High-yield yuan bonds were excellent performers and extremely popular investments last year. The Investment Funds Association said Hongkongers spent US$36.9 billion on high-yield funds last year, more than three times as much as on equity funds.
Mainland firms drove the Asian high-yield market. The issuers, in particular property companies, dominated corporate issuance of high-yield bonds. Surprisingly, however, until recently there has been no high-yield yuan bond fund approved for sale in Hong Kong.
BOCHK Asset Management has now addressed that void. On March 6, the firm launched its BOCHK All-weather RMB High Yield Bond Fund, the first high-yield yuan bond fund authorised by the Securities and Futures Commission. Subscription is open until this Friday.
Let us be clear about what this fund is and is not. It is not the first fund to invest in high-yield yuan bonds, as some funds already offer such exposure. The BOCHK fund does not even invest exclusively in yuan bonds - it reserves the right to invest in securities in other currencies. Nor is it exclusively a bond fund: it has a wide mandate to invest in a variety of instruments.
It is, however, the first fund offered in Hong Kong that is denominated in yuan and invests only in high-yield debt (securities that are rated BB-plus or below, or are unrated). The fund is effectively a vehicle to buy high-yield dim sum bonds, or corporate yuan bonds sold in Hong Kong.
Michael Ha Cheuk-wah, the head of marketing and client services at BOCHK Asset Management, says the fund will invest 30 to 35 per cent of its capital in mainland property bonds, and 30 per cent in bonds issued by mainland industrial firms.
This, for many, is a tantalising investment opportunity. Mainland property bonds have been outstanding performers of late. For example, if someone bought Yuzhou Properties due 2015 bond in January 2012, they would be sitting on substantial capital gains and an annual yield of about 25 per cent.
Mainland property bonds have been delivering the kind of super returns that Hong Kong investors want. This fund offers access to the sector, and Ha says its returns will be in double digits. But, of course, there are risks.
In November last year, the SFC warned investors about the general risk of high-yield bonds. The commission was surely noting the record inflows of Hong Kong money into high-yield funds and was reminding investors that high-yield bonds could be big money losers.
High-yield bond prices are extremely volatile. Just as these securities saw big trading gains last year, they are prone to periodic collapses, and investors need to be prepared to take big losses.
Then there are the particular risks of investing in mainland property bonds. Bryan Collins, a Fidelity portfolio manager who runs Asia's biggest high-yield bond fund, says investors need to think about concentration risk.
For example, most dim sum high-yield issuance comes from the mainland property sector. The sector is risky and forever veering between boom and bust as the authorities periodically intervene in the market to cool prices. Mainland property firms move as one. They profit during the good times and suffer during the downturns. Given that about one-third of the BOCHK fund is invested in property bonds, if the sector is poised for another downturn, investors in the fund could lose a lot of money.
High-yield bonds also involve liquidity risk. The instruments are lightly traded, which makes it difficult for an investor to sell the bonds, especially if markets get choppy. Investors should also be mindful about the governance standards and credit quality of the high-yield dim sum sector, Collins says. Many of the issuers are non-rated and are therefore unknown entities.
Au King-lun, BOCHK Asset Management's chief executive, says the firm assesses the creditworthiness of each bond, assigning an internal rating to every security.
Collins says investors would be better off buying investment-grade dim sum bonds, which offer more issuer diversity than high yield and, of course, better credit quality. The returns are respectable, too, with Collins projecting gains of 3 to 4 per cent from investment-grade dim sums this year. Including yuan appreciation, the total returns in Hong Kong dollar terms could be 4 to 6 per cent, he says. Collins estimates high-yield dim sum bonds will return in the realm of 4 to 7 per cent this year, a much more moderate return than seen last year, and not much better than investment-grade debt, especially given the greater risks.