2020 proved to be a volatile and unprecedented year for markets in many respects, not least in terms of the amount of stimulus provided by both central banks and governments. It served as a stark reminder of the benefits of a well diversified approach,as well as the importance of downside protection.

An inherent bias for many investors, though, is to remain focused on one’s own regional market when considering investment options. However, compared with purely regional approaches a global investment universe can offer several advantages, not least in terms of a divergence of yield sources and risk. In this paper, we will examine the various benefits of adopting a global approach to corporate bond investing, namely :
 

1. Access to a broader, deeper and less concentrated corporate bond market.
2. Increased issuer diversification and scope to add value for an active manager whenselecting bottom-up opportunities.
3. Potentially higher returns through investment in higher yielding markets and greater roll-down opportunities from steeper yield curves. 

For Asian institutional investors, these advantages could boost returns while reducing risk.

Divergence of yield sources and risk

Expanded opportunity set

The global corporate bond investment universe currently stands at over US$12 trillion¹ . By comparison, the total value of Asian corporate bond markets is much smaller, as illustrated by the graph below. Moreover, the opportunity set for global investors comprises 13,967 issues and 1,987 issuers¹ , giving access to a much broader pool to select from, compared with strategies focused solely on regional markets. The potential for diversification is beneficial not only in terms of issuer and sector selection but also from a geographical point of view, as the investible universe is made up of companies located around the world.

In addition to providing greater diversification, having access to a larger number of issues and issuers to select from also offers increased and more varied sources of alpha, thus providing greater scope for an active manager to uncover value through fundamental credit research.

Similarly, the potential to uncover value is increased where investors have access to a broader geographical opportunity set, as they are able to tap into the most attractive investments wherever they exist across the globe. Moreover, there are some smaller markets within the global universe, which could present attractive investments but are too small to constitute a regional approach in their own right. Within Asia, an example is the Singaporean market. However, there are also attractive yield opportunities outside the region for Asian institutional investors. Examples include Mexico’s corporate market or, for long-dated bonds, the Italian market. A purely regional strategy, focusing only on Asian corporate bonds, would miss out on those opportunities.

Additionally, adopting a global approach can significantly reduce concentration risk, especially for Asian investors. For instance, as illustrated by the chart below, 12 issuers already account for more than half of Chinese bond issuance; a mere 62 accountfor 85%. In South Korea, only 5 companies account for more than half, with 14 issuing 85% by value. By contrast, it takes almost 900 issuers to reach that level of concentration risk within the global universe. Investing globally also provides opportunities to allocate to a greater proportion of more liquid names, thus improving overall portfolio liquidity compared with regional approaches

 

1 . Data as at 31 December 2020 for the Bloomberg Barclays Global Aggregate Corporate Index. Sources: Capital Group, Bloomberg Barclay

 

Risk factors you should consider before investing:

• The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
• If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
• Depending on the strategy, risks may be associated with investing in fixed income, derivatives, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.