‘Keep dim sum bonds off menu’

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A new fund that aims to take advantage of an appreciating renminbi by investing in so-called “dim sum” bonds is set to launch next month. But experts warn that these type of investments are unlikely to be suitable for the majority of retail investors.

Dim sum bonds, named after the popular bite-sized Cantonese delicacies, are renminbi-denominated bonds issued in Hong Kong. The market is relatively new, with the first dim sum bond launched only a few years ago, but it has attracted investors keen to access the expected long-term appreciation of the Chinese currency.

This week, Baring Asset Management became the latest fund manager to announce plans to launch a China Bond Fund that will invest in this type of debt securities.

The fund, subject to regulatory approval, will be open to retail investors with a minimum investment of £2,500. It has an initial charge of 5 per cent (direct buys) and an annual management charge of 1.25 per cent.

Last year, Allianz launched its RCM Renminbi Fixed Income fund, which proved so popular that it had to close the fund to new investment just two months after launch. Similar funds have been launched by Barclays and HSBC.

However, while advisers agree that renminbi bond funds can offer retail investors an interesting play on the rise of China, many believe they are still too niche and risky.

“We don’t think funds narrowly focused on these investments are going to be suitable for the vast majority of retail investors as the market is still small – though rapidly growing – and at an early phase,” notes Jason Hollands of advisory firm Bestinvest.

Tom Becket, chief investment officer of Psigma Investment Management, agrees that the market is a niche area for retail investors. “It’s a relatively untried and untested market and is definitely illiquid. It might well be an interesting niche asset to have as part of a much more diversified portfolio but I wouldn’t be going “gung-ho” on dim sum bonds,” he notes.

Experts point out that the relative shortage of supply means that yields currently on offer from dim sum bonds are not particularly attractive, with most yielding below 3.5 per cent.

As a result, advisers argue that retail investors are likely to be better-off opting for a broad emerging market debt fund.

Emerging Market Bond funds: Total % return with dividends reinvested on ex-dividend date
Name1 year3 years
Invesco Emerging Mkts Bond 14.9748.36
MFS Meridian Funds Emerging Mkts Debt15.2446.15
Baillie Gifford Emerging Mkts Bond2.8638.27
Pictet-Latin American Local Currency Debt-1.2335.92
Threadneedle Emerging Mkt14.3134.96
Pictet-Emerging Local Currency Debt0.7629.36
HSBC GIF GEM Debt Total Return9.6728.95
M&G Emerging Markets Bond X6.0328.83
BNY Mellon Emerging Mkts Debt-1.0128.68
HSBC GIF Gbl Emerging Mkts0.2825.86
Investec Emerging Mkts0.2925.22
MFS Meridian Funds Emerging Mkts-0.8424.15
Threadneedle Emerging Mkt-1.3217.69
Baring EM Debt Local Currency-6.417.01
Source: Lipper

Esty Dwek, investment strategist at HSBC Private Bank, believes that investors’ search for yield should lead to emerging market bonds. She points out that emerging market hard currency sovereign bonds have returned 13 per cent in the year to the end of August, while local currency bonds have returned nearly 6 per cent.

“We’ve held a preference for dollar-denominated bonds for some time, as they are often perceived as the safe haven of emerging market assets, and they have proven relatively resilient during periods of elevated volatility,” says Dwek. She prefers countries that offer an “attractive pick-up in yield” and with robust fundamentals, such as Brazil and Russia.

While emerging market bonds have already seen strong performance, some experts believe returns will continue to look attractive relative to other fixed- income assets – largely due to strong fundamentals and yield differentials.

Dominique Maire, head of emerging market fixed income at Rothschild Wealth Management, says she has seen growing demand from clients.

“Two key factors lead us to believe investors should have a strategic core allocation to emerging markets,” she says. “The first is the growing market share of emerging market debt relative to that of developed markets. The second is the potential for solid, risk-
adjusted return and diversification prospects, based on improving fundamentals.”

But despite strong performance over the past three to five years, emerging market debt remains volatile and suffers badly in times of financial market stress.

For example, figures from Lipper show that the Investec Emerging Markets Local Currency Debt fund, which currently yields about 5.2 per cent, returned 85 per cent over the past five years – but only 0.29 per cent in the past year.

Damien Fahy, head of research at advisers Dennehy Weller & Co, recommends the Insight Absolute Emerging Market Debt fund for lower volatility, which has biggest exposure to South Africa, Russia, Mexico and Peru. Those that can accept more capital volatility could consider Investec Emerging Market Debt and the Threadneedle Emerging Market Bond fund.

Becket warns that investors should expect volatility in emerging market bonds to rise, particularly if there is another deterioration in global market sentiment. “In the long term we are bullish on most emerging market currencies, but investors will have to suffer bouts of volatility, so we would advocate using funds with a flexible mandate.”

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