TIP SHEET: Aberdeen Asia Bond Fund Leads Move Into Local Debt

25th Jun 2010 20:00

By Riva Froymovich Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Asian policy makers have increasingly taken steps to deepen local capital markets, and foreign investors, including the Aberdeen Asia Bond Institutional Fund, are hot to the move. As Asian economies work to boost domestic demand as part of a global rebalancing and seek to increase investment vehicles to occupy the building wealth of citizens, the opportunities for foreign investors are also growing. Interest in bonds denominated in local Asian currencies are particularly attractive now after China announced it would allow its yuan currency to appreciate more against the U.S. dollar, opening the way for other regional currencies to do the same. Asian currencies were already expected to rise against the U.S. dollar and euro this year as investors sought higher-yielding assets while the industrialized world keeps interest rates at historic lows through 2010 and Asia begins to build on its relative outsized growth. "In this environment, and particularly on the back of what's happened in China, the Asian currencies do represent value," said Adam McCabe, the Singapore-based portfolio manager for the $450 million fund. His fund's top investments are all sovereign local notes, including seven-year and eight-year bonds from Korea, a six-year bond from the Philippines and a five-year ringgit-denominated Malaysian bond. It is approximately 70% allocated in Asian local currency bonds and its investing universe spans from triple-A rated Singapore to single-B rated Pakistan. McCabe is taking additional steps to gain exposure to local currencies by positioning in the forwards market. That means that the 30% of the portfolio that is invested in global dollar-denominated bonds is hedged into Asian currencies. According to research company Morningstar Inc., as of Thursday the portfolio is up 3.18% year-to-date, 15.06% on the year and 5.37% over the past three years after launching in May 2007. It is compared to the benchmark Barclays Capital Aggregate Bond Index, which is up 2.42% year-to-date, up 5.24% on the year and down 1% over the past three years. Local bond markets are much larger than a country's external market and therefore offer more investment options. In Asia, the local bond market is approximately $4 trillion. Across emerging markets, local bond trading accounted for 69% of total turnover, according to a first-quarter survey of leading investment and commercial banks, asset-management firms and hedge funds by emerging-markets trade group EMTA. The survey showed volume jumped 46% on the year during the first quarter. But most of the action is happening outside of Asia, which is part of the reason why Aberdeen sees this sector as attractive. Economies such as Singapore, Thailand and Malaysia are developing local markets to soak up rising demand among residents for places to put money to work. High savings rates and increased wealth have so far been met by few options for investment at home, at the same time as several Asian economies have strict rules on putting money abroad. The potential consequence is a liquidity bubble. "Policy makers are very aware of this problem," McCabe said. Some U.S. or European investors may fear getting burned by policymakers, who have historically intervened in currency markets or imposed taxes on increased money flows from abroad, which can exacerbate the bubble problem and cause volatility in exchange rates. Yet, a growing move into longer-dated local notes is providing some assurance, McCabe said. "As more of this foreign money shifts into longer-dated local notes, policymakers are starting to understand that the move into Asia's markets is no longer just hedge funds and hot money," McCabe said. "Rather, these are big money managers who have a catalyst to reallocate to fiscally sound developing markets. The catalyst being that, essentially, the U.S. and most of Europe is broke if you look at the governments' balance sheets." (Riva Froymovich reports on emerging-market economies in New York. She can be reached at 212-416-2217 or by email at [email protected].) TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments (END) Dow Jones Newswires June 25, 2010 15:00 ET (19:00 GMT)