Asian Bond Watch: Choosing the right investment vehicle | Partner content

Kheng Siang Ng

More than 20 years have passed since the Asian financial crisis and we have seen the region’s local currency bond market grow from $304 billion in 1998 to over $12 trillion today. This rapid rise can be attributed to programs such as the Asia Bond Fund (ABF) initiative developed after 1997, as part of a collaborative effort by central banks in the Asia-Pacific region, to encourage the development of bond markets. local. These efforts were aimed at reducing reliance on foreign capital and tapping into the region’s wealth to protect it from future economic shocks.

Of course, any government’s efforts would have been in vain had investors not participated, but the region’s favorable growth characteristics; a reduction in credit risk (as evident in the upgrades of sovereign ratings of a number of Asian countries in recent years); the prospect of relatively higher returns; and the benefits of portfolio diversification all worked in tandem with these coordinated policies and contributed to a boom in local bond markets.


Having decided to include a fund allocation to local currency bonds, investors are faced with two choices: should they invest in individual bonds or opt for a collective vehicle, such as a managed fund or a traded index fund? (AND F) ?

If an investor has access to comprehensive and timely bond market research, direct investments would seem attractive as they can manually select the bonds that best complement their existing portfolio or those in which they have the most confidence.

This process takes time and requires skill and effort in finding individual links. It is therefore not surprising that many investors, large and small, turn to external managers who have the ability and resources to identify individual bond opportunities, and who closely monitor the markets, look for changes in interest rate or currency movements and understand how these factors will impact the bond’s performance.


In the past, adopting an active management approach was seen as the best way to invest in emerging market debt (EMD), including Asian bonds, based on the assumption that EMD are an inefficient market and that there are obvious weak segments that could be avoided through active management.

The reality, however, is quite different. The majority of active managers fail to outperform their benchmarks over the long term.

State Street Global Advisors conducted an in-depth study of active managers in the Morningstar database tracking two flagship EMD indices: JPM GBI-EM Global Diversified Index (GBI-EM) for local currency, and JPM EMBI Global Diversified Index (EMBI) for hard currency.

According to our study, in the hard currency sovereign universe, 50% of active managers underperformed their benchmarks over a one-year period. Even more – 57% and 83% respectively – failed to outperform over three and five years1. Outperforming the benchmark appears to be even more difficult for active managers in the local currency universe, with 80%, 83% and 87% of active managers failing to outperform their benchmarks on one, three and five years.1.

There is also some semblance of a correlation between market underperformance and active manager underperformance. This is particularly the case in local currency where it often appears that the worse the index, the higher the percentage of active managers who underperform.

The inherently volatile nature of the emerging markets sector is likely to be one of the main causes of active manager underperformance. Returns are often misaligned with fundamentals, as they are driven by investor sentiment and political risk, which are harder to predict and often lead to binary outcomes.


Indeed, most assets in the Asian local currency fixed income sector remain in managed funds. But the markets now offer much greater liquidity and diversity. More profitable and transparent indexing approaches, in particular ETFs, are increasingly seen as highly efficient and gaining popularity with investors.

ETFs offer a number of advantages to Asian bond investors. Due to their index structure, ETFs are generally cheaper to run than managed funds. This, in turn, will have a positive influence on the overall return of the fund.

Trading like stocks on the stock exchange also allows for quick and easy access to Asian local currency bonds, eliminating the hassle of opening numerous local bond market accounts and tax issues, as well as the hassle of buying and selling. execution of bonds and foreign currencies with different market times and settlement practices.

ETFs may appeal to investors who want to take an active role in managing their money. Its access to liquidity via the primary and secondary markets and the flexibility of trading facilitate tactical and strategic asset allocation decisions.

Visit* for our latest news and investment ideas for Asian Fixed Income.

1 Source: Morningstar. The universe is generated by selecting the 30 largest living funds as of May 31, 2018.


All forms of investing involve risk, including the risk of losing the entire amount invested. Such activities may not be suitable for everyone. Past performance is not indicative of future results.

The information provided does not constitute investment advice and should not be relied upon as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account an investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There are no representations or warranties as to the accuracy of the information and State Street assumes no responsibility for decisions based on this information.

The opinions expressed in this advertisement are the opinions of Kheng Siang Ng for the period ending September 20, 2018 and are subject to change based on market and other conditions. This advertisement contains certain statements that may be considered forward-looking statements. Please note that such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected.

All or part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without the express written consent of SSGA.

This material has not been reviewed by the Hong Kong Securities and Futures Commission (the “SFC”).

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