Asia's Best Dollar Bond Funds Advise: Avoid Indian Banks

  • Top three 2015 Asian dollar debt funds are underweight India
  • More supply and less state support seen hurting bank bonds

Reserve Bank of India Governor Raghuram Rajan’s tough love for state banks hasn’t done much for their popularity among Asia’s top bond investors.

Invesco Ltd., PineBridge Investments and Credit Suisse Asset Management, which have the three best-performing U.S. currency bond funds focused on the region in the past twelve months, held less Indian debt than the benchmarks they are measured against last year. The nation’s dollar notes gained 1.1 percent in 2015, versus 4.4 percent for Chinese securities, Bank of America Merrill Lynch bond indexes show. The fund managers said yield premiums on India’s debt are less attractive than the rest of Asia.

While India’s economic growth picked up to 7.3 percent in 2015, the country’s banks are suffering under bad debts of as much as $59 billion that they have to clear from their books by March 2017. The lenders, who account for 44.2 percent of the U.S. currency bonds from the country, were given incentives by Rajan to speed up loan write-offs and must meet tighter international capital standards. All of that means more bond sales.

“The Reserve Bank of India has asked banks to clean up their balance sheets, but this means their capital ratios and earnings will be hit and they need capital to replenish this which will result in more supply,” said Arthur Lau, the co-head of emerging markets and head of Asia ex-Japan fixed income at PineBridge. “The government is also planning to sell stakes in some of the banks which means perceived government support would be weaker and this would widen spreads.”

PineBridge’s Asian Bond Fund returned 3.6 percent in the past twelve months, the second-best performer among the region’s U.S. currency funds, according to Bloomberg-compiled data. Its allocation to India was less than half the 9.7 percent of the Bank of America Merrill Lynch Asian Dollar Corporate Index.

The top performer in the category over the past year, the Credit Suisse Asia Corporate Bond Fund, achieved a 4.4 percent return. India comprises only 4.6 percent of its portfolio, according to Bloomberg-compiled data, down from 10.1 percent one year ago.

The underweight “is mainly due to valuation,” said Lei Zhu, the Singapore-based manager who helps oversee the investments of the fund. “We have better places to invest for the same rating, relatively speaking.”

The yield on Indian bonds rated one level above junk was 202 basis points over U.S. Treasuries on Thursday, compared with 293 basis points for notes with similar grades from China, or 245 for those from Hong Kong. The premium for Indian debt included in the JP Morgan Asia Credit Index increased 80 basis points in the past twelve months, underperforming the 45 basis point reduction for Chinese notes.

Bond Gainers

Not all Indian bonds are slumping. The extra yield on petrochemical maker Reliance Industries Ltd.’s 5.4 percent dollar bonds due in 2022 has narrowed to 213 basis points more than sovereign notes, compared with 345 in 2012. The spread on 5.75 percent notes due in 2020 from private lender ICICI Bank Ltd. has dropped 14 basis points in the past twelve months.

“A lot of fund managers aim to construct a diversified portfolio,” said Thomas Drissner, a Singapore-based investment manager at Aberdeen Asset Management Plc, which managed about $430 billion as of Sept. 30. “This ensures that there will always be a bid for strong issuers in India. The first few weeks of this year illustrate that trend fairly well.”

Steering clear from India worked for Invesco, which managed $791 billion as of Oct. 31. Its Asian Bond Fund returned 3.3 percent in the past year, the third best in its category, and held only 3.5 percent of assets in debt from India, down from 5.9 percent twelve months ago.

“Indian dollar bonds were strongly demanded by Middle East commercial banks in the past,” said Hong Kong-based Ken Hu, the chief investment officer for Asia-Pacific fixed income at Invesco. Low oil prices have reduced that demand, he said. “We are underweight in Indian dollar bonds due to their unattractive relative values and weak technical support.”

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