DGAP-News: S.E.A. Asset Management Singapore Pte. Ltd.
Low Yield in a High Volatility World…
The issuer is solely responsible for the content of this announcement.
ISIN LU1138637738 / ISIN LU1138637225 – Bloomberg: SEAHYBA:LX / SEAHYBB:LX / SBQ7:GR
Low Yield in a High Volatility World…
At the end of October 2016 the gross yield of the S.E.A. Asian High Yield Bond Fund stood at stunning 7.7% while the average duration of the fund portfolio was only 1.35 years.
In a world where historically low interest rates continue to flush the market with liquidity, low yields are still challenging investors in search of returns on their cash and even capital protection where rates have turned negative. Record amounts of liquidity injected into markets by central banks have led to unprecedented spikes in volatility and artificially long periods of ultralow volatility making risk adjusted returns more unpredictable for most asset classes. One corner of the market that massive amounts of liquidity have so far shunned and bypassed are unrated bonds issued by small and medium size companies that have low trading volumes – Asian short duration high yield bonds.
…and the High Yield Low Volatility Opportunity
A fund holding a diversified portfolio of Asian short duration high yield bonds that offers daily liquidity is the right vehicle for investors to gain exposure to high yields with low volatility in particular if most of the bonds are unrated and less liquid than larger higher rated issuers. The combination of higher yield and lower volatility delivers a superior risk/reward ratio versus peer bond funds that follow mainstream Asian high yield bond index benchmarks like everyone else.
Value in Unrated Bond
Unrated bonds denominated in Singapore dollars are typically issued by small or medium sized companies that operate regionally. The issuers target only local investors who are usually familiar with their business. Due to a lack of international investors for Singapore dollar denominated issues, let alone small issues of sometimes only 50 mln Singapore dollars these issuers do not bother to obtain a credit rating by the major rating agencies like Moody’s or Standard & Poor’s or Fitch. Unrated hence doesn’t automatically imply a bond is untrustworthy. Quite a number of the issuers have solid cash flows and balance sheets making their often very short tenors very attractive. Some unrated bonds are from established businesses with stable credit metrics. Key is to identify these bonds that have the ability to repay at maturity or even better call or tender early. Due to the low interest rate environment in Singapore the currency risk can easily be hedged away versus the fund reference currency at almost no extra hedging cost. The most interesting yields are sometimes found in bonds with a maturity profile of 1-3 years. It is in this tenor where the quarterly financial results published by the issuers enable fundamental analysts to have maximum visibility on order books, cash flows, receivables and ultimately the ability of the bond issuer to repay their debt upon maturity. Public listings of issuers or credit rating based research obsolete in this niche. In the past 2 years large fund houses have seeded Asian short duration bond funds and Asian high yield bond funds, both segments for which benchmark indices exist. The segment of Asian bonds that are both high yield as well as short duration will be off limits to them for the foreseeable future.
Singapore Dollar Bonds
Although there have been a number of defaults in Singapore in particular from shipping and oil & gas related companies totalling 785 mln Singapore Dollars there have also been early redemptions amounting to 4.8 bln Singapore Dollars showing strong credit profiles. As of the middle of October a total of 17.4 bln Singapore Dollars have been redeemed by their issuers. Defaults from the oil & gas related sector although they should have not been entirely unexpected led to a sell-off across the board in Singapore Dollar denominated debt. This has led to buying opportunities in selected quality issuers who sold down in sympathy but whose low bond prices and high yield are largely unwarranted.
The Flawed Industry Opportunity for Investors
Typically large fund houses initially seed a new fund with sums of not more than 10 mln USD. Not ever is a fund launched without a benchmark index usually required by the end customer of the fund manager. In order to later ramp up distribution the index the fund invests in must be liquid and large enough for the fund manager to scale up. Otherwise the benefits of economies of scale of large fund houses’ sales force is rendered inefficient; and in the volume game the large fund houses play in products must enable exactly this distribution power. Otherwise fund growth stalls and high cost structures of distribution structures ultimately force fund houses to merge and combine, as we have seen in recent months with the likes of Janus/Henderson for example. Only boutique fund managers that invest benchmark free and have a lean cost structure are able to operate profitably in Asian short duration bonds. High and inflexible cost bases of large fund houses act as barrier of entry to such market niches. After a newly launched fund completed its initial 3 year track record the fund manager begins active marketing and ramps up the fund size. Usually this is achieved by injecting assets its other funds under management into the soon to be marketed fund to bring the new fund’s size from its seed money up to a size of at least 100 mln USD. A track record of 3 years and a certain minimum AUM size are usually hard criteria before institutional investors even consider looking at a fund. All large fund houses and asset managers almost exclusively chase large institutional investors, such as insurers, pension funds for example, who all use the same metrics and benchmarks to identify the best in class managers; and since the large index providers can only survive if their index is purchased by those fund houses, their index products must be liquid, investable and most importantly scalable. Due to these industry dynamics both index providers and the large investment houses avoid Asian short duration bonds. This is where investors can find underowned value with the best risk/reward. Unfortunately, investment vehicles offering exposure in these niches are not on offer by the large fund houses and will probably never be part of their product offerings.
The Liquid Alternative
The S.E.A. Asian High Yield Bond Fund is completely unconstrained and benchmark agnostic. This allows the fund manager to invest in lesser known bond issuers with good debt repayment abilities. The fund focuses on under researched and under-owned high yielding bonds. As these securities tend to be less liquid than the broader market so the portfolio tends to be more diversified than that of our competitors who must take larger bets to outperform their benchmark indices. The Luxembourg UCITS SIVAC structure of the and daily NAV provides investors assurance of liquidity and regulatory oversight. The fund is the only one of its kind investing in Asian short duration high yield bonds. Fund managers are Gallen Tay and Alexander Zeeh of S.E.A Asset Management in Singapore. Custodian and administrator are DZ PRIVATBANK S.A. and IPConcept (Luxemburg) S.A. The SICAV is audited by KPMG Luxembourg. In Q3 2016 the S.E.A. Asian High Yield Bond Fund A was listed on the Frankfurt and Berlin Stock Exchanges.
About S.E.A. Asset Management Pte Ltd
S.E.A. Asset Management Pte Ltd is a Singapore based boutique fund manager offering customised asset and fund management solutions to private accredited investors and institutional investors. The firm specialises in Asian midcap equities and Asian high yield bonds. S.E.A. AM was established in 2007. Ltd.