• 07/12/2017

Wealth Preservation a Key Factor

Embracing China’s “New Normal”

BY BM Editor


Ben Yuen, Managing Director, Head of Fixed Income – BOCHK Asset Management

Ben Yuen is the Managing Director and Head of Fixed Income of BOCHK Asset Management Limited. He has an overall responsibility for the Company’s fixed income investment capabilities and business development. Prior to joining the Company,

Mr Yuen was an Executive Director of UBS Global Asset Management in charge of the portfolio management and business development of the Asian fixed income products. Previously, he was the Head of Asian Fixed Income at First State Investments. He holds a Bachelor’s Degree in Management Science with first class honours from the University of Wales, Swansea, UK and a Master’s Degree of Science in Finance from Lancaster University, UK.

BOCHK Asset Management Limited has earned the Best-In-Class award for its management of RMB Fixed Income portfolios.

For investments to be most effective, they should be held for the long term. Even though along the way, due to the nature of market cycles, there will be periods of negative return and high volatility. BOCHK Asset Management Limited understands this well, which is why managing risk and their clients’ tolerance for risk is a key characteristic of their approach. This was recognised by the judges at this year’s BENCHMARK Fund of the Year Awards, and was a key factor for BOCHK Asset Management Limited winning the Best-In-Class award for its RMB Fixed Income portfolio management strategy.

“Recognising that wealth conservation is as important as wealth creation, we adopt a prudent mindset to minimise downside risks during market distress,” says Mr Ben Yuen, Head of Fixed Income at BOCHK Asset Management Limited. “Our investment philosophy can be summarised as ‘Downside Risk Management & Fundamental Investing, Benchmark Aware but not Benchmark Driven’. We seek to generate investment returns by focusing on quality and value through a unique blend of fundamental and quantitative research.”

While the managers refer to a benchmark to measure their investment performance, BOCHK Asset Management Limited endeavours not to blindly follow a benchmark when it sees rising risks or opportunities. “In most fixed income markets, benchmarks are driven by bond issuance activities, failing to reflect risk and return appetites of investors. When risks or opportunities arise, we are ready to take calculated deviations from a benchmark so as to better account for an investor’s risk and return appetites.”

“When we envisage serious market turbulence, we tend to be defensive so as to manage the downside risk, even though it could mean loss of upside potential.”

Global Perspective

Typical portfolio components are bonds with yields high enough to compensate clients for taking interest rate risk, credit risk and liquidity risk. Having a global perspective is crucial, says Ben Yuen,

“We always maintain a broad understanding of macroeconomics and geopolitics because what happens in another part of the world will also affect Asian and RMB bond markets.”

BOCHK Asset Management Limited’s ‘Value for Risk’ investment process is a combination of both top-down and bottom up approaches, utilising quantitative and qualitative tools: “We believe that a disciplined and comprehensive process of assessing values and risks is essential for superior and consistent investment performance.”

The ‘bottom-up’ approach is run according to two key metrics. For each investment, the fund management team assigns an internal credit rating, with a Momentum Score (MS) and an Information Quality (IQ) Score. Ben Yuen says, “These scores give us a competitive advantage because a daily market presence enables us to be more proactive and timely on credit calls.

“A Momentum Score assigns a Positive/Negative Outlook, giving a timeframe for a credit improvement/deterioration. Rating agencies rarely include this measure. The MS requires us to estimate on a forward-looking basis, not solely analysing in a static way. Along with the MS we evaluate the attractiveness of the yield of a bond against its credit rating.”

“We look at the credibility of the financial figures (audited or not) before analysing financial statements. The IQ assessment helps to reduce the risk of garbage-in/garbage-out in our system. We explicitlyand systematically evaluate the corporate governance and credibility of the senior management of an issuer. Rating agencies do not incorporate the same approach.”

“Our analysis covers a study of bond indenture to evaluate protection of bondholders, degree of subordination, legal structure of the issuer/guarantor, tax withholding issues, call risk, governing law etc. In Asia, particularly the RMB bond markets, the risk of cross-border subordination and legal limitations on access to assets by bondholders under bankruptcy/liquidation need be evaluated on a bond by bond basis. We also have in-house tools to alert us on a daily basis of major changes of stock prices and implied volatilities.”

Local intelligence

Face-to-face meetings with the senior management of issuing firms and cross checking of the equity stories are also undertaken. This being Mainland China, the firm needs to make sure it has access to a variety of information sources, especially crucial for on the ground intelligence. Ben Yuen says, “The combination of research reports and the insight provided by major international investment banks and credit rating agencies, in addition to having relationships with local mainland investment banks, give us a more complete picture on China.”

“Our unique bond database covering global, onshore & offshore RMB bond markets, systematically compares relative values of offshore RMB bonds against those of onshore RMB bonds and the RMB hedged USD bonds. The holistic relative value comparisons give us a competitive edge in strategic portfolio positioning, and help our tactical bond switching for yield enhancements and/or credit risk reduction.”

The ‘Top-down’ part of the investment selection process helps the managers formulate country allocation, industry selection and Chinese RMB and USD interest rate strategies. BOCHK Asset Management Limited established an in-house Sovereign Risk Analytic Framework (SRAF) to help them evaluate the sovereign credit risk of both developed and emerging market countries. The SRAF, which covers 116 countries with data back to 1994, quantitatively gauges the solvency and liquidity risks, and systematically walks through the political risks of a country.

Market timing

The managers are in the unique position of being able to leverage the large research and credit risk management resources of Bank of China (Hong Kong). “The economic research team of BOCHK covers not only the Mainland of China and Hong Kong, but also other developed and emerging market countries. We have regular discussions with BOCHK’s economists about the Chinese economy, fiscal, monetary and foreign exchange policies. To help with our micro-market timing of strategy implementation, we regularly refer to our integrated monitor of global macro-economic cyclical forces, market sentiments and positioning, global funds flows, market liquidity and technical factors.”

Monthly Compliance and Risk Management Committee meetings are held to scrutinise risk exposures, performance, compliance breaches and discuss remedies for impacted investment portfolios, funds or client mandates. Weekly team meetings are held for informal discussions. A monthly investment committee meeting, chaired by the CEO, is conducted for formal review of investment strategies, risk exposures and investment performances. BM