Category Winner: Best Asia Bond Fund - BGF Asian Tiger Bond Fund D2 USD
Inception Date: 2012-5-9
Total Net Assets (Mil) (2018-03-29): USD 3192.97
Manager: Neeraj Seth
M: Morningstar B: BlackRock
M: Can you highlight any major changes you made to the portfolio over the course of 2017? Were there any particular holding(s) that drove the fund’s performance for the year?
B: The fund performed well in 2017 both relative to our peers and to the market. At its heart, the portfolio has a focus on credit and most of alpha generated in 2017 came from credit positions, in line with our risk budgeting over the course of the year. We entered the year with a preference for frontier sovereign credit, Indian credit and Indonesian sovereign and quasi-sovereign credit and ended the year with a preference for APAC financials and off benchmark positioning in higher quality Middle Eastern sovereign and quasi-sovereign credit. Our rotation across sectors and issuers throughout the year is a key contributor to the strong performance observed in the fund. In addition, with the macro research team integrated into our investment process, we were able to employ selective currency plays in the portfolio which added to alpha as well.
M: What is your outlook for 2018 specific to the markets you cover, and how are you positioned to take advantage of opportunities and/or mitigate potential risks?
B: We foresee a benign outlook for Asian credit. Ageing population and high global savings continue to support the income theme and should remain key long-term drivers for the asset class. Despite higher US treasury yields and the recent volatility in equity markets, Asian credit spreads remain well anchored: average Asian credit spreads widened just 0.10% in the recent market rout and remain below long term averages (1Y, 3Y, 5Y, 10Y)1.
We expect a gradual pace toward policy normalization – primarily interest rates returning to “normal” from unusually low levels triggered by the 2008 global financial crisis. The pace is important to maintain stability in credit markets. We see the synchronized global recovery eventually causing inflationary pressures, albeit moderate enough for the Fed to normalize policy without stifling growth. We expect the Fed to lead with additional rate hikes in 2018, while the European Central Bank (ECB) and the Bank of Japan (BoJ) may keep rates low for longer. This should provide abundant liquidity for global fixed income markets over the next several months. We favor credit over developed market government bonds given the income cushion credit provides.
Valuations for Asian credit remain attractive on a risk-adjusted basis and we see a positive fundamental and technical backdrop. The market continues to absorb the increase in supply while buyers continue to shift from foreigners to Asian institutional investors. We see this trend continuing and contributing to keep volatility in check.
Asian credit, across investment grade (IG) and high yield (HY), may provide higher income at lower volatility relative to the global US dollar-denominated corporate credit universe. In the US, IG credit is highly dependent on private corporates; in Asia, about 70% is linked to sovereign or quasi-sovereign credit2. This strong reliance on sovereign credit and stable leverage in IG provide the positive backdrop for the asset class. The smaller Asian high yield universe (~15% of all Asian credit) has seen low default rates2, and we believe they will likely remain low given abundant liquidity and low all-in costs of funding.
We prefer high-quality IG credits but are still finding selective opportunities in HY corporate credit. China’s reform agenda and financial deleveraging may lead to slower growth than markets are anticipating and we could see a pickup in volatility. The silver lining would be an increase in the quality and sustainability of longer-term growth, in our view.
Hard Currency Credit: Investment Grade — We believe regional growth / inflation dynamics support credit: IG fundamentals remain stable and on a deleveraging trend and valuations look attractive relative to developed markets.
Hard Currency Credit: High Yield — We expect default rates to remain low in 2018 backed by adequate liquidity and stabilizing fundamentals. We believe that pockets of value remain, but we see issue-specific risks translating into continued dispersion in performance. This underscores the need for selectivity.
Local Currency Bonds — We have selective exposures in markets with high real yields for attractive carry, such as India and Sri Lanka.
M: Can you comment on the major risks facing financial markets, such as rising US rates and elevated asset prices? How do these risks affect your investment decisions?
B: Rising US rates (and term premium) have been well - flag on the back of the current growth/inflation dynamics. As such, managing duration is an important part of the investment process in addition to managing credit risk in the portfolio. In the BGF Asian Tiger Bond Fund, we actively manage the duration of the portfolio through the use of US treasury futures. This, when used in conjunction to our positions in USD Asian Credit, allows us to manage both risk factors separately. Our view on duration is based on the team’s fundamental analysis in addition to our connectivity to fixed income teams globally.
In times of higher market volatility, there is generally a flight to quality. In a Goldilocks environment, the typical strategy to employ is one that is tilted towards high carry and a bias towards credits down the credit spectrum. In the current environment however, we prefer to have a neutral carry strategy with moderate risk and a preference for higher liquidity in the portfolio. Such a strategy should allow us to move to higher risk positions and pick up credits we like on a fundamental basis at attractive valuations in times of a market dislocation. With that said, while we do expect volatility to move up, we expect market dislocations to be short lived in light of sanguine global growth, stable credit fundamentals and expectations of low defaults.
M: How is your investment team organized? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future?
B: At present, the investment team is well-resourced. There are more than 30 investment professionals3 across portfolio management, research, risk management, trading and capital markets in Singapore, Hong Kong and Shanghai directly supporting the investment process for the BGF Asian Tiger Bond Fund. With that said, Asian credit markets are still evolving and we are constantly assessing the need for additional resources to support our investment process.
M: Can you highlight any areas where you feel that the investment team or the investment process can be improved upon?
B: Over the past 5 years, we have been gradually evolving the team which has most notably included the strengthening of our research capabilities including a head of APAC FI research covering both credit and macro research, reporting to Neeraj Seth who is the portfolio manager of the BGF Asian Tiger Bond Fund. This is in addition to our research hires onshore in China. This reflects the evolving nature of the asset class and the importance of both credit and macro research in our investment process. We believe that our research team is well-resourced at this point with a team of 10 analysts3 but will continue to grow the team as the market evolves. In addition, we’ve increased our portfolio management capabilities with to support on the BGF Asian Tiger Bond Fund and our other Asian credit strategies to ensure sufficient coverage across our portfolios and add to the breadth and depth of our portfolio management capabilities.
View all Morningstar Hong Kong Fund Awards 2018 articles here.