a surge in yields in 2022. This phenomenon has led to a heightened demand for high-quality credit. EPFR, a fund flow tracking entity, reported a substantial influx of $19 bn into global investment grade corporate bond funds beginning of 2023.
Meanwhile, Asian IG bonds have been garnering attention from investors because of their reduced duration profile. Experts are of the opinion that this distinctive attribute not only results in lower spread volatility compared to global counterparts but also provides investors with the advantage of higher yields over a shorter duration.
Furthermore, Omar Slim, Co-Head of Asia ex-Japan Fixed Income at PineBridge Investments, pointed out that this asset class presents a comparatively higher yield in comparison to global peers with similar ratings.
“Asia IG still looks cheap relative to other regions – especially after adjusting for rating differential and durations. With the US Treasury yield curve inversion expected to persist in the near future, investors are likely to maintain their preference for short-duration high-quality bonds,” said Chris Lau, Portfolio Manager at Invesco.
Asian investment grade bonds resilient to market downturns
Asian investment grade bonds have consistently displayed a notable degree of resilience when compared to their counterparts in the United States and the rest of the world, especially in times of market volatility.
Recently, when confronted with a substantial downturn in the US dollar rates market in 2022, the Asia investment grade bond sector encountered a maximum drawdown of 14.77% between August 2021 and October 2022. In contrast, the US IG market experienced a decline of 19.80% between July 2021 and October 2022, and the global bonds market underwent a decline of 23.88% between December 2020 and October 2022.
Additionally, this asset class also stands to benefit from an acceleration in economic growth across Asia, as projected by prominent institutions like the IMF, ADB, and OECD. In the year 2023, the IMF foresees Asia contributing nearly 70% of the global GDP.
“The environment in Asia as an economic bloc is much more benign than in the rest of the world. For instance, some major economies, like China and Thailand, are expected to witness accelerating economic growth this year, unlike in most of the rest of the world. These characteristics can help buffer portfolios against volatility due to the carry,” informed PineBridge’s Slim.
Besides, countries in Asia that issue investment grade bonds, including Singapore, Australia, Hong Kong, and South Korea, align closely with global standards in terms of ESG metrics. This congruence enables investors to bolster their ESG profile across the region.
Selected Asia IG Bonds
There are quite some mutual funds available in the market and few Asia IG Bond ETFs. In the following, we picked two mutual funds for comparison.
PineBridge Asia Pacific Investment Grade Bond Fund A USD
Established in 2015, this fund invests in debt securities spanning short, medium, and long-term durations. The fund maintains a minimum of 70% of its Net Asset Value (NAV) in debt securities, primarily in USD, that are issued or backed by entities located within the Asia Pacific Region.
The fund has total assets under management of $368.2 mn.* The PineBridge Asia Pacific Investment Grade Bond Fund is benchmarked against the JP Morgan Asia Credit Index (JACI) Investment Grade Total Return. The fund has an annual management fee of 0.75% and an ongoing charge of 1.35%. It has risen by 3.4% year-to-date*, as compared to 3.5% of the benchmark.
The fund’s top five major holdings* consist of US Treasury 3.625% N/b 15-Feb-2053 (1.9%), South Korean battery manufacturer SK ON CO LTD 5.375% 11-May-2026 (1.8%), DBS Group 3.3% (1.7%), South Korean life insurance company Hanwha Life 3.379% 04-Feb-2032 (1.6%), and Singapore multinational bank Oversea-Chinese Banking Corporation 4.602% 15-Jun-2032 (1.6%).
When it comes to sectors*, the fund holds substantial investments in finance (47.4%), quasi-sovereign entities (21.2%), sovereign holdings (13%), industrial enterprises (4.7%), and real estate ventures (3.6%). Regarding the geographic allocation, its primary holdings are concentrated in China (19.7%), Japan (16%), Indonesia (10.3%), Australia (9.3%), and Singapore (8.3%).*
Omar Slim and Andy Suen, both with almost twenty years of experience in their respective careers, head the management team of this PineBridge fund.
Invesco Asian Investment Grade Bond Fund A-Acc
The Invesco Asian Investment Grade Bond Fund A-Acc, launched in 2012, has the objective of producing income alongside sustained long-term capital growth. To fulfil this goal, the fund predominantly invests in Asian debt securities that carry an investment grade rating.
With total assets worth $13.05 mn, the fund imposes a management fee of 0.9% and ongoing charges of 1.22%. The fund’s management team comprises Chris Lau, Gigi Guo and Freddy Wong. Lau has been managing the fund since 2015, while Guo and Wong have been at the helm since 2021.
As a reference benchmark, the fund uses 85% of the JP Morgan JACI Investment Grade Index and 15% of the Bloomberg China Treasury and Policy Bank Total Return Index. The fund has seen a year-to-date growth of 2.95%*. Since its inception, the Invesco Asian Investment Grade Bond Fund has encountered a decrease in returns by 7.97%.
The top 5 holdings of the fund include the Agricultural Development Bank of China 4.650% 11-May-2028 (4.7%), China Development Bank 4.040% 06-July-2028 (3.4%), Export-Import Bank of China 3.230% 23-March-2030 (3.3%), Agricultural Development Bank Of China 3.750% 25-Jan-2029 (2.3%) and an Indonesian special purpose vehicle company Perusahaan Penerbit SBSN Indonesia III 4.400% 01-March- 2028 (2.3%).*
About the distribution of sectors*, a substantial part of the fund’s assets is dedicated to corporate entities (39.7%) and financial institutions (21.2%), together constituting more than half of the overall allocation. Furthermore, the top quartet of sector allocations includes industrials (21.2%) and utilities (1.3%). Also, like the PineBridge fund, Invesco’s major focus lies in China (41.4%). This is followed by Indonesia (9%), Hong Kong (8.6%), Philippines (4.5%) and South Korea (4.5%)*.
*as of July 31, 2023.
