Asia Bulls Take Note, This Japan Fund Likes Brazil, Ghana

  • T&D Asset’s EM bond fund is underweight Asia on low real rates
  • The fund is keeping exposure in Brazil after political crisis

Amid all the talk of Asia’s allure within emerging markets, one of Japan’s top-performing fixed-income funds is finding value elsewhere.

T&D Asset Management Co.’s Nomura emerging-market bond fund has returned 14.5 percent this year, beating 98 percent of its peers, according to data compiled by Bloomberg. The fund, also managed by Capital Guardian Trust Co., is currently betting more on debt of countries including Mexico, Brazil, Argentina, Ghana and Kenya, while being underweight notes issued by Asian countries, says Yuichi Onsen, T&D Asset’s chief strategist and general manager of global fixed-income investment department in Tokyo.

“Economic fundamentals for each of those nations are looking solid,” Onsen said. “On the other hand, this fund is underweight in Asia because if you look at the real interest rates, they are not so attractive any more.”

T&D Asset’s fund -- a so-called double decker or layered fund -- invests mainly in dollar bonds of emerging economies and then converts the dollar holdings into the Mexican peso.

Onsen shared his views with Bloomberg in phone interviews this month:

Why are Latin America and Africa attractive?

  • “At this point, there’s probably no change in the view toward Brazil and our fund’s exposure to the nation after the news,” Onsen said, referring to the latest political crisis in the country. 
  • In Brazil, inflation has been contained and interest rates have dropped, and yet, the rates are relatively higher, making them more attractive.
  • “While the emerging-market economies have been stabilizing in general, Mexico has been promoting some reforms in sectors such as telecom and energy, and looking at how the trade negotiations on Nafta are going, it may actually come out with new agreements” favorable to Mexico.
  • In Africa, infrastructure and industrial development has been going on, in addition to their natural resources industries. There’s IMF-led progress in Ghana, and -- for example -- an increase in electricity supply contributes to the slowdown in inflation, which is a positive.
  • The fund will probably continue its overweight positions in Latin America and Africa. 

Many investors are bullish in Asia, but why are you underweight?

  • The fund is underweight in Asia, with almost no exposure to China. 
  • “The fund doesn’t have exposure to China because while there’s concerns about the economy, the real interest rate that takes account of inflation is not attractive. We have acknowledged risks of some bad news like this for China,” Onsen said, referring to Wednesday’s debt-rating downgrade by Moody’s Investors Service.
  • “Asia is underweight as the region’s bonds look to be already expensive, while there are not many economies that offer attractive real yields.”
  • Among Asian economies, the fund holds an overweight position in Indonesia due to stabilizing inflation and improvements in exports. 

What is your investment strategy going forward?

  • The fund currently has half of the excess returns from currencies, when compared against an index it uses as a reference.
  • The dollar seems to be peaking out, so the ratio of local currency holdings may rise to 15-20 percent from the current 10 percent.

What has contributed to the performances of the fund this year?

  • A sharp rebound in the Mexican peso has contributed to the overall performance.
  • “The appreciation of the Russian ruble has also contributed significantly to the returns from the currency positions, although the currency is now looking a bit expensive.”

What is your outlook on the Mexican peso?

  • Although the peso has rebounded quite significantly, it is still cheaper compared with the long-term average, such as over 20 years, while their yields are relatively higher. Therefore, Mexico is still attractive compared with some other countries.
  • Liquidity in Mexican debt is quite ample and the country issues decent amounts of dollar bonds.
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