bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

sponsorType

urlAlias

moreOnThisArticles

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

Last year was the year of debt. More specifically, it was the year of high-yield bond funds, Hong Kong's hottest investment of 2012.
If you were lucky enough to own such a fund last year you would have done extremely well. The HSBC Asian High Yield Bond Fund  climbed 18.56 per cent in 2012.
Bryan Collins, a Hong Kong-based fixed-income portfolio manager at Fidelity, was arguably at the head of the movement. He manages Asia's largest high-yield bond fund (US$2.4 billion) And, according to one survey, ranks among the top 10 fund managers in the world.
But these are complicated times to be a figurehead for high-yield bonds, or debt rated below BBB-.
Hongkongers gorged on the asset in 2012. Individual investors bought US$11.4 billion of high-yield bond funds, according to the Hong Kong Investment Funds Association, with almost all the sales coming in the second half.
Such was the mania for the asset that the Securities and Futures Commission in November put out a circular that flagged the risks of high-yield bonds, and the Monetary Authority began questioning private banks on their sales of the instrument to individuals.
Mainland property firms have been by far the biggest issuers of Asian high-yield bonds and these were stellar performers in 2012. For example, if someone bought Yuzhou Properties due 2015 bond in January last year, they would have captured a 40 per cent capital in 2012, and would be sitting on an instrument yielding about 25 per cent per annum.
But mainland property is also risky and subject to spectacular booms and busts. These firms are routinely brought to the brink of insolvency by rounds of tough rules on mortgages and bank loans to the sector, as regulators react to overheating in the property market. Collins notes that, while no mainland property issuer has defaulted on a bond, "during the 2008-09 crisis we saw some firms come close".
Collins says that mainland property bond issuance has been so strong the issuers now comprise about 40 per cent of the weighting of key Asian high-yield bond indices.
Collins is pulling back. "For me, that [40 per cent weighting] is far too high. So I'm not going to blindly match that. I am going to have an exposure of around 20 per cent."
In this strategy, Collins is sharply underinvesting in the biggest, most liquid, best performing component of the Asian high-yield market, and therefore risks underperforming his peers. The fact that he is pulling back speaks volumes about the risks of the sector.
Collins in October 2012 was ranked eighth globally and first in Asia in a ranking of fund managers performed by Citywire, a London-based research firm. Collins' ranking was based on his management of a mid-sized Hong Kong bond fund that generated far lower returns than the high-yield fund Collins oversees.
But the Citywire ranking adjusts for volatility - the less volatile the returns, the higher the rankings, all things being equal. This played to the advantage of the Hong Kong bond fund, which tends to generate slow but steady gains.
Not so Collins' high-yield fund, which returned about 20 per cent in 2012 (excluding December data), lost 7.5 per cent in 2011, gained 19 per cent in 2010, rose 74 per cent in 2009, dropped 41 per cent in 2008, and so on. This fund is highly volatile. Its risks and returns are thoroughly equity like.
Collins says that 2012 was such a great year because bonds were so heavily sold off in 2011, thanks mainly to the euro-zone crisis but also because of concerns about the mainland and United States economies.
"Investors have been receiving a good income and capital gains, but for 2013 the potential for the market to continue to move in that kind of territory is really limited," says Collins.
Investors might ask, if the top fund manager is tamping down expectations about high yield, why go into the asset? Why not go into something equally risky but for which fund managers do hold bullish views - for example, equities?
Collins' answer is that high-yield bonds are fairly priced according to their risks. While the securities are unlikely to repeat their performance of 2012, and indeed bonds may drop in the year ahead, they will still deliver strong income, and it is this coupon payment that will eventually form the biggest part of a bond's total return.
"That's the reality of high yield … to get regular income you need to remain invested and be willing to tolerate some kind of capital volatility," he says. "If you see volatility, that's OK - that goes with the territory of the asset class. Don't get disappointed."
In other words, for those staying in high yield, prepare for wildly fluctuating returns.


Meet the manager: Bryan Collins

"Volatility goes with the territory," says Bryan Collins , portfolio manager of fixed income at Fidelity. Photo: Warton Li

Business

Money

Markets & Investing