fixed income
10 years of Asia Value Bonds: investing in growth
When we launched our Asia Value Bond strategy, we designed an unconstrained approach that is independent of benchmarks in order to capture the best opportunities in the region’s fast-evolving and growing economies. A decade later, we profile its investment ethos, key investment calls and explain the advantages of being local and contrarian when investing in Asia and emerging-market credit.
|
Need to know:
|
|---|
A tumultuous decade
It’s been a tumultuous decade for Asia and for EM, amid multiple crises, a shifting policy landscape and on-going geopolitical tensions to which economies and companies have adapted. We have navigated the strategy through extreme events such as the collapse in commodity prices in 2015 , the Covid pandemic in 2020, the end of low interest rates in developed markets (DM) and the Chinese real-estate crisis.
Notwithstanding these market cycles and shifts, Asian economies as a whole have expanded, become more self-reliant and gained resilience over the past 10 years. Many companies across the region have grown considerably, become new leaders in their markets and industries, and successfully transitioned to being well capitalised.
Throughout this time, the Asia Value Bond (AVB) team has continually charted trends to capture burgeoning prospects in industries such as renewable energy, technology and infrastructure. We have provided capital to finance the growth of these new industries and maximise the opportunity set for USD-denominated investors in Asia and EM.
As a fresh set of investment opportunities and challenges arise today, we look back and forward to explain what makes the AVB strategy tick.
A flexible approach built for consistency
Our investment philosophy is to seek total return, invest in credit that we believe offer the strongest prospects for long-term value and undertake a relatively flexible approach. We do not build and manage portfolios to match benchmarks, which can miss key openings in Asia and EM more generally. Instead, we use our deep expertise in the region and careful analysis to find patterns where value can arise – this approach helps us to generate consistency. We combine the best of top-down and bottom-up selection in a diligent and repeatable manner and minimise any deviation from this management style.
Our investment teams are located in Singapore because we believe in being ‘local’, including maintaining close interaction with companies and management, both on and off-site. We have also developed a wide network with the trading community, credit ratings agencies and bank syndicate desks to cover the region from the ground up.
As unconstrained investors, we can be contrarian to market consensus when it’s necessary, both in our thought processes and investment decisions. We have often been ahead of the curve to both reduce and take risk, as shown in the graphic below. In this respect, we believe our approach is highly distinctive.
Currently the third-largest Asian USD credit fund in the market, AVB holdings are comprised of 60% investment-grade (IG) and 40% high-yield (HY) bonds; and it has assets under management (AUM) greater than USD 2 billion1. AVB is the flagship strategy of our dedicated fixed income platform, which includes LOIM’s Asia Investment Grade strategy, launched in 2019, and our Asia Diversified High Yield strategy, launched in 2022. Awards for AVB have included ‘Best Asia Credit Strategy in Hard Currency’ from Lipper in 2019, a platinum award from Fund Selector Asia in 2020 and more recently, ‘Best APAC bond fund over 10 years’ from Lipper2.
Finding long-term value
The strategy’s investment approach and expertise have translated into robust returns, making AVB the best-performing strategy among Asia hard-currency blended credit competitors last year3. In 2023, AVB outperformed a group of 11 peers monitored by LOIM and the benchmark, generating a net return of 8.68%4, 162 bps greater than the 7.06% generated by the JP Morgan Credit Index (JACI). To us, this reflects our focus on investing in value-based opportunities.
Our aim to find value over the long-term has also been reflected in our 10-year performance. Since launching in April 2014, AVB has generated a net annualised return of 3.77% compared with 3% for the reference index, in USD terms (see figure 1)5. The performance resulted from our early identification of India and Indonesia as growth markets, careful management of our exposure to China and a flexible approach which allowed us to exit or add risk at advantageous times for investors and focus on total return.
FIG 1. Performance of the LOIM Asia Value Bond strategy vs its benchmark and peer-group median
Source: LOIM, Bloomberg. Covers period of 1 April 2014-1 April 2024. The peer group methodology cited herein is provided for information purposes only and may be subject to change over time. No fund/benchmark/index is directly comparable to the investment objectives, strategy or universe of our fund. Returns shown net of fees. The performance of a peer group shall not be indicative of past or future performance of any fund. For illustrative purposes only. This document has been prepared by LOIM employees who are encouraged to raise assets for their strategy and may have a conflict of interest.
Key milestones
From the beginning, we have adopted a contrarian stance to the market consensus when we believe it’s required to find value for investors. That has included investing in India and Indonesia from the beginning and successfully exiting Chinese real estate holdings to limit losses before further unexpected pressures arose. Along the way, we have always sought to reduce or put on risk in the best interests of investors by focusing on value opportunities and using our unconstrained and flexible process to manage the underlying exposure.
