A reversal in central bank policy, including a potential Fed rate cut this month, will give even more legs to Asia’s traditional «buy-and-hold» approach to fixed income investing.
«Bond issuances and buy-and-hold strategies (both single bonds and baskets) have always been popular in Asia,» said Ken Peng, head of Asia investment strategy at Citi Private Bank.
Many years of strong growth, high relative yields and ample access to balance sheet have made prominent the simple «buy-and-hold» approach in Asia, where private investors would buy bonds from issuers and hold till maturity, a practice made all the more ingrained due to the perception of government protection against defaults.
«[W]e expect this to continue, with the exception of some specialist EM active managers,» Peng added, underlining the attractiveness of emerging market bonds due to strong fundamentals and yield bolstered by a potential US rate cut and dollar weakening.
FMPs continue riding the wave
Despite the «buy-and-hold» headwinds, the broader wealth and asset management industry has found means to add value and charge fees, albeit at lower rates. The basket of bonds that Peng referred to are popularly called fixed maturity plans (FMP), an investment strategy that aim to generate predictable income from a portfolio of bonds that all mature at the same time, assuming no defaults occur.
«Although active managers are already generating strong performance, risk appetite in Asia remains lacklustre,» said Rex Lo, managing director at BEA Union Investments. «We see clients continuing to adopt buy-and-hold strategies, either through single bonds or FMPs.»
FMPs entered Asia’s private banking mainstream in recent years to capitalise on the demand for predictable income without the concentration risk of holding one or just several bonds.
Structured either as a fund or a discretionary mandate, FMPs have gained prominence exclusively with high net worth individuals, despite its simplicity.
«Despite its simplicity, fixed maturity bond funds (FMP) in such a low rate environment are most beneficial to private banking clients,» Lo explained. «There is a very simple reason: leverage.»
