iShares Barclays Capital USD Asia High Yield Bond Index ETF

[cyclone]

The investment objective of the iShares Barclays Capital USD Asia High Yield Bond Index ETF (“Fund”) is to provide investment results that, before fees and expenses, closely correspond to the performance of the Barclays Asia USD High Yield Diversified Credit Index (“Index”) in US dollar terms.

The Barclays Asia USD High Yield Diversified Credit Index tracks the performance of fixed-rate US dollar-denominated government-related and corporate high yield debt of the Asia ex-Japan region. As of April 2012, the following fourteen Asian markets are eligible for inclusion: China, Hong Kong, India, Indonesia, Malaysia, Mongolia, Pakistan, Philippines, South Korea, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam. Issuer exposures are capped at 4% of the overall index market value for diversification.

Top 10 holdings as as of February 28, 2013 (Bonds - Weight):
1. POWER SECTOR ASSETS AND LIABILITIE RegS 7.39 - 1.84%
2. POWER SECTOR ASSETS AND LIABILITIE RegS 7.25 - 1.73%
3. EVERGRANDE REAL ESTATE GROUP LTD RegS 13 - 1.70%
4. VEDANTA RESOURCES PLC RegS 8.25 06/07/2021 - 1.57%
5. MAJAPAHIT HOLDING BV RegS 7.75 01/20/2020 - 1.56%
6. WOORI BANK RegS 6.208 05/02/2037 - 1.46%
7. COUNTRY GARDEN HOLDINGS CO RegS 11.125 - 1.45%
8. CITIC PACIFIC LTD MTN RegS 6.875 01/21/2018 - 1.45%
9. VIETNAM SOCIALIST (REPUBLIC OF) RegS 6.75 - 1.45%
10.CITIC PACIFIC LTD RegS 6.8 01/17/2023 - 1.37%

Sector Breakdown :
- Corporates 74.92%
- Government Related 25.08%

Country Breakdown :
China - 30.66%
Hong Kong - 17.60%
Philippines - 14.02%
Indonesia - 10.65%
India - 5.04%
Sri Lanka - 4.76%
Singapore - 3.43%
Mongolia - 3.41%
Vietnam - 2.62%
Macau - 2.60%

Exchange : SGX
Ticker : O9P
Total Net Asset : USD 52,454,819
Flat yield : 7.1%
Yield to Maturity : 6.2%

[pianist]

What is a flat yield? Can we short this etf? If yes, does it mean a shortist has to fund the coupon?

[cyclone]

What is a flat yield? Can we short this etf? If yes, does it mean a shortist has to fund the coupon?

Wikipedia explains flat yield clearly : http://en.m.wikipedia.org/wiki/Current_yield

I don't know whether we can short ETFs. If shortist has to pay dividend for stocks, by the same logics, he also has to fund the coupon.

[Shrivathsa]

I am reviving this thread to post a very interesting article from Allianz.

http://www.allianzgi.sg/allianzgi-perspe...uities-and

In summary, if you do not want to read the whole article,

"Asian high yield bonds are a rapidly expanding asset class, with a growing number of companies choosing to access fixed income markets in order to fund their development. Over the last ten years, the average annual return for Asian USD high yield credits has been 8.7% (see Figure 3).  The majority of the return has come from the high level of income with some modest capital appreciation as well. We believe this trend will continue."

Full Disclosure : I hold this ETF (O9P) in my portfolio.

[tanjm]

I looked at this before. There's a high China exposure and an effective yield to maturity (after minus fees) of <7%.

A number of the bonds on their asset list are trading at very low prices (implying default or near default). The NAV may be based on illiquid values and you may not realize that in a stress situation.

To my mind, the yield isn't high enough to tempt me yet to compensate for market and non-market risks (illiquidity of underlying portfolio and default risks) yet.

[Shrivathsa]

I agree that the China exposure is high at around 48%.

Yes, the effective yield to maturity is less than 7%, i think it is around 6.2 or 6.8%.

The attraction (for me) was that essentially one is diversified across almost 145 bond holdings at one stroke.

No issuer accounts for more than 4% (by design), in reality, the top issuer weight is 2.1% or something.

I have looked at the holdings which is attached here.

One familar name is Vedanta Resources plc, which is trading at a YTM of 25% now.

The company is buying back the bonds at 57 cents to the dollar as of January.

http://www.bloomberg.com/news/articles/2...-to-miners

At that time, the bonds were trading at a YTM of 38%, so, one sees a nearly 13% improvement in 2 months.

Assuming that the ETF just holds to maturity, which is 2.5 years away, they basically will get 100 cents or can roll over.

In any case, the holding value is 1.4 Million USD out of a total asset base of 62 Million USD, so, just around 2%.