Please navigate the graphic below to discover some of our key milestones.
Macro conditions to foster flows to Asia
Looking ahead, the macroeconomic outlook appears extremely supportive of Asian credit over the next two years. Namely, expected global interest rate cuts and an increase in liquidity should benefit Asia and EM. After the sharpest and most significant rate hiking cycle seen in decades, it’s clear that global rates have peaked, inflation is normalising and DM central banks are expected to start a multi-year easing cycle.
We expect the Federal Reserve to cut 200 bps between H2 2024 and end-2026. Globally, the loosening will be echoed by anticipated rate reductions in Asia (excluding China and Japan) of some 100-150bps over the same period. The relatively smaller Asian rate cuts should heighten the rate differential against the US and lead to more USD liquidity in the region.
Policy easing will significantly increase global liquidity conditions and should provide significant advantage to Asia and EM, in our view. Additionally, the Fed is expected to complete its quantitative tightening programme by the end of 2024, which further underpins fixed income conditions in 2025.
Key Asian markets are now in a growth phase, diverging from DM where growth is slowing. For instance, the growth of Asian economies outside of China and Japan is expected to outpace both global and regional GDPs in a sustained 3-year trend, in our opinion. This is likely to be accompanied by continued disinflation and improving fiscal deficits into 2026 within Asia-Pacific.
The combination of these factors are likely to lead to a key reversal in flows towards Asian credit in 2024 and 2025, in our view.
Favouring India and south-east Asia
We are particularly constructive on long-term credit in India and south east Asia and adopt an opportunistic stance elsewhere in the region. By geography, the largest share of the portfolio is invested in India, Indonesia and Australia11.
India is a key EM market globally because it enjoys structural growth and controlled inflation. We expect the country to move from being the fifth largest global economy to being the third largest by 2030, overtaking Japan and Germany.
In the last decade, India has benefited from structural reforms in digitisation and tax that have improved governance and tax collection. The country is now focusing on promoting fiscal strength, building infrastructure and strengthening its economy.
A significant energy transition is underway in India, marked by a move away from fossil fuel consumption to a marked increase in renewable energy production. Given the country’s strong growth, corporates are now starting a renewed capex cycle that creates attractive prospects for credit investors.
Overall, we believe the centre of gravity for global growth is shifting to south east Asia and India. In the next decade, we aim to make investing in debt simple again by enabling investors to benefit from the long-term trends in Asia and EM such as: rising urbanisation and infrastructure development, positive consumption patterns, improving living standards and advancing technology.
Even as we look back on this past decade of success, we remain forward-looking because we believe key opportunities for the region lie ahead.
sources.
[1] As at April 2024. Portfolio holdings and allocations are subject to change.
[2] Awards and ratings may vary without notice. Lipper fund awards are given for consistent outperformance calculated by region for Lipper Global classifications over 3, 5 and 10 year periods. Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Users acknowledge that they have not relied upon any warranty, condition, guarantee, or representation made by Lipper. Any use of the data for analysing, managing, or trading financial instruments is at the user’s own risk. This is not an offer to buy or sell securities. © 2024 Lipper, a Thomson Reuters Company.
[3] Source: LOIM at 31 December 2023. The peer group referred to is provided for information purposes only and may be subject to change over time. No fund/benchmark/index is directly comparable to the investment objectives, strategy or universe. This document has been prepared by LOIM employees who are encouraged to raise assets for their strategy and may have a conflict of interest. Information relating to peer group methodology is available on requestPast performance is not an indicator of future returns.
[4] Refers to LO Funds – Asis Value Bonds USD NA share class for year to 31 December 2023. Past performance is not a guarantee of future results.
[5] Past performance is not a guarantee of future returns. here the fund is denominated in a currency other than an investor's base currency, changes in the rate of exchange may have an adverse effect on price and income. All performance figures reflect the reinvestment of interest and dividends and do not take account the commissions and costs incurred on the issue and redemption of shares/units; performance figures are estimated and unaudited. Net performance shows the performance net of fees and expenses for the relevant fund/share class over the reference period. Source of the figures: Unless otherwise stated, figures are prepared by LOIM. Please note: between January 2013 and March 2014, the fund held the name of LO Selection–Global Quality Income. The strategy changed from being focused on global hard-currency bonds to Asian hard-currency bonds and the Fund was renamed LO Selection–Asia Value Bond on 1 April 2014. Effective 1 December 2016 LO Selection–Asia Value Bond was merged into LO Funds – Asia Value Bond. There has been no change in strategy since then.
