Several friends in the past month have, for one reason or another, asked me to describe my working day to them. I also used to get this question a lot during my time as a mutual fund manager.
Asian high-yield bonds have been a hot favorite among institutional investors for the last few years.
Also known as junk bonds, they are non-investment grade debt securities that carry bigger default risks — and therefore, higher interest rates to compensate for them.
One recent high-profile example was the debt crisis at China’s Evergrande. Weighed under more than $300 billion of liabilities, the world’s most indebted property developer is teetering on the brink of collapse. Fears of a broader contagion to the industry, and perhaps even the economy, triggered a global sell-off in September.
Given the uncertainty of China’s junk bond market, CNBC asked five strategists and portfolio managers: Would you advise investors to buy Asia high-yield bonds?
To be clear, China real estate bonds form the bulk of Asia’s junk bonds. As Evergrande’s debt crisis unraveled, other Chinese real estate developers also started showing signs of strain – some missed interest payments, while others defaulted on their debt altogether.
Here are the responses from 5 strategists CNBC interviewed:
1. Martin Hennecke, St. James’s Place
Head of Asia investment advisory and communications
Investors should “avoid the use of leverage of any bonds or bond funds at this point in time,” Hennecke strongly recommends, referring to the practice of borrowing money to invest.
He said that predictability of returns in high yield bonds “isn’t nearly as clear-cut … and such a strategy can turn out to be much higher risk than anticipated.”
“The recent sharp sell-off in Asian high yields, coupled with the likely default or restructuring of some, is a good example of this,” he told CNBC.
Hennecke also said investors should diversify globally in order to manage sector and country risks.
“Last but not least, investors should be well advised to diversify across asset classes as well, noting that fixed interest as an asset class generally is vulnerable not only to default risk, but also interest rate and inflation risks,” he said. Rising price pressures are “arguably on the rise and in my view possibly still underestimated today,” he added.
But that doesn’t mean investors should completely brush off high-yield bonds.
“All that being said, Asian junk bonds have already sold off sharply, sending yields much higher, and as long as one is conscious of the risk taken, I would suggest that the asset class shouldn’t be excluded from well diversified portfolios.”
2. Wai Mei Leong, Eastspring Investments
Portfolio manager for fixed income
“With China accounting for 50% of Asia’s high-yield bond market, the developments surrounding the Chinese property sector are likely to weigh on investor sentiment in the near term, but we believe that opportunities exist for the discerning investor,” Leong said.
While China’s property sector has historically been subject to episodes of policy-driven volatility, she said, “we recognize that the depth and scale of policy measures have been unprecedented this time.”
Still, the real estate sector remains an important driver of China’s economy, and accounted for 27.3% of the country’s fixed asset investment in 2020, while being a key revenue source for many local governments, Leong said.
“The Chinese government would therefore prefer to have a healthy property sector than to see multiple large-scale defaults, which could potentially trigger widespread systemic risks.”
Leong added that in the long run, China’s growing middle class, together with urbanization and the development of its megacities, will likely continue to support revenues of the property sector.
“Investors are likely to reassess their risk expectations towards the Chinese high-yield property bond sector in the near term,” Leong added.
But China’s drive to reduce debt within the property sector will ultimately result in “stronger market discipline” among real estate firms, and improve the quality of their bonds, she added.
3. Arthur Lau, PineBridge Investments
Co-head of emerging markets fixed income and head of Asia ex-Japan fixed income
Expect more defaults from the property sector in the near future, Lau said.
Still, he said he doesn’t expect defaults in specific companies to result in a systematic crisis.
He also said there will likely be policy easing on Beijing’s part — such as faster approval of mortgage applications and reopening of onshore bond market to stronger and better quality property developers.
All that should help ease some liquidity concerns, Lau added.
He also pointed out that selective property developers are still able to continue raising funds through the equity market, such as rights offerings and share placements, as well as asset sales.
The stronger developers will emerge from this crisis “even stronger” while the weaker companies may eventually default, Lau said.
“Hence, we cannot emphasise more the importance of careful credit selection to pick the winners and avoid the losers,” he said, adding that his firm expects “a very decent return in the coming six to 12 months if investors are able to identify the survivors and able to stomach the volatility.”
