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Asian bonds now doing well, inflation's benign

Publication Date : 02-09-2012

 

US bonds have long been regarded as among the safest in the market, but an expert says Asian bonds now present a more attractive option

 

US corporate and treasury bonds have long been regarded as being among the safest in the market, given the deep and well-developed American markets.

But for Schroders' Asian bond fund manager Rajeev De Mello, Asian bonds now present a more attractive option.

De Mello, 46, notes that in terms of growth potential and prospects, Asian companies are outshining their American counterparts.

"The growth is here. While big US multinationals do have exposure to the Asian markets, those firms that are focused on the US domestic market are unlikely to do as well as the Asian-focused firms," he said.

"So in terms of ability to pay out a cash flow and better business prospects, Asian firms are safer."

Mr De Mello is in charge of several Asian fixed-income funds, including the Schroders' Asian Bond Fund and the Asian Premium Bond Fund.

The Asian Bond Fund (ABF), which is the big brother of the two, started in 1998. The size of the fund is about US$1 billion (S$1.25 billion) while the Asian Premium Bond Fund (APBF), launched in 2006, has a size of about US$100 million.

Both funds have done relatively well this year.

The ABF posted a return of 4.88 per cent, including any dividends re-invested, for start of the year up to July 31.

The Asian Premium Bond Fund, which aims to beat the Central Provident Fund Ordinary Account rate of 2.5 per cent, achieved 5.46 per cent for the same period.

De Mello started out as a trader in 1987 before venturing into fund management. He moved to Asia in 1998 and was last at Western Asset Management before joining Schroders last year.

Q: How do you go about looking at which companies' bonds to buy?

We take both a top-down and a bottom-up approach.

We look at the macro-level trends. For instance, what the European Central Bank will do and how it will affect overall market conditions.

Then we take a thematic approach at the regional level, for instance, how will oil affect prices in Asia.

We also study each country and how their policies might affect companies.

Then we talk to the companies themselves, study them before we buy their bonds.

Q: So it's a bit like how the equity funds do it?

Yes, except for one key difference: I'm looking for sustainable cash flow.

If a company makes an acquisition using cash, equity funds might get excited for the potential growth it brings.

But for me, I would get excited if it divested, say a big property it held. That gives the company cash to pay its bonds.

Q: The financial crisis marked a huge watershed for equity markets. How did it change the bond markets?

It was a real watershed for many reasons.

One, yields fell across the board.

In Asia especially, firms were going to the capital markets to raise money, simply because banks were not lending as much.

So you have this huge shift when, say 10 years ago in Asia, people were not keen on fixed income. Now there is a lot of interest without investors wanting to diversify their portfolio.

So far this year, the ABF has seen net inflows of S$13.5 million from local investors, while the APBF has seen net inflows of S$6.8 million.

Q: Many people are moving into bonds to escape the volatility in the markets. But surely, that is not without risk. What do you think are the biggest risks?

The biggest risk for me now is inflation. Anyone who buys bonds must be worried about inflation because inflation can eat directly into your yields.

The good news is that, thus far, global inflation has been relatively benign. Both the US Federal Reserve and the European Central Bank are relatively sanguine about the risk worry, so at least for now, it is not a big worry.

US$1 = 1.24 Singapore dollar

 

 

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