Schroder Investment Management has remained defensively positioned on credit markets in Asia, having moved to a capital preservation mode last year with the aim of upholding the absolute return objective of its $1.7 billion Schroder ISF Asian Bond Fund.

Since the start of the credit crisis in the second quarter of 2007, Schroders has substantially lowered its exposure in high-yield corporate credit due to the sector's strong sensitivity to the US credit and banking crisis. The fund house increased exposure on liquid sectors such as US Treasuries and German Bunds and topped up on higher-rated credit.

Angus Hui, a Hong Kong-based Asia fixed-income fund manager at Schroders, believes that during volatile market conditions, it is crucial to hold positions that are liquid in order to have the capability to tactically change investment strategy as the market moves.

Since January this year, Schroders hasn't significantly changed its position on credit. It has, however, selectively added to its Asian currency exposure. For its Schroder ISF Asian Bond Fund, the fund house is focusing on liquid currencies such as the euro and the Singapore dollar. It also has small exposures in the Malaysian ringgit and the Indonesian rupiah as a play on tactical recovery.

"Our overall approach is still quite cautious," says Hui.

As at end-January, the Schroder ISF Asian Bond Fund had a 20% allocation to German Bunds, which is perhaps the strongest indication of just how defensive the portfolio remains. At that level, the exposure is already among its highest since the fund was launched in October 1998. The fund is allowed to have a combined 30% exposure in US dollars cash, US Treasuries and German Bunds as a way to offset any souring of sentiment in Asian credit markets.

Hui generally expects lower default rates in Asia than the US for this cycle. He notes, however, that the Asian credit market lacks depth compared to its Western counterparts and many investment participants are financial institutions with global operations.

Hui believes there are more opportunities in credits than interest rates and currencies in the long run. He is continuing to evaluate credit opportunities now and plans to gradually look for opportunities to add fundamentally sound credits with very attractive valuations.

By no means is Hui advocating a buying spree on credit. Each issue must be analysed in the same way stock pickers would analyse stocks, he says: on a case-by-case basis.

"Selective Asian credits are already cheap," Hui says. "Security selection is key. We expect individual credit performance to diverge."

The Schroder ISF Asian Bond Fund had a yield-to-maturity of 5.43%, an average credit rating of A, and had an average duration of 1.99 years in January.

In terms of sector allocation, its top holdings are in local currency sovereigns, which make up around 49% of the portfolio. Around 4.6% of the portfolio is in cash.

In terms of country allocations, Germany (for defensive purposes), Singapore, Indonesia, India and Malaysia are on top.

The fund was down 3.89% in the last quarter of 2008 and down 5.77% for the full year. Schroders cites data from Morning Star that shows a peer average performance of -14.98% in the last quarter of 2008 and -19.15% for the full year.