4. Sandra Chow, CreditSights
Co-head of Asia-Pacific research
“In general, we would stick to the more conservative credits in China,” Chow said, citing firms that have less debt or have strong government links.
“High yield credits in Indonesia and India have been more resilient and better supported by investors seeking diversification outside China or Chinese real estate,” she said.
“We wouldn’t avoid high yield altogether but individual credit selection is very important,” she concluded.
5. Carol Lye, Brandywine Global (investment manager under Franklin Templeton)
Associate portfolio manager
Chinese real estate firms issuing high-yield bonds have been sold off since August, particularly the lower quality bonds — but they later rallied, thanks to verbal interventions from Chinese authorities, Lye said.
However, Chinese real estate bonds had another selloff last week in what the portfolio manager said were “by far the worst.”
“This was driven by concern over hidden debt and contagion among higher quality [BB-rated] names which led to a fire sale across all names. Quality names were trading below 80 cents.”
B or BB-rated names are considered low credit quality rated bonds, and are commonly referred to as junk bonds. However, BB-rated bonds are of slightly higher quality than B-rated bonds.
News over possible changes in the three red line waiver for mergers and acquisitions “helped the market to stage a whipsaw rally especially in quality names,” she said referring to China’s “three red lines” policy which was rolled out last year. That policy places a limit on debt in relation to a firm’s cash flows, assets and capital levels.
Other encouraging signs for investors included a potential change in the reopening of issuance in the onshore interbank market, and a jump in October’s mortgage loans.
“This type of volatile wild market phenomena is not often seen and opens up opportunities to be positioned in quality names,” she said. “But caution is still warranted with volatility likely to remain as various property companies are still in a tight liquidity position.”
Several friends in the past month have, for one reason or another, asked me to describe my working day to them. I also used to get this question a lot during my time as a mutual fund manager.
The investment business is really a 24/7, 365-days-a-year affair. Managers are always thinking about stocks, the economy, world events, even when they are not at the office. Everything impacts the markets. If you are not paying attention — always — you are going to miss something.
But in case anyone else is wondering how an investment professional spends their “working hours,” here’s a breakdown into five categories.
I wake up when a three is the first number on the clock. Part of the early wake-up call is a habit from my old competitive swimming days, but it is now work-related. Simply put, with access to information much easier for every investor these days, an early start is one of the only advantages an investor can get.
Company news — takeovers, acquisitions, contracts — typically comes out in the mornings. Having more time to analyze this news, rather than just reacting to it 30 minutes before markets open, can give you an edge. For example, suppose a company announces a takeover and that it is accretive to earnings. With enough time, you can run your own financial models, rather than just taking a company’s word for it. Advantage: early bird.
Not all news, of course, comes out in the morning. Earnings releases tend to be before or after market, but companies can issue press releases anytime, and there are always virtual conferences and conference calls to attend. The United States Federal Reserve might make an announcement, or the Bank of Canada. The past 18 months has also required investors to become COVID-19 experts, watching virus and vaccine news like a hawk. Basically, any piece of news can move markets.
Sometimes, news you think isn’t so important gets picked up by a larger crowd, and stocks and markets can move erratically. There are rumours and facts to listen to and then decide if they are important. My Bloomberg screen can put out hundreds of press releases a minute. One could spend an entire day just reading these headlines, so quick decisions and time management often become crucial habits.
If I have learned one thing In my career, it is that company executives can lie, sometimes outright. At best, they are expert salespeople. At worst, they can be corrupt fraud artists. I have learned to not really rely on them. Numbers, on the other hand, particularly cash flow, are a lot harder to manipulate, so running data screens is a major part of my day.
I screen for all sorts of things, but start with the new highs from the day before. This gives me some new ideas to investigate, as I need to see what all the fuss is about. But screens can be done on pretty much anything, and I like to look at return on equity, sales growth, earnings revisions and dividend increases, amongst other data points. With 10,000 stocks in North America, screens at least keep the potential investment universe manageable.
Meeting with company executives is still important, but not for the reason many think. Generally, because corporate executives need to disclose all information to all investors, you are not going to get any juicy new information from repeated or one-on-one meetings. But it is important to meet a management team in order to get a feel for the company’s approach and long-term goals, and specifically whether you can trust them.
