Schroders favours Asian high-grade corporate bonds

Asian fixed-income fund manager Angus Hui says the spread between Asian and US high-grade corporate bonds will likely continue to widen.
Next year will be a more difficult year for Asian bond fund managers who will have to monitor new issues and check out whatÆs available on the secondary market more closely than ever before, says Angus Hui, Asian fixed-income fund manager at Schroder Investment Management in Hong Kong.

ôIt will be quite challenging,ö Hui says. ôOur strategy will be to look at individual issues, particularly corporate bonds of companies with relatively robust balance sheets. It will be the equivalent of what stock pickers would do for the equity market.ö

Overall, Hui says Asian credit fundamentals remain generally sound with relatively strong capital ratios and the lowest leverage globally.

He notes that there are three ways to add value to an Asian bond portfolio, and thatÆs by looking at interest rates, credit risk management. AsiaÆs relatively flat yield curve limits the potential for outperformance of government bonds, he says.

Hui says he favours Asian high-grade corporate bonds, or the highest quality corporate bonds issues by the top performing companies in the region, which Schroders has not been actively buying over the past three years because of high valuations.

But now that the spread between Asian high-grade bonds and US high grade bonds has widened a lot, and the potential for further widening is strong, it would be a good time to accumulate more of these issues, Hui says. ôBottom-up fundamental research can still uncover selective total return opportunities.ö

Hui expects a steady stream of new corporate bond issues in Asia in the coming year, mainly because of the impact of US credit concerns on the market this year.

ôThere will be a lot of recapitalisation and new issues,ö he says. ô2007 was a year of a lot of bond redemptions, so there are lots of money to be put to work in 2008.ö

As of end-October the top five holdings of the Schroder International Selection Fund Asian Bond portfolio were zero-coupon German government bond maturing on February 2008, the 6.25% coupon Philippine government bond maturing on March 2016, the 5.25% Korean government bond maturing on September 2015, the 3.541% coupon Bank Negara Malaysia maturing on July 2008, and US Treasury notes maturing on May 2037.

Close to 20% of the fund is in cash. In terms of geographic allocations, the Philippines has the highest followed closely by Malaysia, and trailed by Indonesia.
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