The central question put to one panel at AsianInvestor’s Southeast Asia institutional investment forum in Singapore yesterday was: is fixed income a safe asset class anymore?
The answer was a definite "no" from Khairul Azwa Bahrin, director of risk management and compliance at KWAP, Malaysia’s $27 billion civil service pension fund.
The fund has a significant home bias in terms of debt, but is looking to expand its international bond portfolio for diversification purposes. Generally speaking, at its current growth rate it will soon grow too big to be an efficient player in the Malaysian market.
Bonds are not necessarily safe, argues Bahrin. “Interest rates generally are now at artificially low levels and correspondingly bond price volatility is also at artificially low levels," he says.
"We will see shocks in the system over the next few years," he adds, "driven mainly by government policies, and other central banks that tend to mimic the US Federal Reserve.”
Sun Life Philippines does not invest at all in debt outside its home market, and for good reason: interest rates may have dropped, but they still stand at 6% for 25-year domestic bonds, and 30-year maturities are also available.
They are still considered “very safe”, but perhaps less so than in the past, says Karen Jonas, deputy head of fixed income at the life insurer in Manila.
Trevor Persaud, Singapore-based managing director for Asean and Taiwan at Russell Investments, argues it all depends on your definition of safe, and the fundamentals of what you want from the investments. Are they being used as diversifiers, or to match liabilities?
As for whether now is the right time to boost exposure to debt, that also varies depending on how much you already have invested in the asset class. “There are a lot of arguments now that if you have a lot already, then you probably shouldn’t add more.”
KWAP’s Bahrin takes this view. “It’s not worth putting more into fixed income investments with yields so low. The risk of doing so is a lot higher than we perceive it to be currently. The risk-return trade-off is not attractive."
Jonas says investors need to be watchful for the regulatory inflection point when rates will start rising as inflation creeps up, but points out that a substantial amount of Sun Life's portfolio must be in bonds. An alternative approach the firm can take, she notes, is to developed unit-linked products that are less expensive and require lower yields.
Asked whether China's large exposure to US Treasuries will be an issue and what the possible ramifications are, Bahrin notes that the Chinese are likely to remain significant holders of US debt, as they have little choice. China is “stuck” in this regard, and will be for several years, he adds.
As for investors elsewhere, buying emerging-market debt tends to be a proxy for speculating on currency, says Bahrin. If he could, he would buy the currency directly rather than tying up capital in long-term assets. "Foreign exchange is of course more volatile than bonds and we should be well aware and recognise investment strategies for what they are."
The panellists agreed they would like to see inflation-linked bond markets in their home markets. The markets have perhaps not yet reached the required level of maturity and there is not yet a regulatory framework for such instruments in Malaysia or the Philippines.
However, both Bahrin and Jonas would like to see one put in place. Insurance companies in Malaysia certainly want to see this happen, notes Bahrin.
The Philippine government has talked about moving towards having the country’s first inflation linker issued next year. Jonas expects to see it happen within the next two to three years and says she would take advantage of this, knowing that inflation will rise at some point from its current 3%.
As for eurobonds, neither Bahrin nor Jonas buy them, with the former saying: “The only strong view I have on them is not to buy them.”