[6] Refers to USD NA share class net of fees. Past performance is not a guarantee of future returns. Yields are subject to change.
[7] Refers to USD NA share class net of fees. Past performance is not a guarantee of future returns. Yields are subject to change.
[8] Refers to USD NA share class net of fees. Past performance is not a guarantee of future returns. Yields are subject to change.
[9] Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences.
[10] Refers to total AUM as at April 2024 in Asia Value Bond, Asia Investment Grade and Asia Diversified High Yield strategies.
[11] As of 21 March 2024, 17.8% of the portfolio was invested in India, 10.5% in Indonesia and 9.6% in Australia. Holdings are subject to change without notice.
important information.
This document is a Marketing Communication relating to Lombard Odier Funds and its Sub-Fund LO Fund Asia Value Bond (altogether referred to as the "Fund”). This document is intended only for Professional Investors in the EU/EEA countries where the Fund is registered for distribution, within the meaning of the Markets in Financial Instruments Directive 2014/65/EU (MiFID) and is not intended for retail investors, nor for U.S. Persons as defined under Regulation S of the United States Securities Act of 1933, as amended.
This document is issued by Lombard Odier Funds (Europe) S.A (hereinafter the “Management Company”). The Management Company is authorised and regulated by the Commission de Surveillance du Secteur (the “CSSF”) within the meaning of EU Directive 2009/65/EC and has its registered office at 291, Route d’Arlon, L-1150 Luxembourg. The Management Company is clustered within the Lombard Odier Investment Management Division (“LOIM”) of Lombard Odier Group. LOIM is a trade name. The LOIM entities support in the preparation of this document and LOIM is a trade name. The Fund is authorized and regulated by the CSSF as a UCITS within the meaning of EU Directive 2009/65/EC, as amended.
This document is the property of LOIM, is provided for information purposes only and is addressed for the recipient exclusively for its personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. It is not intended for distribution, publication, or used for any other purpose without the prior written permission of LOIM.
The contents of this document has not been reviewed by any regulatory authority in any jurisdictions and does not constitute an offer or a recommendation to subscribe for any securities or other financial instruments or products described herein. It contains opinions of LOIM, as at the date of issue. These opinions and information contained herein in this document does not take into account all the specific circumstances of the addressee. Therefore, no representation is made that the investment strategies presented in this document are suitable or appropriate to the individual circumstances of any investors. Tax treatment depends on the individual circumstance of the investor and may be subject to change in the future. LOIM does not provide tax advice. Consequently, you must verify the above and all information provided in this document with the legal documents issued for the Fund or otherwise review it with your external tax advisors.
The information and analysis contained herein are based on sources believed to be reliable. While LOIM uses its best efforts to ensure that the content is created in good faith, with greatest care and with accuracy, it does not guarantee the timeliness, validity, reliability or completeness of the information contained in this document, neither does it warrant that the information is free from errors and omission not does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. Particular contents of third parties are marked as such. LOIM assumes no liability for any indirect, incidental or consequential damages that are caused by or in connection with the use of such content.
The Source of the data has been mentioned wherever it was available. Unless otherwise stated, the data is prepared by LOIM.
An investment in the Fund is not suitable for all investors. The ownership of any investment decision(s) shall exclusively vest with the investor. Investment must be done after analysing all possible risk factors and by exercising of independent discretion. The investor must particularly ensure the suitability of an investment as regards with his/her financial situation, risk profile and investment objectives investing. There can be no assurance that the Fund's investment objective will be achieved or that there will be a return on capital. Past or estimated performance is not necessarily indicative of future results and no assurance can be made that profits will be achieved, or that substantial losses will not be incurred. The investor bears the risk of losses in connection with any investment. The information contained in this document does not constitute any form of advice on any investment or related consequences of making any particular investment decision in any particular investment decision in any Fund. Each investor shall make his/her own appraisal of risk, goals, liquidity, taxes and other financial merit of his/her investment decisions. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. The scenarios presented are an estimate of future performance based on evidence from the past on how the value of this investment varies, and/or current market conditions and are not an exact indicator. What you will get will vary depending on how the market performs and how long you keep the investment/product. Investments are subject to a variety of risks. The investments mentioned in this document may carry risks that are difficult to quantify and integrate into an investment assessment. In general, products such as equities, bonds, forex, or money market instruments bear risks, which are higher in the case of derivative, structured, and private equity products; these are aimed solely at investors who are able to understand their nature and characteristics and to bear their associated risks. On request, LOIM will be pleased to provide investors with more detailed information concerning risks associated with given instruments. The liquidity of an investment is subject to supply and demand. Some products may not have a well-established secondary market or in extreme market conditions may be difficult to value, resulting in price volatility and making it difficult to obtain a price to dispose of the asset. Where the Fund is denominated in a currency other than an investor's base currency, changes in the rate of exchange may have an adverse effect on price and income. All performance figures reflect the reinvestment of interest and dividends and do not take account the commissions and costs incurred on the issue and redemption of shares/units; performance figures are estimated and unaudited. Net performance shows the performance net of fees and expenses for the relevant fund/share class over the reference period. This document does not contain personalised recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Neither this marketing communication nor this document nor any part of it shall form the basis of, or be relied on in connection with, any contract to purchase or subscription to the Fund. Not all costs are listed in this document and the investor is recommended to refer to the Offering documents for more information.