Managers and investors don’t need to meet with executives every quarter. Let them run the business. Many company executives, and fund managers, too, have decided these meetings are a bit of a waste of time, and prefer to let the numbers do the talking (see the prior point). I’ve been to thousands of meetings in my career, but I took fewer and fewer meetings as my career progressed, and had more time for real research rather than listening to a sales pitch. One caveat: I do like talking to the competition of a company I am researching. Competitors will tell you the flaws of the other company. Management won’t.
One needs customers, so whether you’re a portfolio manager, analyst or someone helping do-it-yourself investors, part of any investment professional’s day is spent marketing. Current customers always have issues, enquiries need to be answered and there are always new customers to win over.
More than half of my day as a portfolio manager during the financial crisis in 2008 was spent calming investors down, whereas I would have preferred to be spending that time trying to manage an imploding investment world. But it is a necessary task. If my customers all leave, there isn’t much point focusing on the other four points above now, is there?
Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also associate portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)
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With years of attention paid to educating older Canadians about protecting their money from fraud, it may be surprising that many younger investors have fallen victim to get-rich-quick pyramid schemes, bogus virtual currencies, and more.
Perhaps equally surprising is how New Brunswick’s financial and consumer services regulator feels Millennials are disinclined to take financial advice from a Crown corporation.
“We know this demographic is notoriously difficult to reach,” says Marissa Sollows, the director of education and communications with The Financial and Consumer Services Commission of New Brunswick (FCNB).
In an interview with Huddle, Sollows cites FCNB’s research, in addition to research coming from other provincial commissions, confirming Millennial investors are in some cases at higher risk of falling for poor investment pitches or making decisions without the right financial knowledge.
In the first nine months of 2021, 20 New Brunswickers reported losing nearly $711,000 in crypto investment scams, according to the Canadian Anti-Fraud Centre.
“When we started looking at this situation in New Brunswick, it became clear as we saw different trends in DIY investing and interest in crypto and that this was an audience that we needed to try and reach,” explained Sollows.
Sollows says Canadian investors in their 20s and 30s approach their finances from a different cultural perspective than their predecessors: research shows they are less likely to want to work with a financial advisor and want more hands-on control over their investments.
But Sollows says there is also fear that they don’t know enough about investing and are worried about losing money.
“To come from a regulator, we sort of recognized it wouldn’t work as well for this audience, who get their information from different sources and who have different levels of trust with those different sources,” said Sollows.
In an effort to respond with something meaningful for the Millennial segment, FCNB designed a new awareness campaign that was outside its traditional outreach. Where social media has hooked young investors on finance, FCNB decided to put more of its campaign resources on YouTube, Twitter and, for the first time, TikTok.
For Sollows, that meant focusing not just on what channels Millennials were getting their financial information from, but also trying to understand how they were interacting with those they perceived as “experts” and where that financial advice was coming from — whether legitimate registered online trading platforms, or somebody purporting to be an expert with a hot tip.
“There’s a much higher level of comfort, with the younger generation, with technology and with putting trust in their peers in these different online forums as opposed to going to a traditional financial advisor that their parents would have had more trust in,” says Sollows.
On Nov. 22, FCNB launched “The Right Recipe,” a new investor education campaign targeting Millennials and do-it-yourself investors with resources designed specifically for them.
FCNB campaign videos serve as explainers on a variety of topics–including fad investing, multi-level-marketing schemes, influencer scams, and high-risk investment products–while reinforcing the steps any investor can take to protect themselves and their money.
Covid-19 lockdowns and uncertainty translated into a meteoric rise of online DIY investment platforms and trading apps, leading many to investment possibilities for the first time at the touch of a button. Others are getting their advice on social media and choosing instead to test unconventional methods. But, as Sollows points out, these often “prey on FOMO” (fear of missing out) on advertised payoffs.
The rise of “finfluencers” (a specific type of influencer who focuses on money-related topics) have made full use of platforms like TikTok, Instagram, and YouTube to get the attention of young investors. Couple that with Millennials increasingly willing to devote cash on decentralized cryptocurrencies and hot stocks – with much of that advice coming at them through social media – and you’ve got a scene rooted in familiar tones.
Interactive Investor, A UK online investment service published a July survey showing more than half of young investors surveyed in the UK who have purchased cryptocurrency like bitcoin or dogecoin have done so using credit cards, or even student loan money.
