Best Asia Bond Fund: Winner

We spoke to the winning managers and asked them about their strategies. Here is an edited excerpt:

Question: How was the portfolio positioned to navigate the coronavirus-driven market volatility in 2020? Were there any particular holding(s) or theme(s) that drove the fund’s performance for the year?

Answer: The fund was long duration and increased its US dollar exposure during periods of heightened risk aversion (February to April 2020) to ride out the market volatility. After April 2020, the fund reduced its overweight exposure to the US dollar and added back to Asian duration that had attractive risk premiums versus US duration. The fund also added back to Asian currencies.

The rates strategy was the largest contributor to performance for 2020. In particular, long positions in Indonesia, US, and Korea rates added value to the fund as yields fell across the period.

Question: Against the backdrop of (i) the vaccine rollout, (ii) a new US administration, and (iii) ongoing monetary easing globally, what is your outlook for 2021, and how are you expressing these views in your portfolio?

Answer: Asian economies, led by China, have rebounded steadily from the pandemic, with economic activities normalising in many countries. We expect Asia to continue to benefit from stable Chinese growth. We do not expect a significant policy reversal in China for now, which should allow growth to hold up in the first half of 2021. As vaccinations continue to be distributed and global economies gradually work towards reopening, global trade and growth should pick up over this year. We expect this positive growth trajectory to continue providing support to Asian local-currency sovereign debt.

Despite the steepening of the US Treasury curve since the start of the year, indicating a rise in inflation expectations, we do not see conditions in place for a structural rise in inflation yet and expect major central banks to maintain accommodative monetary policy for now. But we believe that nominal yields will normalise in a reflating world.

Asian sovereigns still offer attractive yield advantages, both in nominal and real terms, compared with developed markets. We believe the rate differential between Asian and developed markets will continue and attract further portfolio flows from international investors.

The Fed’s Average Inflation Targeting framework, as well as twin deficits in the United States, are expected to keep a lid on the US dollar’s strength. The growth differential in favour of Asian economies should attract more capital flows into Asia amid a trade recovery, providing support to the Asian currencies.

We continue to remain overweight in Chinese duration as monetary policy should remain neutral to broadly accommodative because of the need to facilitate debt restructuring and work out of higher NPLs. Flow dynamics remain supportive owing to index inclusion. We also maintain a slight short US dollar and euro bias expressed against a long position in the yuan, which is attractive based on its REER.

Question: What are the top risk factors that could have an impact on your portfolio, and how are you positioned to mitigate these potential risks?

Answer: The top risk factors that could meaningfully drag on fund returns are as follows:
• Delays in the distribution of vaccines, which would result in slower reopening of global economies and weigh on recovery and growth;
• Yield volatility continuing, and US yields continuing to adjust upwards at a quick/faster-than-expected pace, which could negatively affect Asian currencies and erode the carry from Asian high yielders and credits;
• Rise in oil prices to new highs, which could negatively affect Asian economies that are oil consumers (other than Malaysia).

We are very slightly short the US dollar in foreign exchange and converted some Asian duration positions to relative value trades. In addition, we favour using times of relative market calm to buy optionality to hedge against some of the portfolio risks.

Question: How is your investment team organised? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future?
Answer: Schroders has one of the most well-resourced Asian fixed-income teams in the region, with 29 individuals based in Singapore, Hong Kong, Shanghai, Jakarta, and Taipei. The team is responsible for managing more than USD 12.4 billion in AUM across dedicated Pan-Asian and single-country strategies.

Roy Diao, head of Asian fixed income, has oversight over the team and is responsible for the overall direction of Schroder’s Asian fixed-income franchise from a business management and staffing perspective. The team comprises nine dedicated portfolio managers and six credit analysts. The Asian multisector team is headed by Julia Ho, head of Asian macro. Julia is responsible for the formulation of investment strategies across Asian local duration and currencies. The team also has the advantage of access to our local-currency fixed-income team based in Shanghai, Jakarta, Taiwan, and Hong Kong and inputs on India from the joint venture with Axis bank. Angus Hui, head of Asian and emerging-markets credit, is responsible for the formulation of credit strategies including security selection decisions working in conjunction with the team of credit analysts. The credit analysts are led by Raymond Chia, head of credit research Asia.

The Asian fixed-income team is well-resourced across Asian multisector, Asian credit, and Asian credit research. At the moment we have no immediate plans to augment the team. However, we are prepared to make further investments in team resources as our business expands.

Question: Where do you feel that the investment team or the investment process can be improved upon in the future?

Answer: Sustainable investing is an important initiative for Schroders. We strongly believe in the merits of sustainability in Asian fixed income. Our Asian fixed-income strategies have begun to incorporate key sustainable factors into the research process as a first step. Constructing portfolios with sustainable characteristics is the next step.