Investec launches two high yield bond funds in Hong Kong

The manager expects the funds will benefit from expected rate falls led by the US in the second quarter of next year.

Investec Asset Management has launched two high-yield bond funds targeted at the Hong Kong market following their recent authorization by the Securities and Futures Commission.

The US Dollar High Income Bond Fund holds a portfolio of fixed and floating rate securities issued by governments, institutions and corporations in both developing and developed countries. While securities held are mainly denominated in US dollars, the fund may invest in fixed interest securities denominated in other currencies but hedged against the greenback.

The Sterling High Income Bond Fund invests in a broad range of fixed interest and high yielding securities denominated in any currency but hedged against the Sterling.

Paul Griffiths, voted best fixed interest manager by a UK investment magazine in 1996, 1998 and 1999 while with Invesco, is heading the Investec fixed income team in London.

With the current high interest rates, Griffiths says generating a high level of income can be difficult. And while emerging market debt and high yield corporate bonds offer a high yield, they are potentially volatile.

The funds categorize their holdings in three areas: investment grade debt issued by the US and European governments, emerging markets debt of or below investment grade, and non-investment grade corporate debt.

"Clearly we need to be good in each one of those areas. But we also need to be good at choosing which one we get into from time to time because the investment style of a high yield manager in a strategic product like this needs to be good at, first, managing these instruments, but also knowing when to sell, for example, emerging markets in favor of treasuries or high yield debt," says Griffiths.

Griffiths expects GDP figures coming out from the US this Friday will be low, indicating a slowing growth rate worldwide led by the US.

"Our growth expectation for the US this year is in the 3% to 3.5% range compared to 3.2% for Europe. A less aggressive growth environment is a positive signal for fixed interest," Griffiths says.
He believes short term interest rates in the US have peaked, and expects them to ease in the second quarter next year.

"We believe the Fed in the US will have room to cut rates in a gradual manner, with one [cut] in the second quarter and then perhaps another one and possibly two in the second half of the year."

The US dollar fund, with a minimum investment of $3000 or HK$25,000, charges a front-end fee of 5%, an annual fee of 0.75% and a promotional fee of 0.15%. The $4.5 million fund is managed by Andy Seaman. Around 15% of its holdings has less than one year maturity.

The Sterling fund, with the same level of fees and minimum investment, is managed by Paul Brain. The fund has $3.28 million under management.