More unconventionally, users of Reddit have made headlines swelling into pump-and-dump schemes targeting low-cost stocks for small companies. Money inflating the value today might be worthless tomorrow on a pre-planned selloff, leaving young investors holding pennies of worthless stock days later.
Trendy concepts like “Impact Investing,” where a company gathers investment intenting to “generate measurable, beneficial societal and environmental impact, alongside a financial return,” have gotten young people to invest money for the promise of helping a greater good, which often leads to confusion and no return for the investor.
“It’s the same old scam,” according to Sollows, who says it’s just wrapped up in different wrapping paper with a different story around it.
“We’ve seen this kind of thing happen with ‘green investing’ in the past when renewable energy and so on was becoming really popular. The scammers would follow the headlines and build pitches around it.”
On the flipside, Sollows says there’s a need to help young investors navigate many of the legitimate online platforms out there. She hopes FCNB can be a trusted resource to help Millennials make some of their first investment decisions, especially when going the DIY route.
“The Right Recipe” depicts a fictional brewmaster who has heard a lot of financial tips over the years.
He’ll tell you that everybody knows someone who’s made a bundle in the markets. He figured if his customers could do it, why couldn’t he? The example allows the user to follow his investment journey, for better or worse, through videos. That journey is everything from “listening to some rando’s advice on social media” to letting “FOMO be his guide” and blindly “following the latest investment trends.”
In addition to campaigns like “The Right Recipe,” FCNB also offers investment updates and fraud alerts emailed directly to those who sign up on its website and provides a variety of financial literacy topics through both in-person and through virtual presentations. Those sessions are offered to workplaces, classrooms, and the broader community, covering topics ranging from financial literacy and budgeting to investing to fraud prevention.
For navigating the investment learning curve and the possible pitfalls for young investors, Sollows believes the campaign would be a success if people used the information and experience of the brewmaster to instead follow their gut instead of social media when the offer seems too good to be true.
“If you’re being offered some crazy returns on things, and they’re telling you, ‘Oh, I can guarantee you’re going to make this much money and it’s so easy you don’t need to understand it — In any other aspect of your life, if somebody said that to you, would you keep the conversation going or would you walk away saying, ‘No thanks, I’m good.’”
FCNB’s The Right Recipe campaign will run until mid-February, in both English and French on most social media platforms and at: therightrecipe.ca.
Tyler Mclean is a Huddle reporter based in Fredericton. Send him your feedback and story ideas: [email protected].
She’s interested in helping women take charge of their finances and advance in their careers, but her people skills have launched her into the digital side of transforming wealth management.
Casciato was able to wed both aspects in her last job. Given that women are expected to control 31% of the wealth in Canada by 2024, but the industry’s leaders and advisors still don’t represent gender or diversity equity, she was pleased to be able to increase the number of women leaders in BMO’s frontline contact centre roles from 20% to 45% They lead teams of 15 to 20 customer service – or investment – specialists and now are all women of color.
She’s also been the executive sponsor for BMO’s North American Customer Contact Centre’s Diversity, Equity and Inclusion Council and a member of BMO’s employee-run diversity, equity, and inclusion board of directors. She’s pleased that they’ve started mentorship programs and done virtual events, and she often gets to speak to increase awareness about diversity, equity, and inclusion and getting more people engaged. “I get a lot of value in watching women succeed,” she said, “and truly feeling like I’ve helped them.”
Casciato now is head of the section that oversees customer service and sales, but is also driving BMO’s digital transformation across its wealth business. She said her role is “to meet the clients in the way that they want to be served – and, increasingly, they want to be served digitally. For my business, which is self-directed investing, they want to have the best possible platform and servicing that they can have because they are do-it-yourself investors.”
That also means providing them with the ability to connect with the help they require. “Increasingly, I see that as being more digital than phone,” she said. “My experience in the broader wealth business has taught me that for some pieces – particularly when you’re dealing with high-net worth individuals and family offices – there’s a relationship component that’s really hard to replicate digitally. So, we need to be prepared to meet our clients where they are, to have the digital capabilities and continue to have those – face-to-face virtually through technology – relationship pieces with another human because that’s important when you’re dealing with people and their money and advice.”
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