Fund managers series

Asia credit market 'still looks pretty good'

Be disciplined and manage your risk, says Mr Ashley Perrott, head of Pan Asia Fixed Income at UBS Asset Management. If you don't understand it, don't invest in it, he cautions.
Be disciplined and manage your risk, says Mr Ashley Perrott, head of Pan Asia Fixed Income at UBS Asset Management. If you don't understand it, don't invest in it, he cautions.ST PHOTO: DAVE LIM

There are ways investors can generate steady returns despite interest rates remaining low, finance expert Ashley Perrott explains in the latest in our series featuring fund managers and leading market experts

Mr Ashley Perrott, head of Pan Asia Fixed Income at UBS Asset Management, has more than 30 years of experience in the industry.

He is the lead manager for the firm's flagship UBS Asian Full Cycle Bond Fund, which is available to retail investors. The fund started in 2010 and invests in US dollar-denominated debt of Asian firms.

It has assets under management of US$260 million (S$355 million) with institutional investors as its main customers.

The fund posted returns of 3.2 per cent for this year to date and 5.2 per cent for the whole of last year.

Q Tell us about the UBS (Lux) Bond Fund - Full Cycle Asian Bond (USD). What do you mean by "full cycle"?

A This is our flagship fund that we launched back in 2010. It gives investors exposure to the opportunities mainly in the hard currency Asian credit market. The market has grown enormously in the past five years in number of issuers and size, so this fund is a way in which investors can get efficient access and exposure to that market.

Hard currency, like the US dollar, is not likely to depreciate suddenly or to fluctuate greatly in value.

We named it "full cycle" because we wanted investors to know it is a fund for investors across seasons and market cycles. It is actively managed to provide returns in bullish or bearish markets, whether that is in relation to interest rate exposure or credit exposure that it holds. There are times when you need to be defensive and protect returns, and there are times when you can be more risk-seeking when valuations are attractive. We actively manage it and seek to do well across the full economic cycle, not just in the good times.

Q What have been the main recent events in Asia's bond markets, and what are the key developments you are looking at?

A The main event in both markets recently, and going forward, is around China. First, in relation to the hard currency market, Chinese issuers now account for close to 50 per cent of the market cap. This has grown substantially in recent years as they have come to dominate the market - to be expected, I guess, given the relative size of its economy versus others in the region.

But it hasn't just been about issuance from China. The past year or two has also seen a huge increase in the investor base in China buying China USD bonds. Investors within the region are now the main participants in the market, compared with a few years ago when investors outside Asia were the main players.

It has helped the market in terms of breadth and depth of the liquidity and investor base.

The big development going forward is also around China, and is in relation to the onshore China interbank bond market. It is fair to say it's not just a key development for Asia's bond market - it's the biggest thing to happen for global bond markets, possibly ever.

There has never been, and never will be again, the sudden availability to investors of a market that is the equivalent of US$8 trillion in size - the third biggest in the world, just after Japan, and that's expected to double in size in the next five years. That is clearly huge, and investors in this region and globally are going to have to get up to speed if they aren't already looking at it.

Q It's a low-yield world with seemingly many challenges and uncertainties. What do you think investors should be looking at in this region to generate returns?

A Even with some further tightening by the US Federal Reserve and balance sheet tapering, the overall low growth, low inflation and consequently low yields relative to pre-global financial crisis are still the most likely outcomes.

This means all investors are going to have to continue looking at areas where they can generate reasonable income without taking on excessive risk. I think that still augurs well for demand for emerging market fixed income. And in that sense, the Asia credit market still looks pretty good, given that yields are very solidly positive, and credit and macro fundamentals are pretty stable. Parts of the Asia high-yield market look reasonable. And in local currency markets, places like India and Indonesia, with the highest yields in the region and improved fundamentals compared with a few years ago, will continue to see investor demand.

Q Does uncertainty in US policy - fiscal and monetary - affect Asia fixed-income investing?

A Yes, of course. What happens with the US dollar and US interest rates is the most important influence within global markets, as it's the global reserve currency and impacts on liquidity conditions everywhere.

So when uncertainty is higher, risk sentiment is often negatively impacted, and when that happens, emerging markets in general can suffer, and Asia is obviously a part of that. If it results in outflows from the region, that would clearly have an impact on bond markets, either from rising credit spreads, rising interest rates or weaker currencies.

Q What is your outlook for the second half of this year?

A Broadly, the environment for fixed income remains supportive. Moderate global growth, low inflation, central banks that remain pretty accommodative on policy, and low default rates all support credit assets. Despite some gradual increase by the US Fed, rates are likely to remain low globally given the structural forces, and demand for positive-yielding assets remains very strong given that so much of the world's bond markets still have a negative yield.

Volatility, however, has been very low but there is a risk that complacency will grow in the market, leaving it badly placed to react to unforeseen events. Developments in the world's two largest economies - the US and China - will continue to be the key drivers of sentiment. But we also need to watch for any shift in rhetoric or policy from the major central banks that might result in tighter financial conditions, such as tapering of asset purchases or rundown of balance sheets.

Q With your 30 years of experience as a fund manager, what advice would you give to investors?

A Be disciplined and manage your risk. If you don't understand it, don't invest in it. Understand what it is that you are looking to achieve, and what amount of risk you are willing to take to achieve that. Investing is all about risk/reward. You never know when you make an investment if it is going to pay off or not. The market will determine that. All you can do is do your research, make your judgment, and take an amount of risk that you are comfortable with, and don't be afraid to cut your losses and admit you were wrong. Risk management is key.

A version of this article appeared in the print edition of The Sunday Times on August 20, 2017, with the headline 'Asia credit market 'still looks pretty good''. Print Edition | Subscribe