Fund rationalisation seen as post-crisis norm

The days when the stigma of failure was attached to product closures are long gone as managers adapt to market realities after the global financial crisis, says Baring Asset Management.
Fund rationalisation seen as post-crisis norm

Baring Asset Management’s efforts this year to rationalise its product suite and launch new funds are symptomatic of the times and offer insight into how firms evolve in the post-crisis climate.

The manager, with $11 billion in Asia AUM out of a global $49.4 billion base (excluding a pending acquisition in Korea), earlier this year moved to close an absolute return bond fund and merge it into its multi-asset suite. More recently it closed a US equity fund that was not seeing demand.

The former was launched and marketed in the UK in 2004 as a long-short bond and currency fund when Ucits III emerged and shorting first became available for funds. Chiefly it invested in government bonds and currencies and had an absolute-return target.

However, as Ian Pascal, the firm’s London-based head of marketing and communications, says, opportunities for the fund’s manager to make money post-Lehman have been restricted as the market “is not reverting to where it should be” on the back of prolonged quantitative easing and investor risk aversion.

“Even though lots of people agree some government bonds are overvalued and some undervalued, and the same for currencies, the reality is nothing is really happening and the Swiss franc is still very strong,” he tells AsianInvestor on a visit to Hong Kong. “We came to the conclusion this is not going to change anytime soon.”

Barings manages a suite of about 40 funds, but Pascal suggests any stigma of failure that used to be attached to fund closures has vanished post-crisis as asset houses adapt to market realities.

“We have been rationalising for a few years now,” he says. “Before the crisis there was a bit of a stigma around closing off funds, so you didn’t do it that often.

“But now there is no such stigma, it is just down to product management. If things are no longer popular, you recycle them into something different and close them down.”

Data from Strategic Insight shows that ex-US, the number of fund closures has doubled from 2,000-3,000 per year between 2006-08 to around 5,000 per annum from 2009-11 (and that does not include merged funds). It does include short-term vehicles, with Strategic noting the rise of closures post-crisis may have to do with the launch of more short-term fixed income products in India and Southeast Asia.

As an emerging-markets-focused manager, Barings has moved to launch new products recently: an EM corporate debt fund, an Asia debt fund and a China bond fund.

The latter two are managed out of Asia by Sean Chang, who joined the firm from HSBC Global Asset Management in May.

Its China bond fund was approved recently under the Ucits structure. This will be an institutional-focused product and is available in Hong Kong via private placement, although it’s possible the firm will look to roll it out for retail investors in Hong Kong in the future.

Chang is now in the process of selecting securities, with the fund likely to be operational by the end of October or early November.

It will hold 40-50 investment-grade bonds with a minimum credit rating of BBB-. It will be dynamic in that it can hold higher-quality credit (including agency and sovereigns) in risk-averse markets and hedge currency risk. On the flip-side, in risk-on markets it can hold more local-currency corporate debt.

The strategy will not only focus on Chinese issuers, but also Asian and foreign credits that issue in renminbi or CNH currencies. “Basically we have brought our investment universe into dim-sum bonds issued in Hong Kong, Singapore and London,” says Chang.

Its targeted yield is 4%+ and Chang aims to add alpha through credit selection and duration management, as well as active trading strategies where it sees dislocation.

The fund will reference the HSBC RMB Offshore Market Index and sees a sweet-spot of 2-4 years’ duration. Initial fundraising is targeted at $50-$100 million, although the fee structure has not yet been formalised.

Chang explains he is optimistic on the outlook for the Chinese bond market, which he says is at the beginning of its easing cycle that could last for two years. When it comes to the question of corporate governance, he says China has been improving management and regulation control.

But he adds: “We will focus on the dim-sum bond market at this stage, because issuers in the CNH market are adopting a jurisdiction such as Hong Kong and the UK with a rule of law that is more recognised worldwide and regulation is more developed than onshore [China].”

Separately, Barings’ emerging markets debt product is being launched out of Dublin to look across the ratings spectrum, but is being managed from London so is not Chang’s responsibility.

The firm’s Asia debt fund received approval from Hong Kong’s Securities and Futures Commission this June as a retail product focused on local currency markets, although it looks into the Asian US dollar credit market as well. It, too, has a $50-$100 million fundraising target, and is over 60% invested in sovereign bonds and 30% in corporate credit, with 40-60 securities.

Overall Barings has 19 fixed-income staff based in London, of which three are emerging markets specialists and three dedicated credit analysts.

Chang confirms that as Asia’s fixed income markets develop, and provided investment demand is there, Barings will look to add expertise in credit analysis and risk management based in Asia.

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