Eastspring Investments (Singapore) Ltd., whose fund targeting the riskiest Asian bonds has topped 95 percent of competitors, favors debt from the Philippines and Indonesia that have different rankings from Moody’s Investors Service and Standard & Poor’s.
The $72 million Asian High Yield Bond Fund (IOFAHYD) also holds debt issued by Indian banks among more than 100 securities in its portfolio, assistant director Leong Wai Mei said in a Sept. 13 interview in Singapore. Her fund posted a 16.2 percent gain this year, data compiled by Bloomberg show. Eastspring manages $87 billion and is the Asian asset management arm of Prudential Plc.
Moody’s rates Philippine debt Ba2, its second-highest junk level and Indonesia Baa3, the lowest investment grade, while S&P ranks both Southeast Asian nations BB+, its highest speculative level. High-yield Asian bonds handed investors a 15.4 percent return this year through Sept. 14, compared with 3.7 percent a year earlier, according to JPMorgan Chase & Co.
“Some companies and sovereigns have split ratings from different agencies, and Indonesia the Philippines offer such crossover opportunities,” Leong said.
The extra yield investors demand for Asian speculative grade debt over Treasuries has narrowed 94 basis points this year to 370 basis points, or 3.7 percentage points, the least since August 2011. They are typically rated at or below BB+ at S&P and Ba1 at Moody’s.
While Indonesia and Philippines won rating upgrades from S&P and Moody’s this year, the outlook on India’s investment- grade ranking was cut to negative from stable by S&P and Fitch, reflecting the possibility of a downgrade on weaker growth and a widening current-account deficit.
Moody’s kept its rating outlook on India stable in June, saying the slowdown in the nation’s economy is likely to be temporary. The company had placed ICICI Bank Ltd. (ICICIBC), HDFC Bank Ltd. and Axis Bank Ltd. (AXSB) under review for a downgrade in April.
“We stick to their senior debt given the rating pressure on the sovereign,” Leong said in the interview. “The banks are systemically important enough and won’t be allowed to default.” Her fund owns State Bank of India Ltd. and ICICI debt.
Philippine government bonds gained 12.8 percent this year versus 8 percent a year earlier, while Indonesian debt rose 10.2 percent compared with 7.1 percent in the same period of 2011. Investors earned 14 percent on Indian notes, more than 2.9 percent a year earlier, according to JPMorgan indexes.
Leong’s fund counted the debt of coal miners PT Adaro Indonesia and PT Berau Coal Energy among its 10 largest holdings in July, according to Eastspring’s website.
Adaro’s 7.625 percent bond due October 2019 has gained 4.8 percent this year, sending its yield to a six-month low. Berau Coal’s 7.25 percent notes due March 2017 issued have advanced 1.9 percent since they were issued in March.
Leong’s fund also holds 2024 debt sold by Philippine utility Power Sector Assets & Liability Management Corp., or PSALM, and perpetual notes issued by International Container Terminal Services Inc. (ICT), the nation’s biggest port operator.
“PSALM bonds are guaranteed by the government and offer a slight pickup of about 25 basis points over sovereign debt,” she said. International Container “has a niche business operating terminals in emerging-market countries, she said.
The fund allocated 23 percent of its asset on Philippine debt, 19.4 percent on Indonesian securities and Indian credits accounted for 5.1 percent at the end of July, according to fund data. Chinese issuers accounted for 20 percent of its assets, with real-estate developer Country Garden Holdings Co. Ltd. being the single-largest holding. The high-yield fund is allowed to invest about 20 percent of its assets in Asian currencies, and as much as a third in investment-grade securities in times of market turmoil, Leong said.
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