Seeks to generate medium- to long-term capital appreciation by investing primarily in local currency denominated bonds issued by sovereigns, quasi-sovereigns, banks and corporates of Asian countries.
The Asia Local Currency Bond (ALCB) strategy is a key strategy managed by our Asian Fixed Income team at Nikko AM. It seeks to generate medium- to long-term capital appreciation by investing primarily in local currency denominated bonds issued by sovereigns, quasi-sovereigns, banks and corporates of Asian countries. Driven by a proprietary Fundamental Valuation Technical (FVT) Macro and Foreign Exchange (FX) Framework, it aims to bring together a high conviction active portfolio of the team’s best ideas in Asian local currency bonds.
Our investment process seeks to deliver returns through multiple sources of alpha, utilising both top-down and bottom-up strategies. The research approach utilises our proprietary Fundamental, Valuation and Technical (FVT) framework to distil the top-down and bottom-up perspectives from a multitude of macro-economic factors and issuer- and issue-specific characteristics, to add value within the defined levels of risks and constraints, using both qualitative and quantitative techniques. Most important in our fundamental analysis is our Internal Credit Rating (ICR) model, which has been time and stress tested for its robustness since inception in 2006. Our ICR assesses quantitative and qualitative aspects of each issuer independently of external credit rating agencies. Environmental, Social and Governance (ESG) factors also form an important aspect of the credit analysis. Our proprietary Internal Credit Rating (ICR) model, conceptualised and developed by our Asia Credit team, is the first pillar in our credit research process.
The investment philosophy and strategy of the Asian Fixed Income team is well-tested over time and remains stable. For more details on our investment philosophy, Research and ESG framework and investment team, please visit the Asian Fixed Income Strategy page.
The ALCB market (currently about USD22.8 trillion1) comprises primarily domestic local currency (LC)-denominated bonds that are mostly issued by sovereigns and major quasi-sovereign issuers. Foreign investors’ participation in this attractive asset class has increased over time and this large pool of foreign exchange reserves makes currency volatility risks more manageable. Furthermore, although the Asia ex Japan region accounts for 45%2 as of May 2022, of the global economy gross domestic product (GDP), its representation in the global bond index is still relatively low. We believe that an allocation to this market will provide investors with adequate exposures across the different bond and currency markets in the region.
Asian local government bonds provide relatively attractive carry4 vs US Treasuries and other developed market government bonds. With attractive yields and exposure to relatively strong currencies, the iBoxx Asian Local Bond Index (ALBI)5, which is the Asian LC bond index, has delivered better performance after the Global Financial Crisis as compared to global bond benchmarks that primarily invest in local government bonds. Asian LC bonds also provide diversification benefits for global bond investors given their different market characteristics relative to G36 bond markets.
With a diverse and growing investment universe in Asian bonds, our highly experienced Fixed Income team manages a wide range of active Asian fixed income portfolios. They are present on the ground and understand the idiosyncratic risks of individual countries, sectors and issuers within Asia. An Asia-focused manager is able to provide alpha both from a top-down and bottom-up perspective given their specialisation and a deep understanding of the local markets and the underlying issuers. This enhances their ability to generate investment ideas.
There are sub-strategies within the ALCB spectrum managed by our team – Regional ALCB and Single Country ALCB (e.g. RMB, Singapore dollar (SGD) bonds). Passive strategies are also available via exchange traded funds (ETFs) like the ABF Singapore Bond Index Fund and the Nikko AM SGD Investment Grade Corporate Bond ETF.
1 Source: AsianBondsOnline (Asian Development Bank) and comprises the People’s Republic of China; Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam, as of December 2021.
2 Source: World Economics: https://www.worldeconomics.com/Thoughts/The-Future-is-Asian.aspx
3 A risk-adjusted return measures an investment's return after taking into account the degree of risk that was taken to achieve it. There are several methods of risk-adjusting performance, such as the Sharpe ratio. The purpose of risk-adjusted returns is to help investors determine whether the risk taken was worth the expected reward.
4 Attractive carry: The difference between the yields earned from Asian local government and US Treasuries & other developed market government bonds.
5 The Markit iBoxx Asian Local Bond (ALBI) Index referenced herein is the property of Markit Indices Limited and is used under license.
6 G3 refers to the economies of US, Japan and Eurozone.
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