China’s central bank, the People’s Bank of China, carried out a surprise devaluation in August by changing its daily fixing mechanism, leading to about a 3% devaluation of the RMB against the US dollar. That contributed to global market volatility as investor concerns over China increased. In trade-weighted terms, however, industry sources note that the RMB has already recouped nearly all its losses versus the US dollar since August.
The poor manner in which China communicated its currency reform led to strong speculative downward pressure on the RMB, forcing the PBOC to step up intervention in August and September to prevent a further slide.
BSI Bank noted that the PBOC lowered the one-year lending and deposit interest rate by 0.25% to 4.35% and 1.5% respectively.
The interest rate cut was the sixth since November 2014.
The PBOC also cut the reserve requirement ratio (RRR) by 0.5% to 17.5% for all banks, with an extra 0.5% reduction for institutions focused on rural and SME loans.
“There is still room for lower rates, which is beneficial to the onshore and offshore bond market. One or two more rounds of interest rate cuts and RRR reductions could be likely toward the end of 2015 and into 2016,” BSI Bank added.
Another factor impacting the RMB is the widely expected inclusion of the currency in the IMF’s SDR basket of currencies. Some portfolio managers believe central banks and institutional investors will find they are underweight China’s currency and start allocating to RMB fixed income.
Given the rising global importance of China’s currency, Fund Selector Asia compares two relatively new products: the Fullerton RMB Bond Fund and the ChinaAMC Select RMB Bond Fund.
Wendy Lim, fund advisor at BSI Bank, provides a comparative analysis.
Investment strategy review
The Fullerton fund, led by CIO Manraj Sekhon, seeks to achieve a gross target yield of 3-4% per annum at a steady rate.
Sekhon and his team invest primarily in RMB-denominated bonds, both onshore (CNY) and offshore (CNH), with a mix of money market instruments, certificates of deposits, term deposits, credit linked bonds and convertibles. Sekhon also utilises US-denominated bonds, credit linked notes, currency forwards and currency swaps.
Lim noted that investing in onshore RMB bonds may include bonds traded both in the China interbank bond market and on domestic stock exchanges. These trades are made through the fund’s qualified foreign institutional investor (QFII) and renminbi qualified foreign institutional investor (RQFII) quotas.
“There is a dynamic allocation between onshore, offshore and US dollar issues to enhance returns while maintaining a high credit quality of the portfolio,” Lim said.
The Fullerton fund’s onshore bond allocation is primarily in Chinese government bonds and in bonds issued by state-owned banks that are used for government spending (policy banks), Lim added.
She likes the fact that the duration of most CNH bond issues are between 1-3 years, making them less sensitive to changes in interest rates.
In contrast, the focus of the ChinaAMC fund is mainly on onshore corporate bonds. While the fund maintains a 5% flexibility call to invest in convertible bonds, its investment mandate does not allow exposure to equities.
ChinaAMC gains access to corporate bonds through its RQFII quota.
Led by Zhu Can, the team at ChinaAMC employs a bottom-up selection of bonds that fits their investor risk appetite. Lim noted that ChinaAMC’s current strategy focuses solely on fixed income securities.
A snapshot of the two funds:
| Fullerton Fund | ChinaAMC Fund | |
| Launch | 7 May 2013 | 21 Feb 2012 |
| AUM | $207.2m | ~$175m |
| Average duration | 2.5 years | 1.95 years |
| Yield to maturity | 5.0% | 4.63% |
| Top 5 holdings |
China government bond 4% Sep 2017 – 5.5% China government bond 2.76% Feb 2016 – 4.6% China government bond 3.99% Jul 2016 – 3.1% China government bond 4% Jun 2024 – 2.4% Global Logistic Properties 3.375% May 2016 – 2.4%
|
Xining City Investment Management 7.7% – 5.31% Lanzhou City Development Investment 8.2% – 4.99% Guizhou Railway Investment 7.2% – 4.57% Harbin City Planning Investment Group 7.08% – 4.52% Wenzhou Anjufang City Development 7.65% – 4.40% |
Source: BSI Bank, Fullerton Fund Management, China Asset Management
Fund performance
The Fullerton fund’s performance is vulnerable to concerns over China’s growth slowdown, Lim said. For example, in September, Chinese bond yields ended lower than the previous month while the onshore bond curve was relatively stable.
The Fullerton team reduced the fund’s holdings in Chinese government bonds, China Merchant Land and Banyan Tree Holdings to adjust the cash level higher. The team chose to adopt a defensive stance in view of the uncertain investment climate, which could lead to large changes in investors’ asset allocations, Lim said.
