Aberdeen Asset Management has launched what it believes to be the first Asian local currency short-duration bond fund as a more diversified play on regional appreciation than simply piling into Hong Kong’s CNH market.
The firm opted to rename and reposition an existing vehicle, rather than close the fund and launch a new one. The result is the Aberdeen Global – Asian Local Currency Short Duration Bond Fund, whose benchmark is the iBoxx – Asia ex-Japan sovereign 1-3 years index.
The fund will invest mostly in sovereign bonds across up to 10 countries in Asia ex-Japan, with an expected initial duration of less than 1.65 years, which Aberdeen notes makes it relatively insulated from current inflation threats.
The asset manager believes the fund will appeal to investors looking for low-risk exposure to the Asian growth story, with participation mainly through long-term currency upside (although it intends to pay dividends).
The fund is based in Luxembourg and managed by Aberdeen’s Asian fixed income team in Singapore under Anthony Michael, the firm’s head of Asia-Pacific fixed income. It targets both retail and institutional investors.
“People are worried about structural inflation in Asia, so we wanted to give them the opportunity to invest in a product that has a duration of 1.6 to 1.8 years but still be able to get some yield pick-up,” says Michael, speaking from a roadshow in Frankfurt to promote the fund.
“This will give investors the ability to move out slightly along the curve to a starting yield of about 3%, but also to have upside from the region’s currencies.
“We think Asian currencies are undervalued and have lagged the rally in many currencies. We think the Asian sovereign story and the Asian macro story is the strongest in the global economy, so you bring all those factors together into this portfolio.”
Michael says Aberdeen has seen interest for this product from the personal banking sector. “It fits that sort of niche of where we are in the cycle now,” he adds. “It provides more flexibility for investors to pick the duration profile they want. That’s the most important thing.”
But Aberdeen made a conscious decision not to launch a pure CNH product, and accordingly the firm is targeting investors who are now piling into Hong Kong’s CNH market.
“We are bullish on the Chinese currency to a certain extent, but we think this is a smarter way to play the Asian currency appreciation story,” he states.
“Don’t put all your bets on the Chinese currency. Other policymakers in the region are more flexible. Places like Malaysia, Thailand and Singapore have allowed more currency appreciation without the political pressure.
“So why not diversify that bet? And why pay for extremely expensive CNH bonds in the CNH market, where your starting yield is much lower than you can obtain through a broader strategy?”
Asked why Aberdeen had chosen to use an existing fund vehicle rather than start a new one, Michael says there was some product duplication following the firm’s acquisition of Credit Suisse’s traditional funds business several years ago.
“When we acquired Credit Suisse we had an overlap on our product range. We were going to close a couple of products anyway where there was some duplication in strategy. We could have come out with a new vehicle, but that would have cost us more money and we are achieving the same thing in restructuring this existing portfolio.”
Aberdeen went through the regulator in Luxembourg to effect the change, and has liaised with authorities in Hong Kong over the past few months. It is also in the process of adding the product to a select range in Singapore to enable retail investor access there.
Aberdeen started the product with an existing $20 million, enabling it to create the strategy and launch an institutional share class. The firm is keen to raise $100-$150 million over the next six months. “Once we do that we can push in the institutional market more actively,” says Michael.
Aberdeen is better known in Asia and globally for its equities capabilities, but has been managing fixed income in the region now for over 10 years, mostly for North American clients.
“We don’t have the brand and the distribution capabilities of others, so we are going to start with humble expectations. But this should be a billion dollar product in the next couple of years, easily,” adds Michael. “I am very bullish for this product because it makes a lot of sense.”
In fact, he was surprised there weren’t similar products already available. “We have looked through all the product offerings, but we think this is the first product of its type to be launched in the world. I would not be surprised if people piggy-backed on the back of it.”