Continued Hard Currency Asian Bond Ecstasy for INGs' Dutch Master?

I recently caught up with Joep Huntjens, Head of Asian Credit at ING and lead manager on the ING Asian Hard Currency Bond Fund, for a review of how the fund has been performing and what the outlook was for 2013 and beyond. 

The fund has been hugely successful over the last year and had almost doubled in size, from $130m at the beginning of 2012 to approximately $240m now.

I asked him if there was a real danger of the fund being a victim of its own success in being able to find suitable homes for this additional capital.

He explained that actually over the last few years there has been a huge increase in investment grade opportunities in this sector. This had been due to many new issuances, post credit crunch stasis, but equally it had been due to significant amounts of upgrades on existing offerings. For example EVERY country covered by the fund has been upgraded in the last decade with the exceptions of Vietnam and Pakistan.

Bearing that in mind, the fund only has exposure to 2% of AAA standard assets. Of course, he is not restricted to investment grade but only 4% of his portfolio currently is made up of non-rated bonds. The fund currently is yielding around 4.5% per annum.

We have had a fair bit of negative press recently particularly with regards to ongoing problems in Argentina, and I wondered if this would adversely affect his fund and performance.

Mr Huntjens countered that as his fund is hard currency only, there was less risk than if he had only more risky, less liquid currencies to allocate to, although he conceded that rises in US interest rates would certainly have an impact on the fund.



Giving an example of the eurozone crisis and how it affects, in particular, emerging Europe credit, Huntjens demonstrated that there is minimal exposure of these EU banks to Asian hard currency debt, resulting in less impact on these markets whilst the banks continue to deleverage.


Looking ahead for the fund, Huntjens thinks that ongoing problems in EU and US will hamper equity markets and could favour Asian debt.

Whilst fundamentals continue to be strong, such as overall levels of debt and inflation seemingly under control, capital should flow into these markets and sectors and he does not expect a hard landing in China.

Author: Alan McGregor

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Looking Ahead

As we pass the middle of the year, it may be interesting to note that the markets have broadly followed a similar path of that of a year ago.

The biggest difference however, is that last year, many people saw light at the end of the tunnel, whilst this year people fear that beacon in the darkness is probably a TGV hurtling towards us!

That is because many of us remember, painfully, the events of last August when markets fell by something in the region of 15% in a very short period of time.

However it is vital that investors focus more on the long term than the short terms bumps of pretty high levels of volatility which are presenting themselves. (Let us explain why this should be a part of your investment strategy, too.)

"Markets are driven by macro events at the moment. The Eurozone is pushing prices up or down with each announcement or downgrade," says Chase De Vere's Patrick Connolly.

This volatility is hampering predictions being made, but valuations as they are in the long term there can be only one winner, as equities outperform bonds.

"The safest assets have become more expensive and will likely get even more expensive, while the riskier assets meanwhile will get cheaper and cheaper," according to Graham Toone at AFH Wealth Management.

August can be a volatile month at the best of times, lets see what it brings in the 2012 edition.

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Buffett on Buybacks: the logic of dollar cost averaging

Warren Buffett published his annual letter to Berkshire-Hathaway (BRK.B) shareholders in late February. In it, Buffett devoted many paragraphs to the subject of share buybacks, a topic he has opined on before. This year, he focused specifically on valuation and price performance.

Regarding valuation, here is what the Oracle of Omaha wrote:

Charlie [Warren Buffett’s partner] and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated.
We have witnessed many bouts of repurchasing that failed our second test. Sometimes, of course, infractions—even serious ones—are innocent; many CEOs never stop believing their stock is cheap. In other instances, a less benign conclusion seems warranted. It doesn’t suffice to say that repurchases are being made to offset the dilution from stock issuances or simply because a company has excess cash. Continuing shareholders are hurt unless shares are purchased below intrinsic value. The first law of capital allocation—whether the money is slated for acquisitions or share repurchases—is that what is smart at one price is dumb at another.

Regarding price performance, Buffett argued that investors are better served if a stock price doesn’t move higher when buybacks are made. Instead, he said that long-term shareholders are better served if the stock price languishes for a period of time. Using IBM as an example, Buffet explained his rationale:

If IBM’s stock price averages, say, $200 during the [next five years], the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.

If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the disappointing scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1-1/2 billion more than if the high-price repurchase scenario had taken place.

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or through a fund, you are hurt when stocks rise. You benefit when stocks swoon.

Buffett acknowledged that his line of thinking won’t win many investors over. Behavioral scientists are documenting how hard it is for humans to pass on a certain, but smaller, reward now for a potentially bigger, but uncertain reward in the future. Yet, the math shows that the potential is there for Buffett’s approach to work.

Even if you don’t agree with Buffett’s logic immediately, understand the mathematics behind it. Its the same math that supports the idea of dollar cost averaging into long term holdings. You want to be a buyer when prices are low and expected to rise, not necessarily rising and potentially going to decline. If this is not clear still, make sure you contact us to show you how the seemingly illogical works in your favor.

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