The articles of association, the prospectus, the Key Information Document (“PRIIPS/KIDs”), and the subscription form are the only official Offering Documents of the Fund’s shares (the “Offering Documents”). No party is authorised to provide information or make assurances that are not contained in the Offering Documents.
Access to documents in country of registrations:
The PRIIPS/KIDs are available in one of the official languages of your country and a Prospectus is available in English, French, German and Italian. The PRIIPS/KIDs and the Prospectus together with the Articles of Incorporation and the last annual and semi-annual financial report are available on https://am.lombardodier.com/gb/en/professional/investment-funds/fund/1431/14546.html or can be requested free of charge at the registered office of the Fund or of the Management Company, from the distributors of the Fund or from the local representatives as mentioned below. These Offering Documents are provided for information and illustration and is not a contractually binding document or an information required by any legislative provisions and is not sufficient to take an investment decision.
Please refer to the prospectus and the PRIIPS/KIDs before making any final investment decisions. Before making an investment in the Fund, an investor should read the entire Offering Documents, and in particular the risk factors pertaining to an investment in the Fund, consider carefully the suitability of such investment to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences.
LOIM recognises that conflicts of interest may exist as a consequence of the distribution of the Fund issued or managed by entities within the Lombard Odier Group. LOIM has a Conflict of Interests policy to identify and manage such conflicts of interest and a copy of this policy is available on https://am.lombardodier.com/home/asset-management-regulatory-disc.html.
A summary of investor’s rights relating to regarding complaints and litigation is available in English on https://am.lombardodier.com/home/asset-management-regulatory-disc.html.
Limitation on Sale
The shares issued for this Fund may only be publicly offered or sold in countries in which such a public offer or sale is permitted. Therefore, unless the Management Company or representatives of the Management Company have filed an application with the local supervisory authorities and permission has been granted by the local supervisory authorities, and as long as no such application has been filed or no such permission granted by the supervisory authorities, this Fund does not represent an offer to buy investment shares.
Not for US Person: The Fund has not been registered pursuant to the 1933 United States Securities Act. This document is not intended for any "U.S. Person" as defined in Regulation S of the Act, as amended or pursuant to the 1940 United States Investment Company Act as amended and will not be registered pursuant to the 1940 United States Investment Company Act as amended, or pursuant to other US federal laws. Therefore, the shares will not be publicly offered or sold in the United States. Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
The Fund is currently notified for marketing into a number of jurisdictions. The Management Company may decide to terminate the arrangements made for the marketing of the Fund at any time using the process contained in Article 93a of the UCITS Directive.
When the Fund is registered in the following jurisdictions, it is represented by the following Representatives:
Austria. Representative: Erste Bank der österreichischen Sparkassen AG, Am Belvedere 1, 1100 Vienna, Supervisory Authority: Finanzmarktaufsicht (FMA).
