Update on Exotic Fixed-Income

A while ago I commented on the expanding opportunities in Emerging Markets Corporate Credits as our domestic fixed income market looked increasingly less attractive; this exotic fixed income update wants to highlight the specific Asian segment as a potentially attractive idea.

The Asian bond market can be attractive in terms of Sovereign issues and Corporates as well; the credit quality of many Asian Sovereigns has improved dramatically over the years and it is backed by large current account surpluses. Especially when compared to the Euro Sovereigns and the highly expensive US Treasuries, Asian Sovereigns seem to deserve attention.  This is not to say that they are risk free as this concept is becoming increasingly disconnected from the old fashion definition of government issued securities anywhere in the world. Teresa Kong of Matthews Asia reports significant increases in liquidity, transparency and diversification in the Sian bond market.

An exposure to international bonds carries an additional element to the investment; the position will be affected not only by the general level of interest rates, credit changes and liquidity but also currency exposure.  Exposure to different currencies is a new element of smart diversification that at least large portfolios should consider.  Teresa Kong of Matthews Asia makes a good point when she states: “If one were to think of investments as a way to generate income to cover expenses over the long term, having a proportion of income denominated in the same currency as future expenses might act as a currency hedge. Given that Asia accounts for an increasingly larger portion of U.S. imports, having an income stream derived from underlying instruments denominated in Asian currencies might be prudent.”

The higher yield and the diversification effect do come with a price: a higher level of volatility when compared to US bonds. However, Asian fixed income carries half the volatility of US equities and roughly one third of the volatility of Asia Ex-Japan equities (source: Matthews Asia).

Disclaimer: PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THEREFORE, NO CURRENT OR PROSPECTIVE CLIENT SHOULD ASSUME THAT FUTURE PERFORMANCE OF ANY SPECIFIC INVESTMENT AND/OR INVESTMENT STRATEGIES MADE REFERENCE TO ABOVE AND RECOMMENDED OR UNDERTAKEN BY CERVINO CAPITAL MANAGEMENT, WILL BE PROFITABLE OR EQUAL THE CORRESPONDING INDICATED PERFORMANCE LEVELS. DIFFERENT TYPES OF INVESTMENTS INVOLVE VARYING DEGREES OF RISK, AND THERE CAN BE NO ASSURANCE THAT ANY SPECIFIC INVESTMENT WILL EITHER BE SUITABLE OR PROFITABLE FOR A CLIENT OR PROSPECTIVE CLIENT'S INVESTMENT PORTFOLIO. HISTORICAL PERFORMANCE RESULTS FOR INVESTMENT INDICES AND/OR PORTFOLIO BENCHMARKS DO NOT REFLECT THE DEDUCTION OF TRANSACTION AND/OR CUSTODIAL CHARGES, THE DEDUCTION OF ADVISORY MANAGEMENT FEES, NOR THE IMPACT OF TAXES, THE INCURRENCE OF WHICH WOULD HAVE THE EFFECT OF DECREASING HISTORICAL PERFORMANCE RESULTS.
HYPOTHETICAL RISK DISCLOSURE: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN, IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.