APS KomabaÆs yen for JGBs

And other takes on investing in Asian and global fixed income from one of SingaporeÆs most prominent bond fund managers.
SingaporeÆs star fixed-income manager Lim Heong-Chye, CIO at APS Komaba Asset Management, offers his views on opportunities in regional and global bond markets.

Lim helped put DBS Asset Management on the map by overseeing its successful Shenton Way bond fund. The solid performance of this fund allowed the firm to secure the mandate to run the Singapore dollar tranche of the Asian Bond Fund II, seeded by the regionÆs monetary authorities.

He left in August 2005 to set up a new independent money manager, APS Komaba. After winning an investment license from the Monetary Authority of Singapore in February, APS Komaba launched its global bond fund, which raised around S$40 million. The boutique manages a total of S$500 million, mostly from institutional accounts, in global and Asian bond mandates.

Are the opportunities in Asian markets found in US dollar issuance or in local currencies?
Lim Heong-Chye: We invest in both. There is $200 billion-300 billion in total issuance from Asia ex-Japan denominated in foreign currencies, primarily the US dollar. ThereÆs over $2 trillion worth of issuance in local currencies, and this is where we can add the most value. The distribution along the yield curve among US dollar issuance is minimal, while locally there is a broader range.

The local currencies are also more important to regional institutional investors, who can invest in something with less forex volatility and more choice in yield. For example, Hong Kong and Singapore are fully developed markets with credit default swaps, interest rate swaps, and so on. Malaysia and Thailand are not far behind.

Do regional currencies appeal beyond reduced forex volatility?
They offer value to investors in markets with currencies that are correlated to ChinaÆs. We believe in the long-term appreciation of the renminbi, but foreign investors canÆt get exposure. We can, however, use currencies such as the won, the baht, the ringgit and the Singapore dollar as proxies; not the Hong Kong dollar, of course.

What about returns: how do Asian bonds compare?
Total returns from Asia ex-Japan are attractive. The lowest yields are in Singapore, where the 10-year sovereign is at 3.5%. Hong KongÆs 10 year is a little below 5%. But the yield on Korean sovereign three- and five-year bonds is over 5% and so is the yield in Thailand. And then you have the sub-investment grade markets of Indonesia and the Philippines, where yields are 9-11%.

So how is your portfolio positioned on a currency basis?
WeÆre overweight Korea and Singapore. WeÆre cautious on Indonesia, and neutral on the Philippines, Malaysia and Thailand.

What beta returns do you expect from Asian fixed income?
Overall beta should return 5-6%, and the manager can add another 1-2% of alpha.

WhatÆs the main risk to that scenario?
Politics like North Korea and the Middle East. Oil prices could also hurt some countries like the Philippines and Thailand if they continue to rise and hurt the current account balance. There are also technical issues in the degree of liberalisation from one market to the next, or withholding taxes.

Taiwan isnÆt in the ABF scheme but has a big bond market: whatÆs your view?
The yields are low. The currency has the potential to appreciate, but there is considerable political risk. In the long term, the New Taiwan dollar can be a proxy for the renminbi, but we donÆt hold any local Taiwan securities for now.

Globally, how will markets perform this year?
It is not going to be a good year in global sovereign markets because interest rates are trending higher and thereÆs more foreign-exchange volatility in both emerging and developed markets. But the fixed-income market cycle is shorter than the equity marketÆs, and you get different cycles in various countries, so fund managers can still generate positive returns. Most of our mandates are benchmarked against indices such as Lehman Global Credit or HSBC Asia Fixed Income and we can beat these using a mix of duration, credit, country and currency picks.

Which tactic will provide the most performance now?
I donÆt see much value added in credit, although certain sectors like energy offer opportunities. ThereÆs not much scope for performance in duration in the next few months. Currency offers a lot of potential but you must be careful. We believe the US dollar is in a long-term decline, so currencies such as the Singapore dollar, the yen and the euro have potential to climb. Commodity currencies such as the Australian and Canadian dollar are attractive right now. But your strategy depends on the clientÆs base currency.

On a country basis?
WeÆve seen corrections now in the high-yield countries. The most attractive yields in developed countries are in Australia, where the 10-year governments return 5.7%, versus around 5% in the United States. The United Kingdom is less attractive, but we like the seven- and 10-year euro bonds.

Among developed markets I like Japan the most. The Bank of Japan has been behind the curve, too slow to tighten monetary policy. ThatÆs a reflection of the fact that it is the least independent central bank in the developed world. So we may see the yield curve there steepen. We are avoiding the long end of the Japanese government bond curve but are investing in the short end, mainly because of the currency.

JGBs have not been attractive to the non-yen investor, so they have been underweight Japan. If the yen appreciates, a lot of global fixed-income investors will under-perform. The yen went up in May and June, and a lot of investors were caught off guard. These investors will need to cover those allocations. I like the yen: JapanÆs fundamentals are improving and rating agencies could upgrade the sovereign. The JGB market is the biggest government bond market in the world, so itÆs liquid and easy.

WeÆll also consider investing in (Japanese) REITs selectively, as equity/bond hybrid asset-backed securities. These are returning on average 3%, versus 1.5% for 10-year JGBs, and now that they can invest overseas, they should provide even better returns.
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