Fixed income portfolios need to move beyond traditional indices in order to provide more value for investors through a greater exposure to developing markets, according to a senior investment executive with a leading funds management organisation.
“Traditional fixed interest benchmarks don’t have much in Asia, don’t have much exposure to a market which is quite large and don’t have a proportional exposure even to Asia in their indices because they were just not part of the traditional way they were constructed and therefore they miss out on a number of things,” Axa Australia chief investment office Mark Dutton said.
Dutton pointed out Asian economies did not possess the same characteristics that were posing significant structural risks in developed markets.
“You’ve got improving credit quality, strong growth, balance sheets which are pretty good and governments right through the region which have got pretty good fiscal positions and are by and large running at surpluses. And these economies are pretty much not in the index,” he said.
Specifically the Asian economies, not including Japan, have advantages such as being free of lower yield constraints. That meant government bonds from those countries had a greater capacity to deliver capital gains for investors as their cash rates had more room to decrease, Dutton said.
The Asian economies also offer better credit spreads, with data from JP Morgan and Barclays showing investment-grade credit spreads offered by the Asian markets to be 204 basis points at the end of May 2011 compared to spreads of 134 basis points offered by the developed market bonds.
“It means you’re getting well compensated for the risks you’re taking and you’re actually taking less risk with Asian bonds,” Dutton said.
