Tuesday, April 5, 2016

Opportunity or Value Trap : An evaluation of iShares Barclays Capital USD Asia High Yield Bond Index ETF

I revived a VB thread to post a very interesting article from Allianz.


In summary, if you do not want to read the whole article,

"Asian high yield bonds are a rapidly expanding asset class, with a growing number of companies choosing to access fixed income markets in order to fund their development. Over the last ten years, the average annual return for Asian USD high yield credits has been 8.7% (see Figure 3).  The majority of the return has come from the high level of income with some modest capital appreciation as well. We believe this trend will continue."

There was some feedback that the China exposure is too high, so I drilled into the holdings.

I agree that the China exposure is high at around 48%.

Yes, the effective yield to maturity is less than 7%, i think it is around 6.2 or 6.8%.

The attraction (for me) was that essentially one is diversified across almost 145 bond holdings at one stroke.

No issuer accounts for more than 4% (by design), in reality, the top issuer weight is 2.1% or something.

I have looked at the holdings which is attached here.

One familar name is Vedanta Resources plc, which is trading at a YTM of 25% now.

The company is buying back the bonds at 57 cents to the dollar as of January.

At that time, the bonds were trading at a YTM of 38%, so, one sees a nearly 13% improvement in 2 months.

Assuming that the ETF just holds to maturity, which is 2.5 years away, they basically will get 100 cents or can roll over.

In any case, the holding value is 1.4 Million USD out of a total asset base of 62 Million USD, so, just around 2%.

Another name is Noble group, which is trading now at 14% YTM.

They also bought back at a 60% discount which has now narrowed to 40% discount.

Coincidentally, the share price has also rallied after that.

Noble bonds are around 1 Million USD , also a 1.5% weight.

Mongolian Mining is likely to default 

But, in reality the holding is worth 100K USD and is around 0.15% of the weight.

The reason I have highlighted only Noble and Vedanta is that among the top 20 issuers, which account for nearly 42% of the weight, only these two have YTM which seem very high at 25 and 16%.

The rest are actually quite reasonable YTM.

From Morningstar report

iShares Barclays Capital USD Asia High Yield Bond Index ETF (USD) - O9P
Morningstar Rating (Relative to Category) Morningstar Return Morningstar Risk (Rel to Cat) Morningstar Rating
3-Year                                                        High                          Low                                  5 star

Volatility Measurements

Volatility 5.11 %
3-Yr Mean Return 7.91 %

Sharpe Ratio 1.39

The Sharpe ratio in the past three years means one has obtained 1.39 return for every dollar risked.

I do understand that Sharpe ratio is ex post and cannot be used for ex ante calculations and there is no reason to expect similar behavior in the future.

Risk Measurement 1 Year 3 Years    5 years
Standard Deviation 6.17        5.11
Positive Months        6          24       35
Negative Months        6          12       15
Worst Month       -2.44        -3.11      -20.46

I will gladly accept a worst month of 2 to 3% down for a upward slope of positive risk adjusted returns.

I am not trying to "sell" the idea of buying this ETF, all I am saying is that it seems like a reasonable risk reward scenario,

Disclaimer :- 

I am not an investment professional.

I encourage you to do your own independent "due diligence" on any idea that I write about, because I could be and probably am wrong.

Nothing written here is an invitation to buy or sell any particular stock.

At most, I am handing out an educated guess as to what the markets may do.

The market will always find a new way to make a fool out of me (and maybe, even you!).

Even the best strategies of the past fail, sometimes spectacularly, when you least expect it.

I am not immune to that, so please understand that any past success of mine will probably be followed by failures

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