International Investments in Asian Bonds


International investments can be in international real, international stocks and international bonds. A reader sent this note last week that started me thinking:

International Investments Question

“Gary, is there an Asian bond fund out there that you like? I’d prefer one with no Japanese bonds. Rates are too low on Japanese bonds. I fear an upward move.”

International Investments Reply

My immediate answer was “No, I do not know of any, but I will check this out”. Here is what I have found so far.

I knew there is so much international investments liquidity in the strong Asian countries that there are not large bond markets. The successful Asian countries are lenders who hold international investments these days not borrowers.

I had not looked at international investments in Asian bond funds because the main reason for investing in Asian bonds would be to earn interest in currencies likely to appreciate (i.e. China). Yet these are the markets with the fewest bonds available. The markets where there are sizable bond markets (such as the Philippines, Indonesia etc.) offer lower quality bonds with higher risk.

Nevertheless there are Asian bonds funds that can be good international investments and what I have learned to date is that some of them may make sense.

International Investments Article

A February 26, 2007 article entitled “Take on debt” by Katherine Ng in The Standard (China’s business newsletter) says:

“Volatility may be on the horizon now that equity markets, especially emerging markets, have soared from one peak to another. Investors in the mainland and Hong Kong equities reaped healthy gains last year while valuations skyrocketed. Equities were favored over bonds. Yet many see a correction ahead in the equity markets. Perhaps then, it is time to go defensive and switch to fixed income.”

The article points out that US Treasuries are not the "best buys," for individuals because the total returns are lower than the savings rate and says:

“In 2006, historical market returns for US Treasury bonds ranged from 3.48 percent to 4.33 percent.”

This return is lower than the Hong Kong dollar savings rate. So, Jessy Yang, head of research at Morningstar Asia asks, “Why should investors buy into US long-term bonds?"

International investments in global bond funds offered a better return of 5.23% compared the US treasury average of 4.2%.

International investments in Asian bond funds in 2006 did much better, 8.27%.

This makes them better than US bonds but not the best last year. International investments in emerging markets bond funds at 11.67% and international investments in European bond funds had the highest yield of 12.34%.

However, logic suggests that there are three reasons why this could change and that international investments in Asian bonds will do well.

First, Asian equity markets have been hot. If the current correction continues, many investors may flee to bonds. Second, these investors may shun US dollar bonds. They are aware that numerous Asian currencies are undervalued and may appreciate versus the greenback. Third, if numerous investors plunge into these somewhat thin Asian bond markets, the demand will push yields down and the bond prices up.

If this thinking has any merit, it may make sense to act and put international investments in Asian bonds sooner rather than not.

But which Asian bond funds should we hold our international investments in?

One option for international investments is the Singapore based Schroeder Asian Bond Fund that invests in Asian bonds excluding Japan. Oddly enough its major holding (24%) now is German bonds, but it has a wide variety of Asian bonds. The portfolio update at the beginning of 2007 its portfolio breakdown by country shows:

Germany 24.4%
Indonesia 18.3%
Malaysia 15.4%
Philippines 11.6%
South Korea 8.1%
Singapore 7.4%
China 6.8%
Kazakhstan 3.1%
Thailand 2.5%
Others 1.9%
Cash 0.5%

Schroeders is an old line British merchant Bank, and they have been in Asia since the colonial era. One of my good friends when I lived in HK in the early 1970s worked for Schroeders so I know they have a long experience in the region.

Another fund to look at for international investments is the British based Templeton Asian Bond Fund that seeks to provide superior risk-adjusted returns by identifying sources of high current income in Asian markets while capitalizing on global interest rate and currency trends. This Fund invests in a variety of fixed-income assets of governments, agencies and corporations in both local and externally issued currencies throughout Asia. The Fund may also invest selectively in bonds rated below investment grade issued by Asia-related governments and companies offering higher yields in a manner consistent with prudent credit risk management.

This fund is well diversified across Asian emerging and developed countries as well as across investment grade, non-investment grade and corporate debt instruments and generally contains 20 to 50 issues.

The managers take fundamental long-term currency valuations, short-term currency dynamics and fundamentals such as geopolitical events or an oil price shock into consideration.

The most current yield for the Templeton Asian Bond Fund I have found to date is 6.75%.

The fund’s top 10 holdings were

Government of Malaysia 8.60% 12/01/07 13.1%
Korea Treasury Note 4.25% 9/10/08 7.4%
Government of Indonesia 11.00% 11/15/20 6.2%
Korea Treasury Note 3.75% 9/10/07 5.9%
Government of Indonesia 12.80% 6/15/21 4.7%
Government of Singapore 2.62% 10/01/07 4.4%
Government of Indonesia 12.90% 6/15/22 3.7%
Government of Malaysia 3.13% 12/17/07 3.5%
Woori Capital Co. Ltd. 5.31% 12/14/08 2.9%
Kumho Industrial Co. Ltd. 5.90% 12/12/09 2.9%

The Currency Split of this fund was :

S Korean Won 22.8%
Indo Rupiah 20.3%
Malaysi Ringgit 20.3%
Thailand Baht 16.5%
Japanese Yen 7.8%
Singapore Dollar 5.9%
Indian Rupee 2.8%
US dollar 2.3%
Australian Dollar 1.3%
New Zealand $ 0.0%

A third fund for international investments I reviewed was the Luxemburg based Merrill Lynch Asian Tiger Bond:

This is the oldest of the funds I have looked at so far, launched in February 1996. This fund is in the Fixed Income Asia Pacific ex Japan S&P sector and has about 100 million under management. Its annual yield over the past five years has been 7.6%.

These three funds are all based offshore. Your overseas investment bankers may be able to buy the Schroeders Fund on the Singapore Stock Exchange, Templeton in London and the Merrill Fund in Luxembourg.

US investors may be excluded. To date I have not found a US based equivalent for our American readers. I am pretty sure Merrill has a US equivalent as one of the pages I came across in my initial review was an SEC filing. Those who have Merrill accounts may be able to find out by calling your broker.

I’ll be writing more about this in days ahead. Please share with me what you might know!

One final thought about international investments in Asian bonds. I am not so sure that the reader who kicked off this thought is correct in excluding Japan. If Japan raises its interest rates, bond yields will drop, but carry investors will also flee their Japanese loans. This could push the yen higher than bond values fall, especially if a fund that has short tern yen bonds (which is likely).

We have made fortunes through international investments in our Asian shares. Now perhaps it time to be a bit more conservative and hold our Asian currency bets in bonds instead. Tomorrow’s messages looks at other international investments in Asia that skyrocketed but I missed. Don’t you miss it!

Our next international investments update of our Borrow low Deposit High will show how well the bond portfolios have performed during the current equity drop. You can learn how to track these portfolios with us at http://www.garyascott.com/catalog/bldh/

You can continue this message and see more pictures of Ecuador exports at http://www.garyascott.com/international_investments/258.html

Until then may all your international investments bond with wealth!

Gary

Our courses Mar. 16 -18 International Investments and Business Made EZ Course in Ecuador will include two account executives from Jyske Bank who join with me to update global currency values and economics. See http://www.garyascott.com/catalog/IBEZec/

This course will be updated May 25 – 27, 2007 in North Carolina. Thomas Fischer joins me to update global economics.


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