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Opalesque Futures Intelligence

Founders Q&A: Learn about credit macro. An Asian pioneer discusses a novel strategy.

Thursday, May 27, 2010

Asian Credit Macro Pioneer

Guan Ong is a founder in a special sense-he's been in the Asian credit market since its early days and built businesses in this market. Malaysian by birth, he worked across Asia and in Europe. More recently (2006-09) he was the investment chief of Korea's sovereign wealth fund. In addition, he continues to serve on the investment committee of the National University of Singapore's endowment, where he's been a committee member since 2000.

After leaving the sovereign wealth fund, he founded Blue Rice Investment Management, based in Singapore. At the end of 2009 he launched BRIM Asian Credit Fund, domiciled in the Cayman Islands. The initial investors are an Asian bank and family office. BRIM is a new venture with a fairly novel strategy that should be of broad interest.

The fund invests mostly in bonds, but it includes an intriguing credit macro strategy that uses futures contracts and other derivatives to pursue themes based on industry fundamentals. Mr. Ong explains below.



"The macro picture across the different Asian countries is very positive."

Opalesque Futures Intelligence: Where do you invest in?
Guan Ong: Our focus is pan-Asian credits, so the investment space goes from Japan to Indonesia, from India to Australia and New Zealand, and includes China, Korea, Taiwan, the Philippines, Malaysia, Singapore and Vietnam.

OFI: How did you learn about Asian bonds?
GO: Well, I started in fixed income in Europe. In 1990 I joined Credit Suisse First Boston in London as an analyst and was part of a team that advised Sweden in restructuring Swedish banks during the banking crisis of 1993-1994. I was responsible for developing mortgage- and asset-backed products for CSFB London before focusing on Asian corporate credits in 1995. Those were the early days of this market. In 1996, I moved to Hong Kong to join Lehman Brothers and worked on corporate credit research and Asian distressed assets. Then I joined Prudential Financial in Hong Kong in 1998, as an Asian fixed income portfolio manager and started Prudential's Singapore office, developing an Asian credit team. In 2004 I became the chief investment officer of Prudential Asset Management Co. in Korea before joining the Korea Investment Corporation, Korea's sovereign wealth fund, as their first chief investment officer in 2006.

OFI: What is BRIM Asian Credit Fund's strategy?
GO: The fund has three strategies-high grade, high-yield or sub-high-grade and credit macro. The credit macro strategy allows us to hedge the credit portfolio or to go long. We can adjust duration and go short using standard 10-year Treasury futures, go long or short on S&P 500 index futures or use credit default swaps. These can be a hedge or an outright strategy.

OFI: Do Asian credit markets differ from Western markets?
GO: Fixed income in Asia is not as well known, gets less research coverage and hence has more inefficiencies. This creates opportunity. One difference right now is that Asian countries - with the exception of Japan - have either flat or higher credit ratings since 2005. Korea was recently upgraded and Indonesia's outlook was recently revised to positive. The macro picture across the different Asian countries is very positive; positive demographics, strong policy and personal financial reserves, strong corporate balance sheets coming into the crisis and most importantly, limited overall impact from the current financial crisis.

OFI: Do you trade currencies?
GO: This is not a currency fund. We do not invest in local-currency paper, only in US-dollar or hard-currency denominated Asian debt, because we don't want to mix currency risks with bond risks. We have clearly defined our risk space. The Asian local currency market is much bigger than the US-dollar market but it is fragmented because countries have different regulations, whereas the dollar market is pretty standard and typically have 144A or Regulation S type structures.

OFI: Does the credit macro strategy include structured notes?
GO: We do not buy structured notes, private loans or secondary loans because of liquidity concerns. We also do not invest in defaulted paper from a liquidity standpoint. Our criterion and focus are not just about return on the portfolio but also risk. We are clear about not mixing the risk characteristics of a bond fund with currency and liquidity risks.

OFI: Are there other Asian credit funds?
GO: There are a handful of Asian credit funds, but it is a growing niche. There are also multi-strategy funds that do both credit and equities, and some distressed funds. But there aren't many defaults because Asia has not been much affected by the credit crisis, except through its exports. This is not like the late 1990s Asian credit crisis. Now interest rates are low everywhere, external shocks have not caused defaults and the supply of defaulted assets is shrinking, so the returns are not high enough for that kind of investment.

OFI: Do you buy the same type of bonds across Asia?
GO: Asia is not one country, it is quite a diverse space. When you get down to the details, each country is different and presents unique opportunities. Japan has a high rating and the yield on Japanese debt is very low. There has to be a special reason to buy Japanese bonds-for instance, recently Japanese banks started to buy back their own bonds to be compliant with the new Basel rules, so we traded Japanese bank debt at a nice profit. By contrast Indonesia is low rated and yields are high. We like resource-related Indonesian businesses. Our credit research guys were in Indonesia last month to investigate. We look hard to find opportunities. We may like a country and industry but we want to be clear about the issuer's credit fundamentals.

OFI: What do you buy in mainland China?
GO: Chinese property has been very popular and the yield is good. We've been in and out of that space, now we're out because the new bond issue pipeline is strong and we are concerned about supply. There is a lot of talk about bubbles in China but you can't paint China with one brush. There may be property bubbles in Beijing and Shanghai but not in smaller cities.

OFI: How long do you hold positions?
GO: Our allocations may evolve month to month but we are not active traders, we do not churn the portfolio but we also need to be flexible to ensure that we mitigate portfolio risks. We do diversify. Some countries have longer duration paper. The Philippines is a place to get 10-to-15 year sovereign debt. Malaysia is also a place for long-dated paper but Korea tends to have shorter maturity debt.

OFI: How much money can your three strategies take?
GO: We believe that this credit program can deploy up to $1 billion but we do not want size to be a constraint to our flexibility. The JP Morgan Asian Bond Index, which is a high-grade index, has a market capitalization of between $275 billion to $300 billion. Let's assume that half of those assets are not available for investment or are less liquid, so there may be around $150 billion we could invest in. You don't want to be more than 1% of the market, so that leaves us in the $1 billion to $1.5 billion ballpark. Before we get half way to that point we'll do a review.



 
This article was published in Opalesque Futures Intelligence.
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