ABF Pan Asia Bond Index Fund ("PAIF") is an exchange traded bond fund which seeks to provide investment returns that corresponds closely to the total return of the Markit iBoxx ABF Pan-Asia Index ("Index"), before fees and expenses, and its return may deviate from that of the Index.
PAIF primarily invests in local currency government and quasi-government bonds in eight Asian markets, comprising of China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand.
Investment involves risks, including risks of exposure to bonds in both developed and emerging Asia markets. Investors may lose part or all of their investments.
PAIF is not "actively managed" and will not try to "beat" the market it tracks.
The Executives' Meeting of East Asia and Pacific Central Banks group (the "EMEAP") member central banks and monetary authorities are like any other investors in PAIF and each of them may dispose of their respective interest in the Units they hold. There are no guarantees that the EMEAP member central banks and monetary authorities will continue to be investors in PAIF.
The trading price of PAIF may differ from the underlying net asset value per share.
PAIF may not be suitable for all investors. Investors should not invest based on this marketing material only. Investors should read the PAIF's prospectus, including the risk factors, take into consideration of the product features, their own investment objectives, risk tolerance level etc and seek independent financial and professional advices as appropriate prior to making any investment.
Asia Offers Exciting Fixed Income Alternative
Adding a new dimension to investment portfolios
Government bonds have long been considered a core component of many investment portfolios, including for pension schemes, where participants are often advised to lift fixed income allocations as they near retirement. In June 2021, the OECD noted that half of global retirement assets — which had grown by nearly one-tenth to over $35tn in the year to December 2020 — were invested in bonds. Bond holdings are also considerable in insurance portfolios.
Foreign interest in Asian bonds, however, has been modest, with overseas holders' involvement only picking up from 2008. Historically, low weightings in Asian fixed income might have made sense. Opportunity was limited and came with risks. The Asian financial crisis in the late 1990s was exacerbated by excessive short-term overseas borrowing in non-local currencies, primarily the US dollar.
Out with the old view
The situation has changed on both fronts, with expansion in Asia's local currency bond markets since early 2000 presenting a new pool of investible assets. "The market size of aggregated local currency government bonds and corporate bonds in ASEAN plus China and Korea is almost equivalent to US treasuries — a really large market — and the euro area's euro-denominated bonds,” says Satoru Yamadera, advisor for the Asian Development Bank’s Economic Research and Regional Cooperation Department.
As the market has expanded, liquidity has also improved. Bid-ask trading spreads have compressed from 15 basis points to under one basis point in China1 since 2008, with similar contractions in other markets across the region. Access has been enhanced by initiatives such as China's Bond Connect, which since July 2017 has allowed foreigners to buy renminbi-denominated bonds in what has become Asia's largest bond market.
The risks, too, are not what they once were, with marked improvements in Asia's fiscal backdrop since the Asian financial crisis. "At the time, policymakers in east Asia noticed that heavy dependence on US dollar short-term finance is the source of vulnerability", driving a deliberate shift towards longer term local currency financing, says Yamadera. "They have really learned the lesson from the Asian financial crisis."
Thailand, for instance, has reduced its dependence on overseas debt. In the decade prior to the pandemic its government local currency debt-GDP ratio rose just one-tenth, from 30 to 34 per cent.2 Meanwhile, McKinsey notes that Indonesia's "sound fiscal discipline" prior to the pandemic has given it more leeway to issue debt to shore up its economy. Across the region, robust debt issuance has been supported by healthy economic growth. Meanwhile, a large proportion of this debt is held by domestic institutional investors — a steadier holding base that reduces the threat of capital flight overseas.
Global systemic risk is also less of a worry. Even before Covid-induced reshoring, McKinsey observed that gross cross-border flows globally were down by half in absolute terms since 2007, significantly reducing the likelihood of a 2008-style financial crisis. This disentanglement not only reduces financial contagion risk, it suggests that if one region is struggling, others can still thrive, further favouring geographical diversification.
“We have seen increased demand for Asia’s fixed income market as it offers higher yields and diversification benefits with its low correlation with other major assets. Growing appetite for Chinese assets and their inclusion in broad indices are also driving increased demand for Asian bonds”, says Kheng Siang Ng, Asia Pacific head of fixed Income and head of Singapore at State Street Global Advisors.
Yield and duration benefits
Those higher yields come with similar if not lower volatility than for comparable yields elsewhere. The ABF Pan Asia Bond Index Fund (PAIF) is an index-tracking ETF managed by State Street Global Advisors, and the fund aims to deliver returns of the Markit iBoxx ABF Pan-Asia Index that has a yield of 3.15 per cent,3 versus a global treasury yield of 1.63 per cent.4
To earn higher yields elsewhere, investors would have to purchase comparatively lower quality, if still investment grade, corporate debt — which tends to be more correlated to equity markets during crises — introducing more volatility to a broader investment portfolio.
In fact, based on a 60 per cent weighting in equity and 40 per cent in bonds, a hypothetical portfolio that holds 10 percentage points of the bond weighting in the Markit iBoxx ABF Pan-Asia Index offers a slightly higher expected yield compared with one that holds instead the Global Investment Grade Corporate Bond Index — and with an overall credit rating one notch higher.5
And while higher risk is undoubtedly a factor behind the higher yields on government bonds in Asia, they come with a bonus of lower correlation to US debt and equity. The shorter duration of Asian government paper, averaging seven years, also offers maturity sooner than that which is required for most developed markets. In a challenging return environment across asset classes over Q1 of this year, the hypothetical 60:40 portfolio with Asian government bond exposure held up better than the comparison portfolio by 0.46%.6
Foreign investors are warming to the region. Prior to the onset of the Covid-19 pandemic, overseas investors held about 39 per cent of Indonesian local currency bonds.7 Meanwhile, countries such as China and South Korea have seen strong buying interest through this environment, according to Asian Bonds Online data.
