| The Bond Specialist |
Bond markets in Asia have performed remarkably well in the midst of the fallout in equities market. “They’ve all rallied very strongly,” says Rajeev De Mello, portfolio manager and head of Western Asset Management in Asia.
In turn, interest in the bond market has been significant, “The magnitude of the rallies in the bonds market in Asia is unprecedented,” he adds.
Western Asset Management was founded in Los Angeles back in 1971 and became affiliated with Legg Mason in 1986. It set up office in London in 1996 before establishing its Singapore base four years later with Western Asset Management Company (Asia) Pte Limited. It acquired the Citigroup Asset Management in 2005.
As of mid 2008, the company had US$624.1 billion under its management and maintained 715 client relationships. Western Asset has presence in eight locations worldwide: London, New York, Pasadena, Tokyo, Hong Kong, Singapore, Melbourne and Sao Paolo. Its main business is in the active management of funds and specialises on fixed income.
In his October 2008 commentary, Mr De Mello expressed optimism about the health of Asian currencies. “Financial systems in Asia are healthy, foreign reserves are high and government finances have been well managed. Therefore we remain positive on Asian currencies in the medium term,” the report said, highlighting that even if growth slows down, Asia would still be well propped up compared to the US, Europe and Japan.
The volatility in equity markets continue to make bonds a good proposition for investors. “In a way, it’s what one would hope and expect when this type of environment happens. That is when there’s really a flight to quality as well expectations that central banks would cut interest rates to deal with the fall in equities,” Mr De Mello further says. ASIAN BONDS IN FAVORMr De Mello favors the South Korea and Indonesian domestic bond markets as the central banks in those countries continue to exercise sound monetary policies in the light of the current credit crisis. “The Indonesian central bank increased policy rates by 25 bps to 9.50 per cent to address higher inflation. Indonesian bonds offered value at yields of around 13 per cent,” said Mr De Mello in his October 2008 commentary.
Standard & Poor’s October 2008 report also maintained its “A” and “A+” ratings for Korea’s foreign and local currency and affirmed its stable outlook for the country for the long term.
“The sovereign credit ratings on Korea are supported by its dynamic economy, sound fiscal position, and sound external position,” said Standard and Poor’s credit analyst Kim Eng Tan of the Sovereign Ratings group.
Western Asset has been managing bond funds since 1996. In July this year, it launched the Asian Opportunities Fund to target retail investors who want to participate in the growing bond market in the region.
“We decided to launch a bond fund available to retail investors because we are seeing a growing interest from retail investors in this asset class,” Mr De Mello says.
Typically, Asian investors would have a preference for equities and the more sophisticated ones would go for US bond funds to balance their portfolios. But seeing the vulnerability of the US dollar in the recent market sell off s, a lot of these investors have decided to give the local credit market a second look.
“Governments have encouraged investments by making their capital markets more liquid. They have also taken a lot of initiatives to stimulate the bond market,” Mr De Mello explains. Western Asset’s Asian Opportunities Fund invests about 70 per cent in debt securities from Asian issuers.
As of August 2008 Western Asset’s Asian Opportunities Fund was overweight in its exposure to the Korean won (16.95 per cent). It also had good exposure in the Singapore dollar (15.68 per cent) and the Chinese yuan (15.25 per cent).
“We look for fundamental value in longer term strategies. When we see an asset class, a bond or country with value we will position and buy that bond,” says Mr De Mello.
The fund managers also diversify their strategy and use a number of different ideas in the portfolio. They use a methodology of choosing the country, currency, sector and which types of bonds to include in the weighting. They also analyse the outlook and the suitable risk level for the portfolio. At times, the managers would buy the bond but not the currency or simply just hedge it. This is to make sure that if something goes wrong, the whole portfolio will not collapse.
With regard to sector allocation, the fund is invested in derivatives (48.64 per cent), sovereign debts (38.42 per cent) and corporate bonds (11.05 per cent).
“[The fund] offers the option to buy a diversified basket of Asian bonds. It’s very difficult for investors to buy a whole range of bonds because a lot of countries have barriers to entry. We offer a range of bonds and currencies,” Mr De Mello says.
Banking on its track record as a specialist in the bond markets, the fund also offers a well-thought through asset management competency, he further notes.
Investment in the Asian Opportunities Fund starts at $1,600 with an initial charge of up to five per cent. Management fee is up to 1.10 per cent per annum. As of August 31, the fund’s size is at US$36 million. THE BOND MARKET RALLY CONTINUESMr De Mello believes that the bond market rally which started in early July 2008 will continue as the outlook for the broader global economy remains bleak.
“We don’t think that we are going to bounce out of this very easily. So the bonds market will remain supported. Central banks will cut interest rates in a number of Asian countries,” Mr De Mello explains.
He says low interest rate for bonds would still be the scenario for 2009 as the crisis is far more severe than what Asia has seen since the financial crisis in the late 1990s. “Countries will not normalise their interest rates very quickly. So even if they keep their policy rates low, investors will still benefit from higher bond yields,” Mr De Mello says.
Investors are also not likely go back to equities even with a significant correction, he believes, as it will take a while before investor confidence is restored. “The market turmoil has developed into a major panic. In terms of value, we believe there are currently many opportunities. We will increase our investments when we see global markets integrate the significant measures made by policy makers globally,” said Mr De Mello.
Investors can also find some gems in corporate bonds. “Corporate issues continue to underperform government bonds as poor market conditions in the US. and European credit markets continue to affect Asia. We believe that there is good value in select Asian issuers,” said Mr De Mello in his commentary.
As to an investor’s exposure to bonds versus equities, he believes that the decision really boils down to the individual’s need for money and his appetite towards risk. “If you are young and have a long horizon, you can afford to have more weights in equities. But if you are an older person just before retirement, then you really want to be in bonds because if you lose a lot of capital in equities, you have no chance to recover it,” Mr De Mello ends.
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