Another name is Noble group, which is trading now at 14% YTM.

http://www.bloomberg.com/news/articles/2...downgrades

They also bought back at a 60% discount which has now narrowed to 40% discount.

Coincidentally, the share price has also rallied after that.

Noble bonds are around 1 Million USD , also a 1.5% weight.

Mongolian Mining is likely to default

http://www.bloomberg.com/news/articles/2...s-ijvgoxt7

But, in reality the holding is worth 100K USD and is around 0.15% of the weight.

The reason I have highlighted only Noble and Vedanta is that among the top 20 issuers, which account for nearly 42% of the weight, only these two have YTM which seem very high at 25 and 16%.

The rest are actually quite reasonable YTM.

From Morningstar report

iShares Barclays Capital USD Asia High Yield Bond Index ETF (USD) - O9P
Morningstar Rating™ (Relative to Category) Morningstar Return Morningstar Risk (Rel to Cat) Morningstar Rating™
3-Year                                                        High                          Low                                  5 star

Volatility Measurements

Volatility 5.11 %
3-Yr Mean Return 7.91 %

Sharpe Ratio 1.39

The Sharpe ratio in the past three years means one has obtained 1.39 return for every dollar risked.

I do understand that Sharpe ratio is ex post and cannot be used for ex ante calculations and there is no reason to expect similar behavior in the future.

Risk Measurement 1 Year 3 Years    5 years
Standard Deviation 6.17        5.11
Positive Months        6          24       35
Negative Months        6          12       15
Worst Month       -2.44        -3.11      -20.46

I will gladly accept a worst month of 2 to 3% down for a upward slope of positive risk adjusted returns.

I am not trying to "sell" the idea of buying this ETF, all I am saying is that it seems like a reasonable risk reward scenario,

[tanjm]

Obviously I've looked at it before as a prospective investment.

I think you've focussed on the relatively minor "diversified credit risk" while I think that the more concerning risk is liquidity risk which is a type of concentration risk in Asian bond markets.

This market is typically not as deep as a developed market bond market. The value of the ETF in tracking the NAV relies on 1. The NAV being accurate with access to liquid pricing and 2. That big boys can redeem their units of ETF for actual holdings of bonds and sell the bonds at market prices.

In a stress situation, the bond market may freeze up. Then either the managers may maintain the polite fiction of unchanged NAV because they cannot find current quotes or they are forced to remark the NAV very much lower. In the former case, knowledgeable Traders would not believe the NAV and just dump the ETF.

Either way, the ETF is not as safe as you might think. I do not think the odds of this happening are so Low that you can ignore it, or accept a 6% yield as adequate compensation for this risk. It is already well known that investors are starved for yield, resulting in junk having relatively Low yields - the price of this ETF is symptomatic of the mis pricing.

I think investors can still hold this ETF but please don't think that just because it has 100+ bonds, it is safe. Buy what you can afford to lose is my view.

[Shrivathsa]

14 cents dividend announced for the quarter.

In the last year and a half, roughly the yield has remained more or less stable.

The price has not really appreciated, but, one does not really buy this ETF for price appreciation.

Price appreciation, if any occure, is a bonus.

[mobo]

Does anyone know if these iShares ETFs are subjected to any withholding tax for a Singapore resident holder? If yes, under which tax jurisdiction will they fall under? US?

Thanks.

[Shrivathsa]

Hi Mobo,

This trust is structured as a singapore sub-fund.

"IPO Performance
Prospectus Download:

Country of Incorporation
Date of Listing
Dec 08 2011
Issue Manager
iShares Barclays Capital USD Asia High Yield Bond Index ETF (the “Fund”) is an exchange traded fund constituted as a sub-fund of iShares Southeast Asia Trust that is a Singapore unit trust authorized under Section 286 of the Securities and Futures Act, Chapter 289 of Singapore. The investment objective of the Fund is to provide investment results that, before fees and expenses, closely correspond to the performance of the Barclays Capital Asia USD High Yield Diversified Credit Index (the “BAHY Index”) in US dollar terms. The BAHY Index tracks the performance of fixed-rate US dollar-denominated government-related and corporate high yield debt of the Asia ex-Japan region. Issuer exposures are capped at 4% of the overall index market value for diversification. The investment strategy of the Fund is to use a representative sampling strategy (i.e. an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to the BAHY Index)."

The tax jurisdiction should be Singapore, in my opinion.

https://www.blackrock.com/sg/en/literatu...-en-sg.pdf

https://www.blackrock.com/sg/en/products...&view=list

I have held this for around 5 years or so,and there has been no withholding tax.

But, please read at Blackrock and do your checks as well.