Taiwanese fund managers have shifted out of the conventional fixed-income philosophy of “buy-and-hold” to “buy-and-harvest” in line with a startling increase in bond fund turnover since the global financial crisis.
Speaking at AsianInvestor’s 6th annual Taiwan Institutional Investment Forum in Taipei last week, Vincent Wu, fixed income CIO for Fuh Hwa Securities Investment Trust, suggests that since the 2008 crisis bond investing has ceased being a long-term strategy.
From 2002 to 2003, he points out, five-year Japanese government bond yields dropped from 0.7% to 0.3%, resulting in a one-year capital gain of between 1-2%.
Further, the yield on five-year US government bonds stands at 0.9-1.5%, and Wu predicts that provided the US Federal Reserve keeps interest rates at the current low level until 2014, one-year capital gains will stay below 2%.
He also notes that the European sovereign debt crisis caused yield curves to invert last year, while the Fed interest-rate policy has caused near-term credit spreads to come down, making short-term debt a more attractive target for investment.
“Last year there were massive fund flows into long-term emerging market debt, but this year the fund flows started to enter emerging market short-term debt and flatten the inverted yield curve,” notes Wu. “If you invested in short-term debt towards the end of last year you would have made a profit.”
Looking ahead he sees an investment opportunity in short-term corporate bonds denominated in British pounds, pointing to their wider credit spreads at present in comparison with bonds denominated in US dollars and euro.
“The inverted curve of credit spreads is largely due to the bias towards long-term debt as the bulk of [corporate bond] investors in the UK are pension funds,” says Wu.
Meanwhile Patrick Liao, index investment fund manager for Polaris International Securities, points to a shift among investors towards fundamentally weighted bond indices as a departure away from market cap weighted indexing.
“The global financial crisis and European sovereign debt crisis have challenged the old concept that countries issuing more government debt should enjoy a higher weighting in a global bond index,” Liao notes. “It will not work if a country’s repayment capability deteriorates when it becomes highly geared.”
In January, US bank Citi and Research Affiliates launched the fundamentally weighted Citi RAFI bond index series – with fundamentals taking account GDP growth, land, population and energy consumption.
Liao notes that the weighting of the United States, for example, would drop from 28% in the old market-cap approach to 21% in the new fundamental-based index, while Japan drops from over 30% to less than 10%.
“This change in the benchmark will challenge the rationale of sovereign bond investors,” he adds.