“We will continue to look for opportunities in reasonably strong corporates trading at good valuations,” Fullerton said in a note to clients.
Lim agreed with the fund team’s assessment. She expects the RMB to remain stable against the US dollar. The PBOC is likely to manage the RMB with stability in mind to ensure inclusion into the IMF’s Special Drawing Rights basket of currencies.
“After inclusion into the SDR, the RMB may weaken against the US dollar, but it will still outperform other Asian currencies,” Lim said.
She also likes the Fullerton fund’s call to focus on corporates.
“Corporates currently provide a good pick-up over government bonds, while offshore CNH bonds are attractive given their cheaper valuations,” Lim said.
In the case of the ChinaAMC fund, Lim noted that Zhu, the manager, also became more cautious in the third quarter of this year.
“The current credit spread is too narrow to provide sufficient cushion for correction. [Zhu] therefore stayed relatively defensive on the duration. He has also reduced [the fund’s] credit exposure,” Lim said.
A look at the ratings breakdown for the Fullerton Fund (ratings are internally generated):
| Rating breakdown | Fullerton Fund |
| AA | 27.8% |
| A | 19.1% |
| BBB | 30.4% |
| BB | 13.1% |
| B | 7.2% |
| Cash | 2.3% |
Source: BSI Bank, Fullerton Fund Management
A look at the ratings breakdown for the ChinaAMC Fund (local credit rating):
| Ratings breakdown | ChinaAMC Fund |
| AAA | 11.99% |
| AA+ | 37.71% |
| AA | 36.12% |
| AA- | 0.00% |
| A-1 | 8.16% |
Source: BSI Bank, ChinaAMC
A look at the performance of both funds:
| Fullerton Fund | ChinaAMC Fund | |
| Total return YTD | 0.99 | 5.61 |
| Total return 1-year | -0.49 | 4.79 |
Source: Morningstar
BSI Bank refers to performance figures provided by Morningstar. The bank takes into account performance on a total return basis, net of fees.
The bank uses the ratings provided by Standard & Poor’s, Moody’s and Fitch to assess the quality of counterparties and the ratings provided by Standard & Poor’s and Moody’s for debt securities.
Based on that, BSI gives the Fullerton fund an A rating and the ChinaAMC fund an AA+ rating.
Manager review
Lim said that the Fullerton fund uses a team-based approach. A disclosure from Fullerton states that Manraj Sekhon is supported by Patrick Yeo, who has 20 years of investment experience.
Prior to joining Fullerton in 2011, Sekhon was a head of international equities at Henderson Global Investors. Sekhon has 20 years of investment experience. He started his career at Mercury Asset Management and also worked with Invesco Asset Management before joining Henderson in 2003.
Yeo is head of the fixed income team. His experience is primarily in the areas of fixed income, currency management and interest rate trading. In his current role, he is responsible for the overall management of all fixed income portfolios that include Asian hard currency bonds, Asian local currency bonds, and short- and medium-term Singapore dollar bonds.
Prior to joining the firm, Yeo was a co-founder of a fund management company in Singapore for the Usaha Tegas Group in Malaysia, where he managed global bonds and global equities.
He previously held positions at OCBC Asset Management, Rothschild Asset Management, HSBC and the Government of Singapore Investment Corporation.
In the case of the ChinaAMC fund, Lim noted that Zhu has been managing the fund since 2013. He serves as portfolio manager for several other China onshore bond funds in ChinaAMC.
Aside from information provided by Lim, there is no other public disclosure on ChinaAMC’s Select RMB Bond Fund’s portfolio manager and analysts.
Fee review
The Fullerton fund charges a management fee of 0.80%. Lim noted that the fund house’s charges are in line with its peer average.
ChinaAMC charges management fee of 1.25%, which is line with peer average within the onshore space, she said.
Conclusion
Lim said that investors who are bullish on the RMB bond market should consider the Fullerton fund and ChinaAMC fund for different exposures.
“The Fullerton fund offers diversified opportunities across onshore government and policy bank bonds, offshore bonds and USD bonds.
“The ChinaAMC fund gives investors exposure to onshore corporate bonds.”
“Of the two funds, the ChinaAMC fund could potentially offer more opportunities and hence higher returns as the onshore RMB market develops and deepens. But with higher returns, investors should be aware of the higher risk relating to defaults, mis-pricing and structural issues,” Lim said.
