What is your investment philosophy?
My investment philosophy, shared by Aberdeen, recognises that the Asian credit market is not perfectly efficient and exhibits regional idiosyncrasies. This leads to outright long and relative value investment opportunities. To achieve superior, risk-adjusted performance, we consider the entire investment universe of issuers, we are not benchmark oriented or driven and we undertake comprehensive, bottom-up fundamental research to construct a high-quality and diversified bond portfolio. We believe that this type of portfolio will better tolerate downturns in the economic operating environment, but should also generate strong returns in economic up cycles.
What is your background and what are the challenges of investing compared to other jobs you’ve held?
I’ve spent virtually my whole career in credit analysis mainly as a fixed-income researcher and later as a prop trader before joining Aberdeen Asset Management as head of Asian credit. The challenge of being a successful portfolio manager requires not only thorough knowledge of the credits in the portfolio, but also a very accurate read of market dynamics and trading technicals. In the past few years those skills were tested to a higher degree and, though fund managers may have made the right decision to reduce risk in 2008, many didn’t change their strategy in time in 2009, which is why very few fund managers outperformed in both 2008 and 2009. I am very proud to be able to say that I did.
How big do you expect the primary issuance calendar to be this year and how active have you been in the primary market?
The new issue calendar in 2011 will likely exceed $70 billion for a second consecutive year and this elevated rate should continue for the coming years as more Asian borrowers diversify into the fixed rate market. I would like to be more active than participating in only one of four new issues, but I don’t add a new name to the portfolio for the sake of owning it. Some of the reasons why I am not more active are: one, Asian pricing tends to end with a lower new issue premium than that of a US primary issue; two, issue sizes are manageable and result in well-covered order books; and, three, leads tend to want to impress the issuer with tighter execution.
Looking ahead, do you think we could see an over-supply of bonds driving up yields?
Bond syndicate teams generally tend to be disciplined and don’t flood the market with too many new issues that cause benchmark yields to surge. But new issue announcements still tend to cause spreads to widen on a limited number of related names. In my view, it is in fact systematic and fundamental reasons, or a US Treasury sell-off, that are more likely to cause overall Asian yields to rise.
What are your top picks in terms of individual issues?
Given our investment process, the issuers in our portfolio will be solid businesses with strong cash flow and stable to improving credit profiles. We look at the whole universe of bonds, filter out issuers that reside in countries that we are avoiding and then drop borrowers with poor corporate governance track records or undesirable sponsors. Of the companies that are in our portfolio, we think the ones that offer the most relative value or will most likely outperform the benchmark are PTTEP, New World Development, Country Garden, China Fisheries, Fufeng, West China Cement and Bank of Baroda.
Which sectors are you overweight and underweight in your portfolio?
Our portfolio constantly evolves to reflect the ever-changing opportunity set. Though we liked Asian high-yield sovereign debt last year, we entered 2011 underweighting it. However, we remain overweight high-yield corporate bonds and this is expressed in our Chinese real estate and non-real estate positions. We are also overweight senior and subordinated debt of Asian financial institutions.
We are currently underweight telco debt, but that is due to lack of value in this sector rather than lack of confidence in their financial metrics and business outlook.
What do you see as some of the key headline and event risks that investors face this year?
Most consensus risks for 2011 are well publicised and many are recurring themes from last year. They are that a US Treasury sell-off would reduce absolute returns; a European banking debacle or stringent Basel III regulations would put pressure on Asian financial spreads; the weak fiscal position of European periphery countries subdues risk sentiment; and rising commodity prices and robust Asian growth fuels inflation. Though several issuers exchanged their maturing debt or repurchased their debt at discounts during the global financial crisis, there were very few financial defaults during this period and most of these were in fact due to fraud. But, in 2011, there may be a surprise financial default in either the offshore renminbi or US dollar market as weaker companies in 2010 were able to tap the debt markets to fund capacity expansion initiatives. If sales don’t materialise as planned, I think an issuer or two may indeed default.
How has your performance been?
Real money managers generally compete against a benchmark and our return bogey is generally not absolute but relative to that benchmark. There are three Asian credit benchmarks and each is created and maintained by a global financial institution. I think the overall performance of our Asian credit portfolios has been rather respectable.
As of the end of March 2011 our Asian US dollar credit portfolios had returned 9.41% over one year, 18.80% per annum over the past two years and 9.85% per annum over the past three years, outperforming the Bank of America Merrill Lynch Asian USD Bond Index by 123bp, 145bp and 124bp respectively.
There is talk that we’re in the midst of a bond bubble. What’s your view on this?
We are not in the midst or in the run-up to a bond bubble. I recognise that there was record primary issuance last year, which could be topped this year, and spreads are at near record tights post the global financial crisis, but Asian credit is undergoing a dramatic and sustained change as more dedicated funds and global managers invest in this asset class so going forward we can more easily absorb an elevated level of new issuance.
Furthermore, though Asian spreads are tighter relative to historical levels, they are still cheaper than that of global peers.
This story was first published in the May 2011 issue of FinanceAsia magazine