Marcus Frampton, chief investment officer of Alaska Permanent Fund Corporation (APFC), sees Asia offering growth and diversification benefits, amid concerns over a potential US or global downturn and heightened geopolitical uncertainty.
And while he feels investing in private equity as the best way to play emerging market growth (as outlined in the first article of this two-part series), APFC also wants to enter China’s onshore bond market.
The $67 billion fund started working towards this goal in August last year and incorporated renminbi bonds into its customised index in April, Frampton told AsianInvestor. They now constitute 1.9% of the benchmark, and that proportion will grow by 0.4% monthly until it reaches its full weight of 5.5%, as is likely by April 2020.
Hence Juneau-based APFC is now making arrangements with its custodian with a view to starting to trade renminbi debt by August next year.
"We plan on trading Chinese bonds in a magnitude similar to their weighting in our non-US global sovereign bond benchmark, the Bloomberg Global Treasury Ex-US Index," Frampton said.
The fund has yet to decide which access channel it will use, he added. The obvious options include registering to trade on the China interbank bond market or going via the Bond Connect.
RMB bonds will represent a small fraction of APFC’s $16 billion fixed income allocation. Around 85% of that is invested in US bonds, 10% in non-US global sovereign bond portfolio and 5% in emerging market sovereign debt.
HUNTING FOR HEDGIES
In addition to increasing APFC's equity and fixed income exposure in Asia, Frampton said he would like to find other “compelling” hedge fund managers in the region to run money for its absolute-return portfolio. That allocation stands at around 6% (as of August), up from 3.5% some 18 months ago, and currently incorporates one Asian firm, Hong Kong-based macro manager Complus.
|APFC'S ASSET ALLOCATION, JULY 2019|
“The theory is that Asian markets are less efficient, with more attendant alpha opportunity than in US markets,” he noted.
However, "with hedge funds we are quite focused on long track records and have an insistence on zero beta – shorting exactly what they are long," Frampton added. “A strict adherence to these standards has made it hard to find managers in Asia.”
The landscape will no doubt change as Asia’s capital markets mature.
Similarly, APFC’s plans to trade RMB bonds reflect a gradual, inexorable trend.
Overseas investors are slowly but steadily upping their holdings in China’s $13 trillion-odd onshore bond market, but still account for only around 2% of it. Still, industry experts see an acceleration of foreign inflows, thanks to institutions such as APFC taking the plunge.
CHINA BOND EVOLUTION
Flows have been encouraged by developments such as the gradual liberalisation of the China interbank bond market (CIBM) since 2015 and the launch of the Bond Connect scheme in July 2017.
Another significant step forward was the phased inclusion of renminbi sovereign and policy bank bonds in the Bloomberg Barclays Global Aggregate Index starting from April this year. Other major benchmark providers – notably FTSE and JP Morgan – are expected to follow suit at some point.
And most recently, on August 23, HSBC facilitated the first T+3 trade in the CIBM, following a decision to extend the bond settlement cycle for overseas institutional investors.
Yet issues remain outstanding, such as various obstacles relating to custody and settlement, and the fact that Chinese rating agencies are seen to lag their international peers in debt-analysis standards. That's not to mention the question of whether foreign investors will be able to withdraw their money when they want to.
And there are concerns in some quarters that bond-market liberalisation could slow up as a result of recent developments, namely the escalating US-China trade war and the protests in Hong Kong.
Still these events seem likely to a short-term bump in the road on the way to Chinese debt market development and its huge implications in the eyes of long-horizon, forward-thinking investors such as APFC.