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Generating a Low-Risk, 5% Yield from Asia

FAX closed-end fund offers exposure to global bond markets

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There’s a lot of talk about yield these days. So if I told you I have an investment that delivers a 5% annual yield and a monthly payment cycle that has been rock-steady back to 2002 … would you be interested?

And what if I told you that despite focusing on highly rated bonds, this investment has outperformed the broader market, with superior five-year and 10-year returns, even without those dividends?


If you are, look no further than the Aberdeen Asia-Pacific Income Fund (NYSE:FAX). This closed-end fund focuses on debt securities in Asia, keeping a third of its portfolio focused on AAA-rated bonds in the region but taking a few riskier but high-yield positions to boost payouts.

It has been a profitable venture, with the fund worth over $2 billion at current asset valuations. Recent performance includes a 266% 10-year return including distributions and an 83.1% 5-year return including distributions. That destroys the S&P 500, but tops even bond kings like Bill Gross and the returns of his flagship PIMCO Total Return Fund (MUTF:PTTRX) in the same windows.

I recently had a back-and-forth with Adam McCabe, senior portfolio manager for Aberdeen Asset Management Asia (pictured), to talk about the key to his success and the outlook for the Asia Pacific region in the next several months. McCabe joined Aberdeen in 2009 from Credit Suisse (NYSE:CS), where he focused on Asian currency and interest rates along with Australian fixed-income investments. Aside from his professional experience in the region, McCabe also has degrees from the University of Sydney and the Chinese University of Hong Kong, and thus real-world experience in these regions.

Here’s what he had to say about China, Australia and the potential of targeted investments in Asian debt securities right now:

Q: China’s growth rate forecast made a lot of headlines in the last few weeks. There’s a complicated mix of causes, but what are the biggest issues in your opinion?
Miserable fiscal and macro conditions in Europe and the U.S. have eroded demand for exports and in turn hurt China’s GDP growth. The current slowdown is also a result of Beijing’s efforts to contain inflation and property bubbles, after massive pump-priming in 2009 led to rampant credit growth and excessive speculation in the housing market. That has led to a significant drop in property investments as well as other related sectors, such as construction.

At the same time, China has focused on rebalancing the economy away from exports, although it is evident over the short term that domestic demand has yet to completely take up the economic slack. There are signs that Beijing is worried about the slowdown and its impact on job creation. Since May, the central bank has cut interest rates twice.

Premier Wen recently indicated that more priority will be given to stabilizing growth by promoting investment. Should economic conditions continue to worsen, China has the wherewithal to bolster growth, given its $3.2 trillion in foreign exchange reserves.

Q: China isn’t the only nation FAX focuses on. Your fund info states that a minimum of 20% of total assets will be in Australia debt securities. Why the focus on Australia?
The fund now holds about 45% in Australian debt securities and has indeed held a large allocation to the Australian market for quite some time. Australia’s solid AAA sovereign rating, relatively liquid bond markets, sound public sector position and relatively high yields have served the fund well over the medium to longer term. We find that a core allocation to the Australian fixed-income market diversifies the fund’s holdings and supports the primary goal of distributing regular income.

Australia is also uniquely positioned to benefit from the longer-term growth trends across Asia, not only in the resources sector but also in other sectors such as services and tourism.

Article printed from InvestorPlace Media,

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