LOIM Asia Diversified High Yield Bond strategy marks 3 years with positive performance and volatility results

In its first three years, our Asia Diversified High Yield Bond (ADHY) strategy has successfully delivered a gross annualised return of 13.1% in USD terms.¹ Launched in Aug 2022, it is the third hard-currency credit strategy from the LOIM Asia and Emerging Markets fixed-income team, following the launch of Asia Value Bond in 2013 and Asia Investment Grade in 2019. Led by Citywire AAA-rated Portfolio Managers Dhiraj Bajaj and Nivedita Sunil², the team currently runs about USD 3.8 billion in AuM, with more than USD 230 million in ADHY.³

Read also: Positive macro drivers for Asia bonds are in play

A multi-year opportunity

When ADHY was launched in 2022, global fixed income markets were experiencing their worst year in decades. US Treasuries had sold off by -12.5%, resulting in significant pressure on Asia and emerging market (Asia-EM) hard-currency debt. However, taking a long-term view, the team perceived a multi-year opportunity for returns amid the downturn .

The strategy was accordingly structured to seek high income with a relatively low duration in a curated and diversified portfolio of hard-currency Asia high-yield bonds. Over time, this approach has proven to be a strong diversifier that complements fixed-income strategies focused on developed markets.

In managing ADHY, we focus on five key principles:

1. High income – focused on income while seeking to outperform the J.P. Morgan Asia Credit Index High Yield over rolling five-year periods.⁴ Combined with low duration of two-to-four years, this provides a strong pull-to-par bond dynamic in the current environment.
2. Diversified and defensive allocations, with strong security selection
3. Seeking attractive growth and yield opportunities across Asia-EM – domestic and regionally-focused growth companies across the infrastructure, renewable energy, financials, industrials and technology sectors, which offer a low correlation to any potential slowdown in developed markets
4. Selected emerging markets (EM) exposure to enhance diversification. Our minimum Asia-Pacific allocation is 70% and maximum EM-ex Asia allocation 30%⁵
5. All portfolio exposure is in hard-currency credit – no FX positions, derivatives or currency mismatches.

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Beating the benchmark

Over the three years since launch, ADHY delivered a total annualized return of 13.1%, outperforming the benchmark J.P. Morgan Asia Credit Index High Yield by 2.7 %.⁶ It achieved this with almost half the volatility of the benchmark and a Sharpe Ratio of 1.1 (see Figure 1).

FIG 1. LOIM Asia Diversified High Yield: performance since inception²

Strong domestic drivers in Asia for hard-currency high yield

During the last three years, the market environment has moved from being dislocated with oversold opportunities to one which is increasingly supportive of risk assets.

This improvement has been driven by both global and regional factors. Further US interest rate cuts and a weaker US dollar should provide Asian central banks with the latitude to ease monetary policy, while domestic liquidity conditions remain robust. The region has strong domestic growth drivers and is not overly reliant on the US to stimulate growth. We have identified eight positive drivers for Asia hard-currency credit in the near-term:

1. Growing market expectations of a Federal Reserve rate cut at its September-October meetings, with US interest rates declining towards 3.5% by the first half of 2026
2. Investors have been incentivised by the drop in Treasury yields at the front-end of the curve to reach for higher all-in yields from short to mid-duration assets
3. Domestic monetary-policy easing across Asian central banks
4. Liquidity conditions are positive for risk assets – easy credit conditions with low funding costs should support consumption and corporate borrowing
5. A clean credit cycle is underway, with normalising and low defaults in Asia-EM
6. Strong macroeconomic backdrop for Asia, which has entered a macro upcycle with robust domestically-focused sectors versus slowing developed market economies
7. Reduced Asia USD bond issuance is limiting supply, creating a supply/demand imbalance in favour of hard-currency credit
8. Ongoing US dollar softness should support regional flows and the repatriation of assets back into Asia-EM.

These improved market dynamics underpin our conviction that ADHY will build on its first three years to continue generating robust returns to our investors.