Value Partners unearths ‘hidden gems’ in Asia’s growing credit markets
The Asian credit space is made up of many fragmented and diverse economies with varying levels of transparency, corporate governance requirements, and investment opportunities. This means that active managers have to be twice as diligent when researching companies.
Gordon Ip, chief investment officer for Fixed Income at Value Partners, discusses his team’s practice of actively engaging with bond issuers in order to secure investment opportunities in the vibrant landscape of Asian credit markets.
What is your approach to investing in the Asian credit universe?
We concentrate on finding ‘hidden gems’; under-researched companies with quality fundamentals trading below their intrinsic value, and we focus on issuers rated single B and below, which are arguably less followed, less researched and ultimately, less well-known. From our perspective, investment grade names or names that everyone already knows are, more often than not, trading at fair value and there’s not much room for us to add value to our investors through our bottom-up credit research and investment process. Therefore, for a bottom-up manager - who does their homework and does it right – the single B-rated and below universe (where there are less-crowded trades) is where an active manager can add true value to investors.
Why do you choose to engage more actively with companies than most long-only fixed income investors?
The team comes to work every day looking to add additional value to our investors. However, we go far beyond typical bottom-up analysis. We are activist investors in the Asian credit space, in the sense that we proactively work with many of our investments’ management teams to improve their credit profiles.
Often, when a new issuer, who may not be very familiar with the capital markets, come in with a credit rating of, for example, single B, then the issuer may not be well-viewed by the market because of their capital structure and their smaller market presence. If we decide to invest in such a company, we then also proactively work with its management to educate them on market best practice and provide advice on financial discipline, ie. how to optimise their capital structure and liability management. During this process and over time, if the company successfully transforms to a better company, i.e. its fundamentals and ‘perception’ by the market improve, then the issuer’s credit profile improves and credit spreads tighten.
Thus, by working directly with issuers to improve their credit profiles, we ultimately add additional value to our investors.
Do you see new issuers in the Asian credit universe proactively reaching out to your team seeking such a relationship?
Absolutely. We are often approached by first-time issuers on pricing thoughts and ideas on deal structuring. In the process, we gain valuable insights into where the new issue market is heading and also the mix of companies in the pipelines. By working closely with many of these new companies early, we have a head start in establishing good relationship with them, which will in turn help us secure sizeable allocation from the primary market if the new issues pick up broad interest.
Does this also apply to ‘fallen angels’?
This applies to issuers across the entire credit spectrum, including “fallen angels” and “rising stars”. We believe having a constructive relationship with issuers will always have a positive impact to our portfolio – whether you are looking from the perspective of corporate access, deal performance, deal allocation or having the first look at new deals and new opportunities.
What are your thoughts on the future, with regard to size of the universe, quality of issuers and its liquidity, and continuing to find ‘hidden gems’?
We are confident that the Asian credit markets will continue to grow, far beyond the current ~ USD1 trillion market cap (as measured by JP Morgan Asia Credit Index, as at 29 April 2020). Arguably speaking, Asia is the most vibrant region in the world, and it’s natural that its credit markets will grow along with the region’s GDP and economic activities. As a result, we believe both the depth and width of the market will continue to grow, and we expect to see more new issuers from various industries will come to market for their funding needs. Finding “hidden gems” is in our Team’s DNA and we do not like crowded trades. Our expertise and the value we bring to our investors has always been placing our bets on high-conviction ideas originating from our rigorous, bottom-up research on opportunities that are less researched, less followed and often time ignored by majority of market participants.