Strategy
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Asia Local Currency Bonds

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.
Investment Philosophy

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.

Opportunities in the Asian Local Currency Bond Market

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.

ALCB may provide higher yields and better risk adjusted returns3, with diversification

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.

Nikko AM’s Vast Experience in Managing Asian Bonds

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.

Important Information

The funds mentioned are Singapore registered funds approved for sale or purchase in Singapore. By proceeding, you are representing and warranting that you are either resident in Singapore or the applicable laws and regulations of your jurisdiction allow you to access the information.

This document is purely for informational purposes only with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. It should not be relied upon as financial advice. Any securities mentioned herein are for illustration purposes only and should not be construed as a recommendation for investment. You should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you. Investments in funds are not deposits in, obligations of, or guaranteed or insured by Nikko Asset Management Asia Limited (“Nikko AM Asia”).

Past performance or any prediction, projection or forecast is not indicative of future performance. The Fund or any underlying fund may use or invest in financial derivative instruments. The value of units and income from them may fall or rise. Investments in the Fund are subject to investment risks, including the possible loss of principal amount invested. You should read the relevant prospectus (including the risk warnings) and product highlights sheet of the Fund, which are available and may be obtained from appointed distributors of Nikko AM Asia or our website (www.nikkoam.com.sg) before deciding whether to invest in the Fund.

The information contained herein may not be copied, reproduced or redistributed without the express consent of Nikko AM Asia. While reasonable care has been taken to ensure the accuracy of the information as at the date of publication, Nikko AM Asia does not give any warranty or representation, either express or implied, and expressly disclaims liability for any errors or omissions. Information may be subject to change without notice. Nikko AM Asia accepts no liability for any loss, indirect or consequential damages, arising from any use of or reliance on this document. This advertisement has not been reviewed by the Monetary Authority of Singapore.

The performance of the ETF’s price on the Singapore Exchange Securities Trading Limited (“SGX-ST”) may be different from the net asset value per unit of the ETF. The ETF may also be delisted from the SGX-ST. Transaction in units of the ETF will result in brokerage commissions. Listing of the units does not guarantee a liquid market for the units. Units of the ETF may be bought or sold throughout trading hours of the SGX-ST through any brokerage account. Investors should note that the ETF differs from a typical unit trust and units may only be created or redeemed directly by a participating dealer in large creation or redemption units. Investors may only redeem the units with Nikko AM Asia under certain specified conditions.

The Central Provident Fund (“CPF”) Ordinary Account (“OA”) interest rate is the legislated minimum 2.5% per annum, or the 3-month average of major local banks' interest rates, whichever is higher, reviewed quarterly. The interest rate for Special Account (“SA”) is currently 4% per annum or the 12-month average yield of 10-year Singapore Government Securities plus 1%, whichever is higher, reviewed quarterly. Only monies in excess of $20,000 in OA and $40,000 in SA can be invested under the CPF Investment Scheme (“CPFIS”). Please refer to the website of the CPF Board for further information. Investors should note that the applicable interest rates for the CPF accounts and the terms of CPFIS may be varied by the CPF Board from time to time.

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Markit has no obligation to update, modify or amend the data or to otherwise notify a recipient thereof in the event that any matter stated herein changes or subsequently becomes inaccurate.

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