Strategy Spotlight

Asia Strategic Interest Bond Strategy: Potential for Attractive Income and Long‑term Capital Appreciation

The increase in issuer diversification in the Asia credit and interest rate market means more opportunities for investors, as well as the ability for active investment managers to add value to portfolios through credit selection.

In today’s environment where interest rates and government bond yields are at or near all-time lows, many investors find it difficult to generate sufficient income from traditional sources. The combination of attractive yields coupled with high average credit quality has drawn investors to the broad Asia fixed income market, which offers compelling risk-adjusted return potential.

In this Q&A, portfolio manager Stephen Chang discusses how investing in a flexible and actively managed Asia fixed income strategy can offer the potential for attractive income and long-term capital appreciation.

Q: What is the PIMCO Asia Strategic Interest Bond Strategy?

A: The PIMCO Asia Strategic Interest Bond Strategy is a flexible and actively managed strategy that focuses mainly on opportunities in Asia fixed income, across both investment grade and high yield markets. Its primary objective is to deliver attractive and stable levels of income, with a secondary objective of providing long-term capital appreciation.

The strategy is not tied to a particular benchmark – while it is mainly invested in Asia U.S. dollar-denominated fixed income, the portfolio managers also have the ability to take advantage of local currency instruments and other compelling income opportunities outside Asia. The strategy targets a diversified set of holdings built from bottom-up selection, while our investment approach emphasizes a balance of risk factors across countries, industries, and issuers.

Q: What is PIMCO’s experience investing in Asia fixed income markets?

A: PIMCO has one of the largest and most established Asia fixed income teams, including more than 20 investment professionals spanning portfolio management and credit research across our Hong Kong, Singapore, Tokyo, and Sydney offices. The team is fully integrated into PIMCO’s global investment platform, enabling it to draw on macroeconomic expertise and combine this with top-down and bottom-up input from the Asia region to implement investment views. As a firm, PIMCO has more than 20 years of experience investing in Asian and emerging markets debt across multiple market cycles.

Performance in Asia fixed income tends to be uneven and differentiated across credit sectors, industries, and individual companies. PIMCO’s forward-looking fundamental credit and sovereign analysis and our internal ratings process that is completely independent from ratings agencies allow us to identify risk and capitalize on opportunities not fully priced into Asian markets.

Q: Why invest in Asia fixed interest now?

A: The Asia fixed interest market has continued to grow swiftly and is now around five times larger than it was 10 years ago (see Figure 1). This greater market breadth and depth has led to an increase in issuer diversification, with the number of issuers increasing from around 150 to more than 600 over this period. This means more opportunities for investors, as well as the ability for active investment managers to add value to portfolios through credit selection.

Figure 1: A decade of growth in Asia fixed interest market

This growth in the market has not hampered its relative performance. In fact, the combination of attractive yields coupled with high average credit quality has delivered compelling risk-adjusted returns compared with many other fixed income sectors over the past five years.

In addition to performing relatively well historically, we believe current valuations in Asia fixed income look attractive, compared with both the market’s own history and with many other fixed income markets. For example, Asia investment grade and Asia high yield spreads to U.S. Treasuries are higher than their averages for the past 15 years, and compare very favourably U.S. investment grade and high yield spreads to U.S. Treasuries (see Figure 2). We believe this could attract more investors from across the globe to the Asia market in search of yield, supporting performance going forward. Finally, economic growth in Asia, particularly in China, continues to outperform many other regions globally, supporting company fundamentals and helping to keep the default rate relatively contained.

Figure 2: Slower recovery of Asia credit spreads versus other asset classes

Q: How is the strategy positioned in the current market?

A: We see opportunities in both the investment grade and high yield markets in Asia. Exposure to select high yield bonds enables the strategy to produce an attractive level of income compared with the broad Asia market, whilst exposure to investment grade bonds helps to balance the overall risk of the portfolio and provide resilience.

We maintain a diversified portfolio across sectors and issuers, focusing larger exposures in areas with stronger secular growth potential, barriers to entry, adequate asset coverage, and more attractive relative value. We focus on investments that can potentially outperform in both positive and negative economic scenarios, such as leading China property developers and technology companies. We are also positive on utilities, telecoms, and banks for their more defensive characteristics and strategic nature of their business that tend to have greater policy support. Going forward, we believe differentiation between the winners and the losers will begin to emerge. This will provide significant opportunities for bond investors, especially those like PIMCO, with an active and selective investment approach.

Q: How can this strategy benefit a portfolio?

A: We believe the strategy can help meet multiple portfolio objectives. First and foremost, it is designed to provide an attractive, steady, and reliable income stream to investors. With exposure to a range of issuers across sectors and geographies, no single issuer has an outsized effect on the strategy. 

An investment in Asia fixed income can also provide attractive income and potential for capital gains with historically lower volatility than has been experienced by other high-yielding sectors. The larger outstanding amounts with higher liquidity, broader sectoral composition, and stronger investor base would warrant a dedicated allocation versus the broader emerging markets asset class. Whilst income generation is an important goal of the strategy, we also aim to grow capital over time, and thus the strategy may also be suitable for investors looking to generate an attractive total return from an investment in Asia fixed income.

Find out more about the GIS Asia Strategic Interest Bond Fund.

The Author

Stephen Chang

Portfolio Manager, Asia

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Hong Kong
PIMCO Asia Limited
Suite 2201, 22nd Floor
Two International Finance Centre
No. 8 Finance Street, Central
Hong Kong

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Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.

Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Diversification does not ensure against loss.

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