As inflation returns and the growth outlook falters in developed markets, this interest should continue to expand. To attract and retain foreign investment, countries including Singapore, China and Malaysia have set the withholding tax payable on bond cash flows to zero. Asian government bonds, backed by strong national balance sheets and solid economic prospects, deserve a place in every rounded portfolio.
1Source: Asian Bonds Online, 2008-2021. The AsianBondsOnline conducts an annual LCY Bond Market Liquidity Survey to assess liquidity conditions in LCY bond markets in emerging East Asia. The survey aims to provide an updated evaluation of the state of liquidity for each market in the region and identify potential areas for development. The survey is conducted through meeting interviews, phone interviews and e-mail correspondence with bond market participants. Bid-ask spreads represent the difference between the highest price that a buyer is willing to pay for a security (bid) and the lowest price at which a seller is willing to sell (ask). 2Source: Asia Bonds Online, 31 December 2009 – 31 December 2019. Government LCY bonds to GDP ratio = Total amount of government LCY bonds outstanding x 100 Annualized Nominal GDP. This indicator shows the size of government local currency (LCY) bond obligations as a percentage of nominal GDP. Government bonds include obligations of the central government, local governments, and state-owned entities. Bonds are defined as long-term bonds and notes, treasury bills, commercial paper, and other short-term notes. 3Source: Bloomberg Finance L.P., as of 31 March 2022. 4Source: Bloomberg Finance L.P., Bloomberg Global Aggregate Treasury Index, as of 31 March 2022. 5Source: Bloomberg Finance L.P., based on index holdings as of 31 March 2022. 6Source: Bloomberg Finance L.P., performance period from 31 December 2021 to 31 March 2022. 7Source: Asia Bonds Online, as of 31 December 2019.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Sample portfolio returns shown above are hypothetical and are based on the returns of the underlying market indices in the proportions shown above. This information is for illustrative purposes only. Market indices are unmanaged and not subject to fees and expenses which would lower returns. Neither index performance nor sample portfolio performance is intended to represent the performance of any particular mutual fund, exchange-traded fund or product offered by SSGA. SSGA has not managed any accounts or assets in the strategies represented by the sample portfolios above. Actual performance may differ substantially from the hypothetical performance presented.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone
Diversification does not ensure a profit or guarantee against loss.
Past performance is not necessarily indicative of the future performance.
The ABF Pan Asia Bond Index Fund (the ‘PAIF’) is an authorized unit trust in Hong Kong and Singapore only. Authorization does not imply official recommendation. Nothing contained here constitutes investment advice or should be relied on as such. The prospectus for PAIF is available and may be obtained from State Street Global Advisors Singapore Limited (the “Manager”) (Singapore Company Registration number: 200002719D) and authorized participants. Investors should read the prospectus before deciding whether to acquire units in PAIF. The value of units in PAIF and accruing to such Shares, if any, may fall or rise. The semi-annual distributions are dependent on PAIF’s performance and are not guaranteed. Redemption of PAIF’s units could only be executed in substantial size through designated dealers and the listing of PAIF on the Stock Exchange of Hong Kong Limited and the Tokyo Stock Exchange (the ‘Stock Exchanges’) do not guarantee a liquid market for the units, and PAIF may be delisted from the Stock Exchanges.
Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
This document is issued by State Street Global Advisors Singapore Limited and has not been reviewed by the Securities and Futures Commission.
This content has been produced by State Street Global Advisors Singapore Limited in
collaboration with the Commercial Department of The Financial Times.
The ABF Pan Asia Bond Index Fund (the 'PAIF') is an authorized unit trust in Hong Kong and Singapore only. Authorization does not imply official recommendation. Nothing contained here constitutes investment advice or should be relied on as such. Past performance of PAIF is not necessarily indicative of its future performance. Distributions from PAIF are contingent on dividends paid on underlying investments of PAIF and are not guaranteed. Listing of PAIF on the Hong Kong Stock Exchange and the Tokyo Stock Exchange does not guarantee a liquid market for the units and PAIF may be delisted from the Hong Kong Stock Exchange and/or the Tokyo Stock Exchange. Investors should read the PAIF's prospectus including the risk factors. The Prospectus for PAIF is available and may be obtained from State Street Global Advisors Singapore Limited or can be downloaded from www.abf-paif.com*.
All the information contained in this website is from SSGA and as of date indicated unless otherwise noted. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent. This website and the information contained herein may not be distributed and published in jurisdictions in which such distribution and publication is not permitted.
All forms of investment carry risk, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
Securities lending programs and the subsequent reinvestment of the posted collateral are subject to a number of risks, including the risk that the value of the investments held in the collateral may decline in value and may at any point be worth less than the original cost of that investment.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Diversification does not ensure a profit or guarantee against loss.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. Frequent trading of ETF's could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.
The Markit iBoxx ABF Pan-Asia Index referenced herein is the property of Markit Indices GmbH and is used under license. The PAIF is not sponsored, endorsed, or promoted by Markit Indices GmbH or any of its members.
State Street Global Advisors Singapore Limited: Hong Kong address: 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone: +852 2103-0288. Facsimile: +852 2103-0200.