Transaction gives investors exposure to regional markets

Established in 2005, the ABF Pan Asia Bond Index Fund (PAIF) is an exchange traded fund (ETF), authorised in Hong Kong and Singapore, listed on the Stock Exchange of Hong Kong, and cross-listed on the Tokyo Stock Exchange. Managed by State Street Global Advisors, the second largest ETF provider in the world under the SPDR ETF (Standard & Poor's depositary receipt) brand, PAIF aims to track the performance of the iBoxx ABF Pan-Asia Index.

PAIF recently marked five years as Asia's first regional exchange traded bond fund, over which time it has provided institutional and retail investors with efficient and low-cost access to Asia's local bond markets, says Ramon Maronilla, senior product engineer for fixed income in Asia at State Street Global Advisors.

'If an investor bought [US] government bonds on their own, it costs at least US$10,000 - for just one bond,' Maronilla says. 'But the PAIF offers exposure across the yield curve in eight regional markets.'

The PAIF's investment strategy is to employ a representative sampling approach to match the index's characteristics and returns through investing in a well-diversified portfolio representative of the index. Full replication in a broad market index would be impossible or cost-prohibitive in Asian fixed income markets, says Maronilla, given the high cost of transacting in many bonds and the unavailability of some bonds to the general investing public, as long-term and/or institutional investors hold them to maturity. At the end of September, the fund's size was about US$2.33 billion, with potential semi-annual distributions made to investors in US dollars. The PAIF's expense ratio is about 0.20 per cent of its annual Net Asset Value. These are the annualised ratio of expenses to weighted average net assets between July 1, 2009, to June this year. They were computed in accordance with the revised Investment Management Association of Singapore's guidelines on disclosure of expense ratio. The calculation does not include brokerage and other transaction costs, interest expenses, foreign exchange gains/losses and tax deducted at source or arising on income received. Maronilla adds that stamp duties are exempted.

The fund trades in lots of 10, like a stock, with the minimum investment amount of about US$1,200. Maronilla believes there is a benefit to investing in an exchange traded pooled fund vehicle such as the PAIF. It is easy and convenient to buy and sell during trading hours, just like stocks.

The PAIF is also traded on the local bourse because it's an ETF. 'The 20 basis point expense ratio is reasonable for the [Asian] exposure you receive,' he says, noting few funds can match the PAIF's scaled diversification and ease of trading.

'It's an index fund, so investors have a good idea of the types of exposures they're gaining and the risks they're taking. It's also transparent because you can see the constituent country's bonds on the fund's website on a weekly and monthly basis,' Maronilla says.

His point is salient because with higher market volatility, investors need to know where their investment risks and returns emanate. Also, the PAIF can directly participate in China's inter-bank market. At the end of September, the PAIF has a 22 per cent exposure to the mainland's local government and agency bond markets.

Key features

First exchange-traded Asian bond fund in Asia

Potential semi-annual distributions

Entry price of approximately US$1,195

Low expense ratio

Trades like a share (stock code: 2821)

Stamp duty exempted