At the end of May, the Fund’s 2026 YTD returns (USD N Accumulation share class) stood at +2.11% versus the JACI benchmark of +0.81%. At the time of writing (15 June), the Fund’s returns advanced to +2.52% on a YTD basis.
This compares well with other key USD-denominated fixed-income asset classes such as US Treasuries +0.06% YTD, US Corp IG +0.75% YTD and US Corp HY +1.97% (given that the LO Asia Value Bond Fund is a blended product with an average BBB- rating; note the indices’ returns are gross of any fees and costs).
As our previous newsletters have highlighted, we have been constructive and optimistic on the resolution of the US-Iran conflict. As such, we have been positioned for (i) a risk-on environment in credit spreads, (ii) modest decline in US Treasury yields from recently elevated levels, with the 10-year at 4.7% and 30-year at above 5%, and (ii) rebound in oil importing countries which have seen those credit segments lag since March.
We continue to believe the Fed will be able to hold interest rates at current levels (3.65% Fed funds rate) without having to hike, as it can view the oil-induced supply-side inflation as transitory. The Fed will now be able to look ahead to 2027, thereby providing some relief to USD IG duration assets and Asia/EM credit markets.
Additionally, we believe that a case for oil prices to fully normalise towards $60+ and beyond that back to the $50+ range is a realistic one. We do not expect this to happen in the immediate term given the logistical challenges of bringing Gulf and Iranian oil back to the market as well as the need for strategic petroleum supplies to be restocked. But into the medium term of 2H 2027 and beyond, we do see a growing risk of an energy and oil/gas glut. This ‘bearish’ view on oil is predicated on the ‘thinning out’ of OPEC, Venezuelan production coming onstream, as well as additional oil & gas production expected to come online in offshore Brazil, Argentinian shale and West Africa. These factors could add to a medium to long-term glut if Iranian and Russian oil are allowed to be sold in international markets.
As such, we have started to take profit on various oil-producing credits in our portfolio and replace them with companies in oil importing regions or energy utilisers. We have taken profit on Santos 2035 (Australian natural gas giant; 10y bonds have squeezed from 170 bps to 115 bps) and Woodside Petroleum 30-year bonds. Instead, we have added to Indonesia’s new sovereign wealth fund Danantara’s new 10-year bonds at around 145 bps or close to 6%. We believe the new Danantara 2036 bonds will be a core position in the fund over time. To benefit from oil prices, we also introduced Garuda Airlines 2031 bonds at 9%-10% yields into the fund. Garuda Airlines has recently received an injection of up to USD 1.4 billion from its parent, the new Indonesian sovereign wealth fund named Danantara. With the end of the Iran conflict, we expect lower oil and jet-kerosene prices which will further aid the profitability and cash flow of the airline.
In India, we added to the new issue of India Infoline 7.6% 2029 bonds. The fund already holds the 2028 maturity tranche of India Infoline, a Mumbai-based financial lender that provides consumers with gold loans and other asset-backed loans, whilst active in the mid-sized corporate lending market. We now have increased the issuer to 2% of fund weight. We see this as a long-term core holding for the fund, given its high quality management and stable business.
Elsewhere, we increased short-dated bonds (Jan 2027) of New World Development in Hong Kong (HK). The bonds are around 95-96c for Jan 2027 paper, i.e. seven months away but offers an 11% yield to maturity for senior bonds. We think this is grossly mispriced given the asset and cash flow strength of the firm which will be able to redeem this small bond easily. New World is now the fund’s second-largest position (including tactical positions; at around 4.2%), as we continue to expect considerable alpha generation from this complex.
The fund also benefited from strong performance in our Softbank bonds (BB+ rated) on the back of the strong growth in the value of Softbank Group’s underlying businesses and investments. Softbank is now Japan’s largest company by market cap ($252bn), having overtaken Toyota. Softbank is benefiting from significant growth of its 85% stake in Arm ($440bn) which itself has increased fourfold in value this year. Additionally, Softbank’s stake in OpenAI (they own >10%) has also soared this year. Based on sum-of-the-parts valuation, we continue to think various bonds on the Softbank curve remain cheap and have further upside. We have recently increased Softbank to the No. 1 position in the fund at 4.5% weight.
We have started to take profit on our long-standing largest position in the fund, Vedanta (India’s largest commodity firm; USD 35bn) and have reduced it from No. 1 position at 6% fund weight to currently at ~3% fund weight. The bonds have had another round of rating upgrades, bringing the total notches of upgrade to 7 notches over the past two years. The firm has now issued a tender offer to take out these high-coupon bonds at levels we deem attractive. As such, we are selling them at those levels, with a yield-to-call of less than 7% and redeploying capital elsewhere.
The portfolio currently has an attractive yield of 7%, with an option-adjusted spread (OAS) of 280 bps for a modest duration of 5.2 years. The Fund’s rating remains consistent at BBB-. The Fund is diversified (130 different credits) but focused, with the top 20 issuers representing approximately 45% to 50%. This compares favourably with the pre-war portfolio yield to worst (YTW) of 6.5%, whilst the portfolio today has a high coupon rate of 6.5%.
We appreciate your support, and please do not hesitate to contact us with your questions.
DHIRAJ BAJAJ
On behalf of LOIM Asia Fixed Income team
condividi.