Indications by the US Federal Reserve that it is set to tighten monetary policy, initially by cutting back its bond buying, have led investors to eye assets that will perform well in a rate-rising environment.
And asset managers are responding. Boston-based Eaton Vance yesterday inked a memorandum of understanding with Korea’s Daishin Securities to sell some of its key products, in particular its floating-rate loan strategy.
The move will see the fund house seek to replicate the approach that has brought it traction Japan through Mizuho Securities. “We feel Daishin could help us build a similar franchise in Korea,” says Rob White, president of Eaton Vance Asia.
The tie-up comes as Daishin looks to expand its offshore and alternatives product line up and to strengthen its cooperation with global-scale asset managers.
The bank loan strategy is a portfolio containing around 450 US corporate loans with a weighted average rating factor of BB–. Being below investment-grade will rule the product out for a large number of institutions.
However, a significant number have made or are making amendments to their investment criteria to allow them to buy below investment-grade, says Koo Hee-Jin, executive managing director of Daishin. “It’s inevitable this will happen more, because the portion of offshore assets in their portfolios is very low, so they will have to make such changes if they want to diversify more overseas.”
Asked why Daishin chose Eaton Vance as a partner, Koo says his firm started analysing US bank loan strategies late last year off the back of interest from clients. Eaton Vance has the biggest such strategy with the longest track record and “very strong performance”, he notes, along with a diverse range of other products. “So it wasn’t a difficult decision to make."
Floating-rate bank loans have “next to no duration”, notes White. Interest rates, at 2.5%, have come off to such a level that these products should prove very attractive, argues White, given their lack of duration risk and ability to perform well in a rate-rising environment.
They are not highly correlated to other fixed income assets – apart from high yield – and tend to perform well when most debt investments do not, he notes, adding that they’re presently returning 4.5% annually.
Eaton Vance is seeing interest above all from institutions but also from high-net-worth and retail prospects in Korea, says White. “Pension funds and insurers here are particularly interested in trying to manage their duration risk right now,” he adds.
The firm manages $4 billion in the strategy from Asia-Pacific clients, out of a global total of close to $40 billion. With $260.6 billion in assets under management as of June 30, Eaton Vance runs portfolios in US and emerging market equities, US fixed income and global macro.
Set up in 1962, Daishin is one of the oldest Korean securities companies and has some 80 branches servicing institutional and retail clients. Its businesses include brokerage, distribution, investment banking and asset management.