The Asian local currency government bond market is a rapidly evolving asset class. One compelling reason for considering a standalone investment in Asian local currency is the potential to access the relatively higher yielding government bond markets of Southeast Asia. Additionally, investors may also stand to gain from Asian local currency appreciation over time if economic growth in the region continues to outpace other parts of the world. Finally, an allocation to Asian local currency bonds should bring diversification benefits to the typical multi-asset portfolio.  

Many investors currently access the asset class through broad global or emerging markets fixed income funds and/or mandates. But the ability to target Asian local currency bonds through passively managed ETFs means that investors can now further segment their emerging markets fixed income portfolios.

A Changed Market

Emerging markets fixed income has historically been an asset class where most of the assets are actively managed. While that is still the case today, passive management has made significant inroads in recent years, as ever-increasing numbers of investors have been attracted to diversified and cost-effective index funds and ETFs.

“EM fixed income is increasingly a core allocation for many investors,” says Matthew J. Arnold, Head of ETF Strategy and Research APAC at State Street Global Advisors. “And while investors have often started investing in the region through actively managed funds, we are now seeing increasing numbers turning to passive approaches. Why are they doing that? Clearly there must be some disappointment with the returns generated by active managers. As with other areas of the fixed income market, investors appreciate the cost-effective and diversified nature of passively managed vehicles, such as ETFs.”

The Active vs. Passive Decision

This is often not an ‘either, or’ decision, in that a blended approach may be most suitable for investors looking to invest in emerging markets fixed income. Turning to Asian local currency bonds in particular, investors weighing the benefits of an active approach should ask themselves the following questions:

  • Do we think the market is truly inefficient enough to warrant the extra expense of active management?
  • Do we have a high level of confidence in our ability to identify managers that will outperform over time?
  • Do we have resources and processes in place to monitor selected portfolio managers closely over time?
  • And finally, are we prepared to live through inevitable periods of underperformance?

If the answer is to any of these questions is “no,” then gaining exposure via an index fund or ETF may well be the best option. Adopting a core-satellite approach, where the majority of an asset-class exposure is gained passively and at low cost, with the remaining exposure managed using an active strategy, may also make sense for some investors.

Targeting Asian Local Currency Bonds

The ABF Pan Asia Bond Index Fund (PAIF), managed by State Street Global Advisors, was Asia’s first fixed income ETF. With assets of US$3.8 billion, the fund invests mainly in the local currency sovereign bonds issued by eight countries in Asia, including onshore China bonds. It tracks the Markit iBoxx ABF Pan Asia Index.

“The passive structure of PAIF allows investors to gain exposure to a highly diversified portfolio of Asian local currency bonds in an easy-to-use, transparent and cost-efficient way,” says Arnold. “It is used by a range of investors, from institutional to retail, often as the core allocation within their Asian fixed income portfolios.”

Visit www.abf-paif.com/core to learn more about how PAIF can benefit your portfolio.

FOR INSTITUTIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC.

This material may not be reproduced, distributed or transmitted to any person without express prior permission and may not be distributed and published in jurisdictions in which such distribution and publication is not permitted. PAIF is an authorized unit trust in Hong Kong and Singapore only. Authorization does not imply official recommendation. No action has been taken to permit an offering of units in PAIF other than those listed above. Past performance of PAIF is not necessarily indicative of its future performance. The prospectus for PAIF is available and may be obtained from State Street Global Advisors Singapore Limited (the “Manager”) (Singapore Company Registration number: 200002719D, regulated by the Monetary Authority of Singapore) and authorized participants. The value of PAIF and the income from them, if any, may fall or rise. The semi-annual distributions are dependent on PAIF’s performance and are not guaranteed. Redemption of PAIF’s units could only be executed in substantial size through designated dealers and the listing of PAIF on the stock exchanges do not guarantee a liquid market for the units, and PAIF may be delisted from the stock exchanges. PAIF may use or invest in financial derivatives. This advertisement is issued by State Street Global Advisors Singapore Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong (“SFC”).

The views expressed in this advertisement are the views of Mathew J. Arnold through the period ended 8 March 2017 and are subject to change based on market and other conditions. This advertisement contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Diversification does not ensure a profit or guarantee against loss.

ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent.

The Markit iBoxx ABF Pan-Asia Index referenced herein is the property of Markit Indices Limited and is used under license. The PAIF is not sponsored, endorsed, or promoted by Markit Indices Limited or any of its members.

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