Asian fixed-income markets in need of a boost

AberdeenÆs head of fixed-income in Asia Pacific says governments in the region need to do more to deepen the secondary markets.
Donald Amstad is a newcomer to Aberdeen Asset Management Asia, having joined the company as its Asia Pacific head of fixed-income only in March. He oversees the companyÆs fixed income teams in Australia, Singapore and Thailand. Aberdeen manages around $190 billion in assets worldwide, of which $90 billion are in fixed-income portfolios. Amstad, who is based in Singapore, met with AsianInvestor on a recent trip to Hong Kong.

How much of AberdeenÆs assets under management (AUM) are invested in fixed-income?
In Aberdeen, we manage just under $90 billion of assets in global fixed income and just under US$10 billion of that are managed in Asia. We have a team in Sydney, Singapore and Bangkok. In 2005, Aberdeen bought the London and Philadelphia arms of Deutsche Asset Management. In Europe, Deutsche Asset Management had a fixed income team in London and Frankfurt and in the US, it had a fixed income team in New York and Philadelphia. The company realized it didnÆt need two centres on both sides of the Atlantic. In June this year, Aberdeen bought Deutsche Asset Management in Sydney, which is primarily a fixed income operation. The majority of our fixed income assets in Asia are managed in Sydney. The Bangkok operation is much smaller, about $170 million equivalent, and these are Thai baht portfolios that we manage for Thai clients. In Singapore, we manage the Asian part of some US and Canadian closed-end funds.

What have been your main initiatives since taking on your role at Aberdeen?
My first role is to manage our teams in this time zone and the second role is to grow our AUM in this region. IÆm trying to get more assets in for the teams in Asia to manage and global mandates to be managed by our London office and US mandates to be managed by our Philadelphia office. Aberdeen has a fantastic equity brand name in Asia already. The fixed-income team that [global head of fixed-income] Steve Ilott runs globally is also an excellent business. We started the year with $70 billion assets as of December 31, 2006. Of that $20 billion increase, US$8 billion is the assets we bought when we bought Deutsche Asset Management in Sydney and the rest was organic growth. Our fixed-income business is much less well-known in Asia. My job is to understand the opportunities available to Aberdeen in Asia.

WhatÆs the flavour of your fixed-income investments in Asia?
The way we look at is there are three opportunities to add value to our client portfolio in Asia û in currencies, interest rates and credits. We think there are good opportunities to exploit in each of those three markets.

Do you have a stronger view on a particular market or investment, such as currencies?
The problem with answering that question is our views can change within 24 hours. We have a generic house view that Asian currencies as a block look attractive, both against the US dollar and against the European currencies that have appreciated so much against the dollar. A lot of people are waiting for China. There is a lot of expectation in the market that at some stage, China will let the renminbi appreciate significantly rather than the incremental moves that it has been making so far. I think that if China will let its currency appreciate, other countries in Asia will be happy to have their currencies appreciate as well. ThatÆs not to say that there arenÆt trading opportunities in Asian currencies as well.

What is your view on Asian interest rates?
Asian fixed income is not one market, it is a dozen different markets. The correlations between the markets are not constant. You have a situation at the moment where China and South Korea are raising interest rates, while Thailand and Indonesia are cutting interest rates. You have the Hong Kong dollar here that is obviously still pegged to the US dollar and Singapore that manages its currency against an undisclosed basket of currencies. The dynamics of each economy are different û monetary policies, currency policies û which makes this quite an interesting region to look at.

How has the US subprime mortgage crisis affected your fixed-income portfolios?
ThereÆs no impact on our portfolios at all. Obviously, the subprime crisis has caused credit spreads to widen quite dramatically. Probably the benchmark credit spread in Asia is the Philippine government five-year credit default swap (CDS). Before the crisis, that traded just below 100 basis points and maybe as tight as 95. When the crisis hit, it blew up to 250 and it has now come back to 160-170. Obviously, people were quite surprised that fundamentally nothing had changed in Asia yet suddenly the Philippine CDS went up from100 to 250.

You didnÆt need to make any adjustments to your portfolios, or take a different view?
The subprime crisis has given us new things to think about and new things to talk about, but it hasnÆt caused us to change our investment process or the way we look at the markets. Before the subprime crisis blew up, we had a feeling that credit spreads were generally quite tight and there wasnÆt much value so we had a cautious stance in the way our portfolios were positioned.

One of the most common criticisms of global fund managers is the lack of depth in the secondary fixed-income markets in Asia. How are you able to find value in this market under such conditions?
I think it is generically true that turnover levels are low, especially compared to the US and Europe, but I think that is something that will change over time. The response of the governments here to the [1997] crisis has obviously been to build up enormous foreign exchange reserves as a buffer to the market turbulence. Experience over the last couple of months shows that policy has been reasonably successful, but it has not been completely successful. I think the lesson that still needs to be learned is there has been an impact on some Asian institutions. There has been exposure [of Asian funds] to international capital markets and the reason why this has happened is the savings rate here has been very, very high generically and yet the capital market here are generally underdeveloped. And if capital markets are underdeveloped, then savings have to go offshore. I hope that the next stage of developments in the fixed-income markets come rapidly and Asian governments realize that the key to economic growth is to have successful liquid, dynamic, and transparent capital markets that domestic investors can have confidence in. ItÆs quite extraordinary that emerging markets are now exporters of capital.

Aberdeen has been able to build a strong equity brand name in Asia over the years, but the fixed-income brand name is not yet well-known here. How do you plan to build your side of the business in the region?
I am spending time now understanding the opportunities and constraints here. WeÆre trying to visit the different markets and the team is very much on the road, speaking to our clients and the players in the market. We have a team in Singapore that has been there for quite sometime. We need to grow the team so that we can have a dedicated credit team, a currency team, and an interest rate team. The first thing we have done is to invite the number two guy in Deutsche Asset Management in Sydney when we bought the firm, Anthony Michael, to head the fixed-income team in Singapore and he has assumed that role since July. He is a very experienced portfolio manager and is very highly regarded by clients and consultants in Australia. There are a lot of fund houses trying to build their fixed-income team and it is not easy to find good talent. We need to concentrate on building the team, the investment philosophy and the track record. Over the next six months we will hire one or two more individuals [to add to the current team of eight].
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