Fixed-income investing, according to Halbis's Cecilia Chan

Chan expects the US yield curve to steepen and has raised HalbisÆs exposure to selective Asian bond markets.

Cecilia Chan, head of fixed-income at Halbis, which is part of HSBC Global Asset Management, has a positive outlook for Asian credit markets, and aims for stable risk-adjusted returns through a rigorous investment process.

What is Halbis?
Halbis is a fundamental investment specialist covering both equity and bond investments, of which fixed-income assets have over $18 billion under management in Asia, including Japan and Australia. The growth of our retail bond funds has been especially satisfying in recent months despite the strong equity-biased investment culture in the region.

What is your investment style?
We are fundamentally value-driven investors. The process starts with a top-down analysis of the three main categories of risk: interest rates, which determines where we should be positioned on the yield curve and our optimal duration; foreign exchange, in particular our view on the future path of Asian currencies against the US dollar; and credit, where the stage of the economic cycle will point to appropriate sector allocations. At that point, we use a bottom-up analysis to identify companies with attractive financial ratios and bonds that offer value on a comparable and historical basis in terms of yield spread relative to similar credits and to government bonds.

How does that work day-to-day?
Halbis emphasises a "star team" approach, rather than promoting individuals into the
limelight. My role is to oversee a highly-qualified team of six fund managers and three dedicated credit analysts in Hong Kong. We work closely together, and I ensure that their portfolios conform to the strategy and parameters that we set for each fund during our formal weekly and monthly meetings. At the same time, I'm keen to allow them leeway within those guidelines, and with the markets constantly changing we need to be flexible.

Each morning at 9.30am we review what has happened overnight and make adjustments to our portfolios if necessary. Throughout the day we are in constant dialogue both with each other and our brokers.

But isn't fixed-income a hard sell in Asia?
I've been with HSBC for 15 years and in charge of the fixed-income team for more than 12 years after spending a few years in equity analysis. It was only in the mid-1990s that Asian fixed-income started to become a noticeable asset class for the region, and I made the career switch to fixed-income because it suited my quantitative background and my natural inclination to look at the big picture. And, of course, the latter part of that decade provided a tremendous education for all of us who focus on risk, and helped us spot the danger signals ahead of the current crisis.

So what is the appeal for retail investors?
Our flagship HSBC Asian Bond Fund looks to earn added value over our composite
benchmark made up of 70% investment grade bonds and 30% high-yield issues. We aim to make annual returns in the high single-digits over the long term by investing both in US dollars and Asian currencies. At present we are overweight investment grade instruments, and we are very selective about the high-yield bonds and always aim to avoid default risk. Individual holdings normally won't exceed 3% of the portfolio and we avoid high country or sector concentration. It's important to stress that we aim for long-term performance and stable risk-adjusted returns. And in this climate, that is an attractive goal for investors who have seen that it doesn't pay to be too greedy.

How can individuals invest money with Halbis?
The award-winning HSBC Asian Bond Fund has grown from $130 million at the beginning of the year to over $380 million recently. It pays out a dividend every month with an expected annual yield of around 6%, with an initial 3% fee and a management fee of just 1% a year. The minimum investment is only $1,000.

Credit markets took a hammering last year, so how did you cope?
In the first half of 2007 we recognised that the credit markets were not in a healthy state. Credit spreads were far too tight, and the massive growth in the complexity of credit derivatives structures showed signs of excessive gearing in the market. So we reduced our holdings in credit and went overweight US treasuries. The collapse of Lehman Brothers further vindicated our fundamental view as yield spreads widened dramatically.

And your outlook now?
Since March, spreads have tightened -- in fact, they've normalised as the broader picture has become clearer. We expect the US federal funds rate to remain low during the next 12 months and so the yield curve should steepen further as the market factors in future inflation expectations. As a result, the fund has a relatively conservative duration. In the long-term we expect the US dollar will weaken against Asian currencies, and so we have raised our exposure to selective local bond markets, for instance Australia and Indonesia, and to the Chinese renminbi through non-deliverable forwards.

Overall, we believe that Asian credit will out-perform global credit. Many recent issues by Asian borrowers look cheap relative to similar credits elsewhere in the world. We especially like the prospects for Korea on a valuation basis, which has been the source of most regional issuance so far this year.

This interview first appeared in the September 2009 issue of FinanceAsia.

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