Brandywine Asset Management, a $4.2 billion boutique fixed-income manager based in Wilmington, Delaware, is revising its internal guidelines to allow it to invest in Asian fixed income.
"A lot is going to happen in Asia over the next five to 10 years," says David Hoffman, managing director. "The renminbi's appreciation will be a long-term trend. Look at when the yen was freed to trade in 1975, it rallied 350% against the dollar over the next 20 years. Japan had also been a low-cost country of cheap manufacturers that upgraded their quality, and China is on an ever faster track."
In addition to allocating investments to the region, Brandywine also sees business development opportunities. The boutique last year set up its first marketing office in the region, with ex-JPMorgan Chase senior economist John Tsao running client service in Singapore, and now runs around $200 million from clients there and in Tokyo. The boutique's goal is to see non-US sourced assets rise from around 10% to 50% of its business.
Brandywine runs a global fixed-income product that attempts to buy cheap markets and avoid expensive ones using a global macro strategy, rather than delve into local credit research. Its universe includes all developed country indices and some markets in Eastern Europe.
The boutique also disdains bond indices. "Stock indices are a meritocracy," says Hoffman. "Good companies become major components of a stock index. But bond indices are weighted by country size, the value of the currency and the amount of debt issuance, none of which has anything to do with return. Treasurers are trying to reduce their cost of capital, which means they want to reduce fund managers' rates of investment returns. If you buy a fixed income index, you buy their goal of reduced return. Institutional investors make a mistake by pegging fixed income managers to a benchmark, although a lot of fund managers like it because then they don't have to stick their neck out."
Hoffman says the firm nearly pulled the trigger on its first Asia ex-Japan trades but found the threat of an appreciating renminbi, the bond markets were not cheap.
At present the boutique is very defensive in the US, where its holdings are concentrated in money markets; has zero invested in Japan; and has recently exited euro-denominated securities because the dollar is going to correct for a few months. It remains invested in European bonds denominated in other currencies (e.g. Norway, Poland).
Brandywine attributes 49% of its excess return to currency calls, and 27% from duration or sector choices and 24% from picking the right country. "We don't know the future but we can measure a currency's value today and see if the pressures on that value are going to push it up or down."
The firm almost bought the yen in March at JPY/USD112, but decided the long-term weakness in Japan's economy and the risk of sudden losses of value in Japanese government bonds made Brandywine decide that it lacked conviction that yields on Japanese securities would be high enough to avoid losing capital. Asia, however, is looking like another story.
"The US dollar needs to adjust more to Asian currencies, not the euro," Hoffman says. "Our trade problems are with Asia. The world can't depend on US consumption. After the Asian financial crisis, we saw Korea and China start to depend on internal consumer demand, and that's good for growth."