Manulife Asset Management is bullish that its diversified Asian bond fund will prove attractive to investors in this region despite the spectre of interest rate rises to rein in inflation.

The firm first launched its Asia total return strategy on the Ucits platform out of Luxembourg in September 2009. Since inception it has returned around 10.8% net of fees, with a volatility of less than 3.5%, Manulife reports.

But this May the asset manager reached out to this region, making the Manulife Asia Total Return Fund available to retail, high-net-worth and institutional investors in Hong Kong and Singapore.

The firm argues that this fund, which comprises sovereign debt as well as investment grade and high-yield corporate bonds, is different from other products on the market because it invests across the fixed-income spectrum, namely currencies, rates and credit.

“We want a product that can stand up and make positive returns in most market environments,” says Endre Pedersen, managing director of Asia fixed income at Manulife Asset Management. “Last year its return was driven by allocation to local rates. So far this year it has been driven by currency appreciation, as well as by the credit side to some extent.”

Pedersen is expecting inflation in Asia to average between 4.5% and 5.5% in the medium to long term, and he says it is all about picking the right spots -- for example, by increasing exposure to parts of the market that are less sensitive to rate rises, such as high yield, short duration, floating-rate notes and convertibles.

However, he also notes that the average credit quality for the portfolio will remain investment grade, while its illiquid portion will be less than 10%. Overall, the fund will contain between 60 and 100 bonds, depending on how much exposure it is willing to run on the high yield side.

The fund uses two reference indices rather than a benchmark: the JP Morgan Emerging Local Markets Index Plus (Asia) and the JP Morgan Asia Credit Index (USD).

Its Singapore launch was timely, notes Pedersen, given a favourable appreciation outlook for the Singapore dollar and the likelihood that China will expand offshore renminbi trading beyond Hong Kong.

He also notes that the Monetary Authority of Singapore (MAS) in April announced plans to allow further gains in the dollar in the third round of monetary policy tightening in a year.

“Our view is that the MAS has reacted early to inflationary pressures and strong growth,” he adds. “With this latest currency hike, they are still tightening, but not overly aggressively. If inflationary pressures remain, investors should not be surprised to see a further tightening move in October 2011.”

Asked if its Asian bond fund will invest in inflation-linked bonds, Pedersen replies: “It has to make sense for us. With Thailand looking to issue, we are looking at it, but there has to be value for clients. We want to see what the bonds look like and what the features are underneath.”

Pedersen sees the key fixed-income opportunities for the rest of this year in assets denominated in rupiah, won and renminbi. “Indonesian sovereign bonds are delivering strong yields and we believe there is potential for the country to be upgraded to investment grade status,” he says.

“Meanwhile, there is room for the Korean won to appreciate as it’s currently undervalued compared to the currencies of export competitors such as Japan and Taiwan. As the renminbi appreciates, we expect South Korea to feel more comfortable to let its currency follow suit without impacting on the competitiveness of its exports.”

Manulife AM has more than 40 fixed-income professionals across 10 markets in Asia, with 16 of them focused on credit research. The team is led in Singapore by Cheng Duan Pang, with the regional team led by Yu-Ming Wang, head of fixed income for Asia. The firm manages about $29 billion in fixed-income assets in Asia, as of March 31 this year.