Hong Kong asset managers are jumping at the opportunity presented by investors seeking income post-pandemic by launching benchmark-agnostic, bottom-up managed funds, designed to source yield from Asian equities and high-yield bonds.
This week alone, HSBC Global Asset Management and Pictet Asset Management launched separate income funds designed for retail investors. Both funds are premised on the fundamental view that the Asian region will be the best-performing market in 2021 as the adverse impact of Covid-19 slowly dissipates with the advent of the vaccine.
While the HSBC fund is multi-asset and the Pictet fund is a fixed-income fund, both have similar strategies that rely on asset allocation involving risk-on assets to generate a substantial part of their income.
The HSBC fund is premised on the fact that Asian equities are currently trading at a discount compared to those in major developed markets, giving a higher capital growth potential. Asian high-dividend stocks are currently providing a 4% yield.
In terms of fixed income, Asia high-yield bonds offer competitive yields and shorter durations compared to peers, plus the benefit of lower default rates, helping make the case for investing in Asia credit stronger. Asian high-yield bonds currently return about 7%.
In addition, the HSBC fund employs yield enhancement techniques by adding Asian REITs into the portfolio, as they show attractive valuations with decent dividend yield levels.
“The fund captures higher income opportunities in Asia by using a multi-asset approach with additional yield enhancement techniques to unlock the income potential. This includes adding higher-yielding asset classes, writing covered calls on equity and tilting equity to higher-dividend stocks,” says Jimmy Choong, associate director, multi-asset, at HSBC Global Asset Management, who is the manager of the fund.
The Pictet fund, also launched on January 4, invests across a blend of Asian investment-grade and high-yield corporate bonds that targets income optimization while avoiding concentrated credit risks.
It is benchmark-agnostic and adopts bottom-up credit analysis. It takes on a focused yet diversified approach, generating the majority of its core income from investment-grade papers and the rest from quality high-yields.
The Pictet fund allocates a minimum of 60% to investment-grade Asian corporate bonds. It neither invests in bonds with CCC-rating nor distressed debt. To avoid concentrated credit risk, the fund’s maximum allocation to each high-yield issuer will not exceed 1%. The fund targets a distribution yield of around 5% at launch.
While using Asian high-yield bonds as an underlying asset appears to be a sound investment strategy, a growing and important part of the Asian high-yield bond universe is made up of Chinese real estate which has been plagued by recent defaults.
Cary Yeung, head of Greater China debt and fund manager of Pictet’s Asian bond income fund, however, cites economic data which indicate that the Chinese economy is quite solid, being the first to recover from the Covid-19 pandemic.
“Asian credit has gained maturity in terms of breadth and depth over the recent years. Thanks to the region’s economic resilience and healthy investors’ demand, we have witnessed promising growth in the asset class in terms of market size, number of issuers and markets as well as duration and sector diversification. China, which accounts for a majority of the Asian credit universe, enjoys a positive outlook. Economic recovery trajectory remains intact given that policies are likely to stay supportive in the near term,” said Yeung.
He sees value in select Asian credits, including mainland property developers with solid fundamentals and good access to domestic liquidity, as well as select Indonesian utility companies and Indian infrastructure companies.