For the region's institutional investors, including sovereign wealth funds, that would like to diversify overseas but face costly currency hedges, Asian fixed income is increasingly plausible, argues Guan Ong, former chief investment officer at Korea Investment Corporation.
Addressing an audience of Asian and North American pension funds last week at the Pacific Pension Institute conference in Bangkok, Ong said many large institutional investors need to diversify beyond their domestic markets. But volatile moves against yen, Korean won, Aussie dollar and other currencies can outweigh returns gained from equity or bond allocations in the US, he noted.
However, Asian bond markets are now sufficiently developed to provide diversification for regional or global investors, said Ong.
Ong left the KIC after serving as its inaugural CIO for three years. He set up a new hedge fund in Singapore, Blue Rice Investment Management, a credit-focused strategy specialising in Asian investments that is currently establishing its first fund.
Ong also formerly served as a fixed-income portfolio manager at Prudential Financial in Hong Kong, as well as its regional CIO based in Korea.
The region's bond markets have benefited from the restructuring that followed the Asian financial crisis of 1997-98, he says. Today the combined local-currency markets have around $4 trillion of outstanding issuance, while the dollar-denominated Asian bond market is $250 billion in size.
Whereas a decade ago, Asian bond tenors didn't go beyond three or five years, today they are deeper and broader, and can provide enough liquidity and variety to stand alongside stocks, real estate and bank lending as other investment destinations in Asia.
The dollar-denominated market has become particularly mature, thanks to the establishment of two indices, run by JP Morgan and HSBC. JP Morgan's index also includes corporate credit and high-yield bonds. In the dollar-denominated space, sovereigns make up only 40% of the market, with the rest split between corporate bonds and bonds issued by banks and other financial institutions. The corporate world remains somewhat limited, however, with most issuers either utilities or commodity/energy companies.
Ong doesn't see the Asian bond market as growing at the same clip as Asian equities, but it is becoming broader and now offers the full range of credit ratings, as well as hedging tools such as credit default swaps. This year has seen $42 billion of new issuance, and the market is likely to grow 10-15% in size.
As more Asian institutions -- particularly sovereign wealth funds -- expand, they will look to diversify their exposures. Ong argues that Asian fixed income should no longer be viewed as a satellite or highly active strategy, but as a core allocation for long-term institutional investors.