Stephen Chang is head of fixed-income within the Pacific Regional Group of JF Asset Management. He joined the firm in 2004 to take up his current position. Prior to joining the firm, he worked with The Royal Bank of Scotland in Hong Kong where he was a senior interest rates and derivatives trader. Before returning to Hong Kong, he joined Fischer Francis Trees & Watts in New York in 1997 as a global fixed-income portfolio analyst and was later appointed as a global fixed-income portfolio manager. He began his career in 1996 with Morgan Stanley in New York as an associate for corporate treasury and risk management. He shares his views on AsiaÆs fixed-income market with AsianInvestor.

We are experiencing a prolonged credit crisis in the US and persisctent volatility in financial markets everywhere in the world. What does this all mean for AsiaÆs fixed-income markets?

Chang: That is precisely the question people are asking everyday û what is safe? In the US, even money market funds are in trouble. You actually have a huge demand for US dollars. Everyone is scrambling. Global funds are trying to get funds out. The US dollar is still the most common currency. The dollar has been extremely strong. It had a very weak period much of early this year and that put a lot through a chaotic environment in Asia. In terms of bond prices, they were fine and in fact they rallied a little bit because of rate cut expectations. At the same time, you were losing a lot on your currency. ThatÆs why we were seeing a tremendous inflow in US Treasuries.

ItÆs very different from where your home country is. The dollar is still very much the useful currency to trade in a business transaction. There is a tendency to stay with the most liquid û the US dollar. That is the theme until we have some kind of stability in the US credit market.

How have you been dealing with the impact of the credit crisis in the US, in terms of managing your Asian fixed-income portfolio?

As an Asian bond manager, we had been negative on credit û although we didnÆt expect this where you have questions about every counterparty that you deal with. And the trouble for a lot of bonds we trade, which in the past were very active, is the transaction for that has dried up.

Our previous stance was to keep a lot of cash around, hoping for cheaper prices. We have been keeping at least 10% in cash in many of our funds starting early this year. We are steady at that level now. We have been getting some regular redemptions in our series but itÆs controllable. We try to continue to raise cash. Deleveraging is ongoing. We try to keep as much cash as we can.

What has been the impact of the credit crisis on Asian currencies? How has this affected your current investment strategy?

Being an Asian bond fund manager, we tend to have quite a lot of Asian currencies especially when Asia was, particularly with the renminbi, appreciating and people thought there was more room for that. Starting around May this year, we were thinking the dollar was overdone being so weak. We had at that time increased our exposure back to the dollar to about 90% or so.

We still hold that view for two reasons. One, there is a continued demand for US dollars and some tend to sell their off benchmark positions to return to the main currency of the US dollar. Second, most of our funds are quoted in terms of dollar returns so holding dollars is the default or the lower risk position.

WhatÆs your AUM in fixed income?

I manage the whole team. A quarter ago, our numbers were something like $4 billion. Now itÆs actually in the neighbourhood of around 10-15% lower.

What has been the impact of the credit crisis on Asian interest rates? How has this affected your current investment strategy?

What we are continuing to see is the steepening of yield curves around the world. The authorities have almost tried everything from guaranteeing deposits to guaranteeing debts of banks. That will in a way soften rates. If the authorities continue to provide liquidity in the front-end, it will loosen the paper. What we want is softer maturity for our comfort.

What is the mix of your overall Asian fixed-income investments?

For our regional portfolio, the JF Asian Total Return Fund has about $103 million. The mix of that is 10% in cash, 10% in local bonds, the rest in US dollar bonds. Within that mix, we have something like 40% in non-investment grade and the rest in high grade.

The basic story for us is we feel that some of the credit fundamentals of the non-investment grade issuers that we picked are on an improving trend. Some of the investment grade issues that we were looking at were priced expensively and they were more connected to the global crisis. Technically, that would make them more vulnerable. Those names, even some of the most household names, are being priced at distressed levels of near distressed levels. We look at their cash levels, if they look like they are improving their cash positions, and if going forward they will have the cash to pay us upon maturity.

Our set up was to hold shorter maturity bonds and some of that was in non-investment grade bonds or in non-investment grade issuers, but we believe they have enough in their investment budget to pay us.

Are you looking more closely at the possibility of default?

Of course we have always been more cognizant of bottom-up research. We are moving more and more towards that qualitative analysis instead of just a quantitative approach. The distinction between credit and rating is not the most differentiating feature now. ItÆs more about whether they need capital, they need refinancing, those who cannot get funding and they have cash to return to us, thatÆs fine.

Do you have a preference either for short-term or long-term Asian fixed-income instruments?

Short-term. Up to three years maturity.

Do you have a preference for either corporate or government bonds?

Liquidity is very important right now. Governments can afford that. On the other hand, it depends on what our product is. If itÆs a mandate from institutional long-term money, then corporates would provide good long-term value even if there are risks involved right now. For funds where we are allowing our shareholders to trade daily, then they would prefer more liquidity. When we have maturities coming up for the daily traded funds, we would be putting that in government and increase it that way until we see a systemic fix to the global financial crisis.

Do you have a stronger view towards a particular fixed-income market in Asia?

What we have seen in the market is anyone with a funding need or a current account deficit is vulnerable, so we try and stay with countries with more positive trade flows and a huge war chest in terms of current account surplus and FX reserves. The vulnerable ones are India and Korea and the more stable ones include China. ChinaÆs stock market has been battered but in terms of the overall health of the country, itÆs among the best in the world.

One of the most common criticisms of global fund managers is the lack of depth in secondary fixed-income markets in Asia. Do you agree?

The secondary market for bonds is horrendous and Asia is not immune to that. Before the financial crisis, the Asian secondary bond market would be considered less liquid than their Western counterparts. That also means when price goes down, it goes faster in non-investment grade names. The general phenomenon is that Asia tends to rely more on bank loans.

What is your overall Asian fixed-income investment strategy over the next 12 months?

The credit crisis and the deleveraging process will continue until we find a systemic solution and that may still be months away. Until then, one would have to be defensive, have high levels of cash, lean towards short maturities, and just do intense credit analysis on names that one feels comfortable with.

What have been the main challenges you have faced in managing an Asian fixed-income portfolio over the past 12 months?

The main frustration has been the lack of liquidity. We had assumed pretty negative credit scenarios and credit spreads widening, but not like this where there is no one willing to make markets for you. The market was very liquid a year ago. The second shock to debt holders is how quickly things can evaporate. When Lehman Brothers was in financial trouble, people didnÆt think that it would fail over the weekend like it did.

What do you see as the biggest opportunities in the Asian fixed-income market?

Everything is cheap or at least cheaper. We also see a lot of dislocation within the markets. If you have a long enough yield, you can actually benefit a lot. The trouble is the historical arbitraging mechanism û where you can do an asset swap with a broker for example û is unavailable.

The November edition of AsianInvestor magazine contains a feature on the Asian fixed-income market.