The Daily Update: New UK Domiciled Renminbi Bond Fund

Over the past few months there has been a lot of interest in the local Chinese bond market primarily for the attractive yield pickup of Chinese bonds against other emerging and developed bond markets. We have written many articles on China’s bond market and the Renminbi (CNH). With many investors looking at local Chinese debt markets, we believe there is a better and safer way of accessing these attractive yields. We have always believed that locally the only issuers that international investors should consider ought to be the central government issuance and if absolutely necessary the policy banks too. All other credits should be avoided as it is very difficult to figure out which credits will be supported, and which will not. More importantly, if investors have exposure to RMB denominated assets then the major driver of returns is the exchange rate; why try and get an extra few basis points in return from holding non-government issues when you can mitigate that risk.

The main question is why hold RMB denominated debt in the first place when it is sub-optimal to do so. Owning US dollar Treasuries at 10 years yield 1.6% and if you hedge into Renminbi, CNH, you currently pick up around 2.6% per annum so a total yield of over 4% (currently China governments yield around 3.2%). If like us, you buy the likes of USD AA rated pan-Asian sovereign issuance and then overlay with CNH you get a high-quality investment grade bond at a yield of over 3% plus a 2.6% yield with the currency overlay, with potential for capital gains on the bonds. As you can see below, we have been running our Renminbi Bond fund for nearly 14 years with returns that are hard to argue against. There are risks in all markets around the globe in the current climate, but there is no need for investors to expose themselves to those risks if the primary driver of returns is in fact the currency rather than anything else. Again, on our funds where permitted we do have open CNH exposure, through the forex forward market, buying CNH forward the carry is built into the price of the forex contract and currently at a one month maturity yields 2.6% on an annual basis.

New UK domiciled Renminbi Bond fund.

Stratton Street has been managing unconstrained credit portfolios since the mid-2000s. Our longest running strategy is a Renminbi Bond fund (launched in 2007) which has produced an annualised return of 8.71% (USD A Class since inception as at 26 February 2021) by investing in the credits of the world’s wealthiest and least indebted nations, economies whose net foreign assets dwarf that of most developed nations. We are planning to launch a UK domiciled and FCA regulated version of the Renminbi Bond fund in the Spring due to an increase in demand from investors wanting to diversify their fixed income portfolios into less correlated, high quality credits, that offer greater value and yield than is available in developed market investment grade credit. If you would like further information about the new fund, please do not hesitate to contact us at funds@strattonstreet.com.

There is no guarantee of future performance and past performance is not a reliable indicator of future performance.