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
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
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.