The Fund closed 1H 2026 with YTD returns of +2.61% (USD N Accumulation share class) versus +1.24% for the JACI benchmark. This compares favourably with other key USD-denominated fixed income asset classes such as US Treasuries (+0.28% YTD), US Corporate IG (+0.86% YTD) and US Corporate HY (+1.96% YTD), particularly given that the LO Asia Value Bond Fund is a blended strategy with an average BBB- rating (Note: Index returns are gross of fees and costs).
USD credit markets softened once again owing to the widening of US Treasury yields, as Fed Governor Kevin Warsh stated at his first FOMC meeting that all policy options, including both rate hikes and cuts, remain on the table. This led to a modest reversal of the recent steepening in the US Treasury curve, resulting in a slight bear-flattening move. UST 2Y and 5Y yields moved wider to 4.23% and 4.33%, respectively, versus the current overnight Fed rate of 3.65%. This is essentially pricing in two 25 bps rate hikes by the Fed before rates are eventually cut again. The long end of the UST curve has remained relatively range-bound, as any additional rate hikes would further anchor the 10Y and 30Y segments and help contain both growth and inflation. This price action, together with the continued friction between the US and Iran over the Strait of Hormuz, has caused all-in yields across Asia/EM USD bonds to increase over the past few weeks.
Meanwhile, we continued to actively manage the Fund for attractive relative value opportunities. Within HY, we added the new India Infoline (large non-bank lender) 2030 senior secured bonds at a yield of 7.75%. We believe this pricing is highly attractive for senior secured bonds with strong roll-down potential, and we took advantage of the opportunity. With this purchase, our total India Infoline issuer exposure across the 2028, 2029 and new 2030 bonds increased to 2.3% of the Fund.
Also in India, we added a new special situations issuer, Shapoorji Pallonji (“SP”), through its security financing entity. The entity is a 150-year-old group in India and closely linked to the esteemed Tata group. The USD bonds issued have a three-year maturity and are callable in one year at a yield of 14.5%, secured by a portion of Tata & Sons shares with current issuer LTV of less than 30%. The company is working with privately held Tata & Sons to reduce its stake, which would allow this debt to be repurchased and refinanced at lower levels. Our position currently represents 0.55% of the Fund.
Elsewhere in Asia, we also bought into the new issue from Philippine Airlines, purchasing the 2031 bonds at an 8.0% yield with a Fund weight of 0.25%. The airline is currently lightly levered, with strong operations and profitability from trunk routes between the Philippines and the US. It is currently benefiting from improved fleet planning and structurally lower labour costs than its competitors on its key routes. We estimate that EBITDA will continue to grow over the next two to three years, supported by strong product demand in the region, which should further reduce the airline’s leverage.
Within IG, we participated in the new issue of Prosus 10-year at 135 bps over UST 10Y. Prosus is the largest shareholder of Tencent, and the investment holding company has extremely low loan-to-value (LTV) leverage. Within the portfolio, India’s Adani Ports (USD 44bn market cap) was upgraded by S&P by one notch to BBB. The company handles more than one-third of India’s seaport throughput and is structurally benefiting from the secular growth in container and dry-bulk volumes. The Fund’s position in Adani Ports is within the top 10 holdings at a 2.8% weight, making it a stable IG carry and credit spread compression candidate.
The portfolio currently offers an attractive yield of 7.2%, with an option-adjusted spread (OAS) of 290 bps and a modest duration of about 5.2 years. Notably, we reduced duration in June, prior to the recent widening in UST yields, from 5.4 years to the 5.1 to 5.2-year range. The Fund’s rating remains consistent at BBB-. The Fund remains diversified (127 issuers) yet focused, with the top 20 issuers representing approximately 45%-50% of the portfolio. This compares favourably with the pre-war portfolio yield-to-worst (YTW) of 6.5%, while the portfolio today maintains a high coupon rate of 6.5%.
Looking ahead, we believe the resolution of the Iran conflict will provide a further boost to Asia and EM HY USD credit markets, and we aim to benefit from attractive valuations and improving corporate fundamentals in 2H 2026. The large redemption schedule of Asia USD bonds is also expected to return significant capital to investors, which will likely be redeployed into the asset class and provide further support to market technicals. Our Fund remains well positioned to benefit from supportive bid-side technicals, while capturing both attractive carry and potential yield compression opportunities in 2H 2026.
We appreciate your support and please do not hesitate to contact us with any questions.
DHIRAJ BAJAJ
On behalf of the LOIM Asia Fixed Income Team
condividi.