Belgium. Financial services Provider: CACEIS Belgium S.A., Avenue du Port 86 C, b 320, 1000 Brussels, Supervisory Authority: Autorité des services et marchés financiers (FSMA)
France. Representative: CACEIS Bank, Rue Gabriel Péri 89-91, 92120 Montrouge, Supervisory Authority: Autorité des marchés financiers (AMF)
Germany. Representative: DekaBank Deutsche Girozentrale, Mainzer Landstraße 16, D-60325 Frankfurt am Main, Supervisory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)
Ireland. Facilities Agent: CACEIS Ireland, One Custom House Plaza, International Financial Services Centre, Dublin 1, Ireland, Supervisory Authority: Central Bank of Ireland (CBI)
Italy. Paying Agents: Société Générale Securities Services S.p.A., Via Benigno Crespi, 19/A-MAC 2, 20159 Milano, State Street Bank International GmbH – Succursale Italia, Via Ferrante Aporti, 10, 20125 Milano, Banca Sella Holding S.p.A., Piazza Gaudenzio Sella, 1, 13900 Biella, All funds Bank, S.A.U., Milan Branch, Via Bocchetto 6, 20123 Milano, CACEIS Bank S.A., Italy Branch, Piazza Cavour 2, 20121 – Milano, Supervisory Authority: Banca d’Italia (BOI)/ConSob
Liechtenstein. Representative, LGT Bank AG Herrengasse 12, 9490 Vaduz, Supervisory Authority: Finanzmarktaufsicht Liechtenstein (“FMA”)
Netherlands. Representative: Lombard Odier Funds (Europe) S.A. – Dutch Branch, Parklaan 26, 3016 BC Rotterdam, Supervisory Authority: Autoriteit Financiële Markten (AFM)
Spain. Representative: All funds Bank, S.A.U. C/de los Padres Dominicos, 7, 28050, Madrid, Supervisory Authority: Comisión Nacional del Mercado de Valores (CNMV)
Sweden. Representative: SKANDINAVISKA ENSKILDA BANKEN AB (publ), Kungsträdgårdsgatan, SE-10640 Stockholm, Supervisory Authoriy: Finans Inspektionen (FI)
Switzerland. The Fund is intended for Professional Investors only and has not been approved by the Swiss Financial Market Supervisory Authority FINMA (Autorité fédérale de surveillance des marchés financiers) for distribution in or from Switzerland to non-qualified investors pursuant to Article 120 of the Swiss Collective Investment Scheme Act of 23 June 2023 (the “CISA”) . This is an advertising document. Representative: Lombard Odier Asset Management (Switzerland) SA, 6 av. Des Morgines, 1213 Petit-Lancy; Paying agent: Bank Lombard Odier & Co Ltd, 11 rue de la Corraterie, CH-1204 Geneva, Switzerland
United Kingdom. Representative: Lombard Odier Asset Management (Europe) Limited, Queensberry House,3 Old Burlington Street, London W1S3AB, Supervisory Authority: Financial Conduct Authority (FCA)
NOTICE TO RESIDENTS OF THE UNITED KINGDOM In the United Kingdom: This document is a financial promotion and has been approved for the purposes of Section 21 of the Financial Services and Markets Act 2000, by Lombard Odier Asset Management (Europe) Limited (FCA Firm number: 515393) at the date of the publishing. The Fund is a Recognised Scheme in the United Kingdom under the Financial Services & Markets Act 2000. Potential investors in the United Kingdom are advised that none of the protections afforded by the United Kingdom regulatory system will apply to an investment in the Fund and that compensation will not generally be available under the Financial Services Compensation Scheme. This document does not itself constitute an offer to provide discretionary or non-discretionary investment management or advisory services, otherwise than pursuant to an agreement in compliance with applicable laws, rules and regulations.
UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation scheme does not apply in respect of any investment or services provided by an overseas person. The taxation position affecting UK investors is outlines in the Prospectus.
Singapore. The Fund is registered in Singapore as a restricted foreign scheme within the meaning of the Sixth Schedule to the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations of Singapore: The Fund is not authorised or recognised by the Monetary Authority of Singapore (the “MAS”) and Units are not allowed to be offered to the retail public. This document is part of the Information Memorandum. This Information Memorandum of the Fund has not been registered as a prospectus with the MAS. Accordingly, the Information Memorandum of the Fund and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of shares in Fund may not be circulated or distributed, nor may shares in funds be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), (iii) to any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305 of the SFA, or (iv) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. This document has been approved for use by Lombard Odier (Singapore) Ltd. WARNING: Please consult with your professional advisor for further information on the availability and suitability of this product to your profile.
Hong Kong. This Fund is not authorized under Section 104 of the SFO of Hong Kong by the Securities and Future Commission (SFC) of Hong Kong and may not be offered or sold whether directly or indirectly, to any person in Hong Kong other than to a Professional Investor (as defined in the Securities and Futures Ordinance (Cap.571 of the laws of Hong Kong) and any rules made under that Ordinance. This document has been approved for use by Lombard Odier (Hong Kong) Limited, a licensed entity regulated and supervised by the Securities and Futures Commission in Hong Kong for the general information of professional investors and other persons in accordance with the Securities and Futures Ordinance (Chapter 571) of the laws of Hong Kong. This document has not been reviewed by the Securities and Futures Commission. WARNING: The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.
Data Protection: You may be receiving this Communication because you have provided us your contact details. If this is the case, note that we may process your personal data for direct marketing purposes. For more information on Lombard Odier’s data protection policy, please refer to www.lombardodier.com/privacy-policy
©2024 Lombard Odier IM. All rights reserved
