New launch landscape fixated on income

Dynamic bond and equity income funds are forecast to dominate the low-yield environment, agree Fidelity and HSBC Global Asset Management.
New launch landscape fixated on income

Bond funds and income products are dominating the new launch landscape this year in the low-yield environment, and this is expected to continue for the foreseeable future.

The trend towards capital preservation and regular income products that avoid equity market volatility has been evident in the second quarter (see related story); Fidelity and HSBC have both launched income funds, and Allianz Global Investors and Aviva Investors have launched yield-themed bond funds.

It comes after data from Strategic Insight shows that $38 billion from 800 new products was raised in Asia in the first quarter of 2012, exceeding that of Europe, international cross-border and Latin America combined. Asia represented 60% of global ex-US flows.

Of 655 new launches (excluding money market) in Asia-Pacific in the first quarter, bond funds accounted for 63%, followed by equity with 16.5%. Most of the bond funds launched were from managers in Japan and China, particularly in high yield, global, credit and convertible strategies.

Overall in Asia-Pacific there were 412 bond fund launches which attracted almost $20 billion in assets in the first three months, while 108 new equity funds collected nearly $6 billion.

Tapping into the trend for sustainable yield, Fidelity Worldwide Investment held a conference yesterday for the launch of its new global dividend fund.

The strategy is managed out of London by Daniel Roberts, who joined Fidelity last November. He starts with a universe of 2,500 stocks from the MSCI All Country World Index and narrows that down via quantitative screening to 200 predominantly large-caps.

The portfolio houses about 50 stocks and turnover is expected to be low, at 25%; the average holding period for the fund is seen as three to four years, with a target yield of almost 4% net.

Roberts focuses on resilience of earnings, strong balance sheets, valuation support and yield, meaning he looks at dividend history and historic returns. For earnings he takes cyclical variations into account.

In terms of the geography of holdings, 38% of the portfolio stocks are from the US, 28% from Europe (ex-UK), 22% UK, 7% Japan, 3% emerging markets and 2% Asia ex-Japan.

On the question of low exposure to Asia and emerging markets, Roberts notes a number of company holdings sell strongly into emerging markets (such as Unilever).

This strategy targets institutional and retail investors, with Roberts noting that life insurers in the UK are interested in this type of product. The strategy is not being marketed in the US.

Fidelity Worldwide Investment already has a UK and a European equity income product and an Asia-Pacific dividend fund, but Roberts argues his product is more a collection of regional funds.

“I can let regional exposures reflect the best traits in individual markets,” he says, noting he has a disproportionate exposure to consumer franchises in the US, financials in the UK and healthcare in Europe. “You get big sector skews in regional funds which you can avoid by going global.”

He adds that Fidelity is thinking about an enhanced global dividend fund in addition that writes call options to increase yield from roughly 4% to 7.5% (similar to a product it has in the UK).

“If markets are going sideways, you can draw some extra income out of that kind of approach, but it will lag in rapidly rising markets,” says Roberts. “We are piloting this internally to make sure we are doing it well.”

Separately, HSBC Global Asset Management has raised $250 million for its Asia focused income fund, launched last month. This retail product seeks to offer sustainable income by investing in multiple income-generating assets: dividend-paying stocks, bonds, Reits and cash.

Bonnie Lam, head of wholesale business for Asia-Pacific at HSBC's investment unit, says the plan is to roll out the strategy to the region, including Singapore and Taiwan, as well as Europe via the Ucits platform.

“The monthly dividend trend in Asia is more obvious than in Europe, while if you look at fixed income products over the past few years, many houses have added a monthly dividend feature,” she says.

Lam adds that HSBC plans to launch more dynamic asset allocation funds in accordance with customer need and is working on hybrid products that take into account growth and income to meet different risk appetites.

On the fixed income side, this month Aviva Investors launched a global short duration high-yield bond strategy for institutional investors seeking less volatile income. This invests in high-yield corporate bonds with an average maturity of less than five years and domiciled across the world.

The strategy is managed by the firm’s global high-yield team (AUM of $4.5 billion) led by Todd Youngberg, who is based in the US. Jeremy Hughes is the team’s lead fund manager and is supported by five PMs and 26 credit analysts in the US, UK, Europe and Asia-Pacific.

Youngberg notes that addressing the duration of bond investments is a key step as institutional investors seek to reduce portfolio risk while maintaining income. On the short-duration product, he says: “We have provided our investors with more choice, especially those concerned about the effect of interest rate changes on their portfolios in a tighter spread environment.”

Meanwhile, Allianz Global Investors is launching an Asia bond with flexible allocation between investment grade and high yield bonds in hard and local currencies. The IPO period runs from June 4 to July 3.

The firm notes that 2011 was a record year for bonds funds in Hong Kong, with a 44% increase in gross sales to $16.6 billion. That sales momentum was carried on into the first quarter this year, with a further 68% increase to $8.5 billion.

The flexi fund can allocate up to 100% in government bonds and up to 70% in high yield. It notes, too, that foreign investor allocation to Asian bonds has more than doubled in size over the past five years, to $6.5 trillion.

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