Willis Towers Watson has been advising many of its institutional clients in Asia to switch out of global bonds and put 50% of their foreign fixed income portfolios in Asian debt and 50% in cash, as part of a steady allocation shift.
“Our recommendation is primarily driven by considerations of relative risk rather than return,” said Peter Ryan-Kane, Asia-Pacific head of portfolio advisory at the consultancy. “We felt that global bonds were quite fully priced and more vulnerable to moves up in yield than down, and Asia is somewhat more insulated from these pressures.”
Asian fixed income provides an increase in income yield and is much shorter in duration than global bonds, so relative interest rate risk is much reduced, he added.
Ryan-Kane mentioned the recommendation during a panel discussion at AsianInvestor's recent Southeast Asia Institutional Investment Forum, but gave more details separately to AsianInvestor.
Willis Towers Watson has offered the advice to “a broad cross-section" of its clients, some of which have acted on it either wholly or partially, he said. Generally, those that have followed the advice have switched completely or 50% away from their Barclays global aggregate index exposure, he added.
Institutional investors may have needed little encouragement to make such a move in recent weeks, given the bond rout in the month since Donald Trump’s US election win. The November 8 vote has triggered a $2 trillion-odd loss in the value of bonds in the Barclays global aggregate.
But Ryan-Kane (pictured left) stressed that the outcome of the presidential vote was was not a driver of Willis Towers Watson's broad allocation advice.
The firm first started allocating to Asian bonds about two years ago as a compliment to global bonds, he noted, in particular for clients with more of a focus on meeting spending rules than meeting accounting and actuarial valuation bases.
About nine months ago it moved its recommendation further towards Asian bonds as some European interest rates turned negative. It made the final shift two months ago.
Asia bond mandates rising
Asia-Pacific institutions’ typical approach to owning bonds outside their home country has been to follow the Barclays global aggregate, noted Ryan-Kane.
Broad Asia mandates were very rare until recently, he added. “Market size and availability of managers were constraints to moving towards a broad Asia [fixed income] portfolio rather than a global one.” But the situation has changed now.
In any case, there is often no natural reason for investors in the region to hold global bonds, argued Ryan-Kane: many don’t have overly long duration liabilities, and they are more concerned about income than liability matching.
For many, he noted, global bonds are simply a habit, developed when many Asian investors first went offshore following the 1997/1998 Asian crisis, when diversifying away from their home bond markets was in vogue.
Moreover, global corporate bonds have become very illiquid as banks have pulled back from the interbank market and are holding smaller inventories. “Even some global government bonds are not very liquid, particularly with managers reaching for yield,” he said.
Illiquid credit concerns
Meanwhile, Ryan-Kane has also expressed concern, during the Southeast Asia forum, about the big growth in demand for illiquid credit, such as peer-to-peer loans, bank debt and European credit.
“The amount of money that will try to get out when the liquidity cycle turns will be too large to fit out the door,” he said. This will lead to further falls in prices and more market stress, creating a downward cycle, he added.