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The Origins of PAIF Reinventing Economic Resilience Since the Asian Financial Crisis

In 1997, the Asian economic success story came to a crashing halt. The region’s economies started to weaken, and banks refused to roll over short-term loans that companies had borrowed in US dollars. Credit dried up, governments devalued their currencies, and the International Monetary Fund eventually stepped in. At the same time, borrowers defaulted on more than US$40 billion in bonds.1 Consequently, a liquidity and financial crisis swept through the region. This was a deeply unsettling time for the financial industry and investors alike.

When the dust settled, Asian governments and central banks recognized that a lack of long-term local-currency borrowing had contributed to the crisis. This had several implications, not least of which was the need to move away from short-term foreign-currency borrowing that could cause a crisis to spiral.

In response, a coalition of 11 leading central banks in Asia Pacific turned to State Street Global Advisors to develop a unique solution to encourage the creation of a strong local-currency bond market, which, experts believed, could have helped limit the damage in 1997.2

The coalition of Asian countries chose State Street Global Advisors as an attractive partner, given its robust fiduciary culture, risk-management expertise, and sophisticated money-management capabilities. A combination that helped instil confidence in the central banks’ decision.

Harnessing the same portfolio management strategies and risk analytics used across the index mandates under its management, State Street Global Advisors demonstrated how its systems operated seamlessly and in real time across all markets. As such, the company made the case that it could readily manage a new mandate by leveraging their established practices, deep expertise and track record in index management.

The resulting solution — an Asian local currency bond exchange-traded fund (ETF) — was a novel investment proposition, tracking a specially designed index. The sophisticated index methodology included considerations of credit ratings as well as minimum standards of investability and liquidity to create a diversified exposure that would generate regular income for investors both large and small. The ABF Pan Asia Bond Index Fund (PAIF) was, and remains, a low-cost fixed-income ETF that made it easier to invest savings back into the Asian economy and earn interest that is in line with prevailing rates in the region. PAIF allowed the central banks to help prevent a future crisis and created an investment opportunity for those who might be unable to invest in that asset class, or incur significant costs to do so otherwise.

Today, PAIF is still going strong and, more importantly, so are Asia’s economies. Liquidity is ample, and local and regional governments seeking capital can tap into pools of investor savings, both domestic and foreign. Global institutions have increased their exposure to Asian debt, which is now included in many of the broad global indexes. In addition, most primary buyers of bond issuance now reside in Asia.

PAIF was created as part of an initiative to help a region in crisis figure out how to recycle savings, which has helped Asia reinvest across its economies and reinvent itself in many other ways. As far as origin stories go, you can’t ask for more than that.