investment viewpoints
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.
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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.
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