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Asia Hedge Fund Takes Defensive Corporate Bond Bets on Region's Resilience

Date: Thursday, June 10, 2010
Author: Bloomberg

Bonds of Asian companies at the lower end of investment grade that are least affected by economic swings offer the best opportunity for investors, according to hedge fund Prudent Asia Capital Management Ltd.

“Asia will witness sustained growth while at the same time, companies are deleveraging,” Jim Lee, co-founder of Prudent Asia, said in an interview at his office in Singapore. “We’re more focused on developed economies within Asia, such as Japan, Korea and Australia. Within that, defensive sectors which aren’t cyclical, like banks, utilities and waste-management companies.”

East and South Asian economies will grow 7.1 percent in 2010 versus 2.9 percent for the U.S. and 1 percent for the European Union, according to a May United Nations report. Asia proved more resilient to the economic slowdown, the report said.

Asian investment-grade dollar debt has returned 4.21 percent this year compared with 4.85 percent for Asian dollar speculative-grade debt and 2.98 percent for Asian local-currency debt, according to HSBC Holdings Plc indexes.

Lee, who was previously co-head of equities at Deutsche Bank AG in Japan and before that spent 13 years at Goldman Sachs Group Inc. in New York and Tokyo, established Prudent Asia in December with three other former investment bankers.

Hong Na, the company’s chief executive, ran distressed assets at Citigroup Inc. in Korea, while Jean Chung headed proprietary trading at Morgan Stanley in Hong Kong. Alfred Ting ran credit trading at DBS Group Holdings Ltd. in Singapore.

Debt Returns

Bonds favored by Prudent Asia, which opened its fund in May, include dollar debt of Osaka-based Resona Holdings Inc., Japan’s fourth-largest bank.

“It’s focused on small-to-medium-sized businesses and didn’t suffer from any write-offs after the Lehman collapse,” Lee said. “We picked it up at a very attractive yield after a lot of Japanese banks got slammed in the wake of Greece.”

Resona’s 5.85 percent perpetual dollar bonds, rated BBB by Standard & Poor’s, were at 88 cents on the dollar to yield 8.498 percent yesterday, according to BNP Paribas SA prices. They fell as low as 85 cents on the dollar to yield 9.211 percent on May 26, the day U.S. Treasury Secretary Timothy Geithner urged governments to act aggressively to stop the crisis spreading.

The company’s fund, Prudent Asia Balanced Fund, received commitments of about $30 million from banks and financial companies in Korea, Japan, Singapore and Taiwan, Lee said. The founders hope to grow the fund to $500 million, he said. While the fund will invest primarily in Asian dollar bonds, it can also buy equities, convertibles and local-currency debt.

“Once market volatility settles down that’s when we’ll go into high yield, but we don’t think now is the right time,” he said.