Bloomberg /Hong Kong
The red hot rally in credit this year has prompted wealthy investors in Asia to borrow money to buy funds that often load up on lower-rated bonds.
That’s setting the stage for pain should the market turn, as the products pose troubling risks if that happens, some observers say. Some of these so-called fixed-maturity funds put most of their eggs in one basket, such as in Chinese property debt. The risks are compounded by leverage, and by the fact that the notes in the funds tend to mature around the same time.
“When you put a number of high-yield issuers from a single sector into a fixed-maturity product portfolio, is there diversification?” said Desmond Soon, head of investment management for Asia ex-Japan at Western Asset Management. “In a risk-off scenario, the default risk could rise exponentially.”
The threat is increasingly relevant as US-China trade tensions have started to weigh on the broader market. High-yield dollar notes from borrowers in the region lost 0.2% last week, their worst showing in about six months. While they have still made 8% this year, heavy supply has also added to concerns that returns will continue to slip ahead.
Fixed-maturity products typically offer investors a targeted yield, and there is less transparency compared to regular funds that disclose what they buy and track a benchmark, according to Rahul Banerjee, founder of Bondevalue, a fintech firm that focuses on Asian bond markets. A diversity of maturities would help investors ride out the interest-rate cycle, but fixed-maturity funds don’t offer that benefit, he added.
If the credit market turns significantly, investors who have used leverage to invest could also face margin calls, said Banerjee.
To be sure, there is a range of such investments and not all carry the same risks. Some banks that sell such products say they offer investors diversified portfolios.
“We have more than 100 issuers in the fixed maturity fund and it is broadly diversified by borrowers and geography,” said Alexandre Bouchardy, head of Singapore asset management at Credit Suisse Group AG.
The bank this year raised over $1.9bn globally for a fixed-maturity strategy that invests in dollar bonds around the world. The majority of demand for the fund came from Asia and the strategy will invest in notes from the region too, according to Bouchardy.
Demand from private banking investors for fixed-maturity funds has been “insatiable” and leverage ranges widely from around 20% to 70%, according to Hayden Briscoe, head of fixed-income for Asia-Pacific at UBS Asset Management. The firm launched two fixed-maturity funds, one for emerging market dollar bonds and another for Asia dollar bonds this year, and both tend to focus on investment-grade, he said.
Investment-grade and high-yield Asian bonds have both delivered strong returns year-to-date, despite the more recent turbulence. Wealthy investors now face a timing call as trade concerns engulf global markets – to hold or to sell.
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