For many investors, the global financial crisis forced a reassessment of their approach to asset allocation and provided fresh impetus to enhance portfolio diversification.
At Aberdeen we believe that by examining relatively new asset classes we can find investment strategies that can improve portfolio diversification, as well potentially generate attractive returns.
Asian fixed income is one such asset class. Its emergence follows Asia’s rapid rise, which has been built on fiscal prudence and surplus savings (in stark contrast to the excess borrowing in the West). Such is this shift in capital ascendancy that the traditional investment order of developed and developing nations is being turned upside down.
Broadly, Asian fixed income is best understood as a range of opportunities – credit, currency and sovereign - and one, we emphasize, that requires both insight and skill to unlock.
The Asian fixed income market offers a range of opportunities. Over the longer-term, we see these developing in credit, currency and interest rate markets. Low historical correlation with other asset classes also highlights the diversification benefits for global investors and supports the case for a move away from traditional fixed-income strategies.
The Asian investment universe has grown rapidly over the past decade and is now equal in size to some of Europe’s largest bond markets. This growth has improved liquidity substantially, further increasing the number of opportunities for investors and signalling the development of a more mature bond market.
Another important feature is the diverse set of country markets, from triple-A Singapore to single-B Sri Lanka, and hence the scope to potentially enhance portfolio yields.
Despite its size and relative health, Asia makes up a very small percentage of major global bond indices. For investors expecting to gain exposure through traditional benchmarks, including emerging market indices, this often comes as a surprise.
To take just one example, the Barclays Global Aggregate Bond Index allocates just 2% to Asia (ex Japan). Even though formal access to some individual markets may be limited, this is still a token allocation. Besides, use of forward contracts, for example, means that currency exposure to even closed markets remains possible.
Perhaps one of the best ways to take advantage of the opportunity set is to choose a strategy that has a discrete exposure to Asia – be it through local currency, dollar bonds or both. Tailor-made exposure to credit and currency markets, either through direct absolute return portfolios, benchmark strategies or overlay programs are all possible.
Depending on what strategy is chosen, the potential benefits of allocating directly to Asian fixed income include diversification, improved risk/reward profiles (given low historical correlation with other asset classes) and yield enhancement.
Aberdeen’s strengths in Asian Fixed Income: