21 August 2019
Nordea AM's Philippe Graffart says the company aims to launch yuan-based products down the track.
Nordea AM's Philippe Graffart says the company aims to launch yuan-based products down the track.

Nordea scouts for partners in yuan mission

China is half a world away from Scandinavia but one unit of Northern Europe’s biggest financial services group has its sights firmly set on long-term yuan horizons.

Nordea Asset Management (Nordea AM), a unit of Nordea Bank AB, aims to tap the Chinese market and launch yuan-based products down the track. In the meantime, it’s readying an Asia-based bond offering for liftoff possibly as early as this year, according to a senior manager.

“We are looking for partners in yuan-denominated products as the market is definitely [going to] keep going. It’s going to be a norm but the liquidity is not big enough to make it a core asset or [something] that is highly in demand. So we have a much longer-term view on RMB-based funds,” Nordea AM Asia-Pacific fund distribution head Philippe Graffart told EJ Insight. 

As part of the yuan push, Nordea hopes to take advantage of expected mutual recognition between Hong Kong and the mainland to distribute bond fund products across the border. “We expect mutual recognition to come like the RQFII [renminbi qualified foreign institutional investors] scheme, which is separated into batches. We know we won’t be the first batch of institutions, so we have a bit of time to think about it. It’s not a short-term target,” he said.

Nordea AM had 228 billion euro (US$307.66 billion) in assets under management as of September last year and is backed by its Stockholm-listed parent, which has market capitalization of about 39.7 billion euro and total assets of 630 billion euro.

The company offers exposure to a wide range of funds through its distributors which include banks, asset managers, independent financial advisors and insurance companies. MacKay Shield, a US-based fixed-income focused investment management firm managing US$80 billion in assets, is one of its boutique units.

Nordea AM has a US$250 million Chinese Equity Fund managed by its team, a US$160 million Nordea Indian Equity Fund managed by Indian lender ICICI Bank, and a Nordea-managed Asia Focus Equity Fund with US$100 million.

As broad as that coverage may be, Nordea’s near-term goal is to find Asian partners to help plug gaps in its regional offerings, particularly in fixed income. The key will be to find partners that can complement its focus on high-yield products.

“Hopefully it can be done this year,” Graffart said. “We want to commit to the domestic market so we prefer to partner with some long-term, domestic institutions to differentiate ourselves.” 

The process is expected to take longer in Taiwan because Nordea is looking for a distributing partner and to register funds locally.

The long and short

High yield is set to remain the catch cry in the region, with Asian investors continuing to show major interest in high-yield products. Corporate bonds including high-yield were the best fixed-income investment performers last year and are tipped to put in a similar showing this year, he said. The common portfolio theme is long credit and short two-year treasuries.

“Lots of our clients who invested in high yield are staying this year … investors are watching issues like interest rate increases and the tapering policy. We see lots of demand in short-duration products and long on credit risk to look for extra margins, so you don’t need interest rates but credit and duration spreads to make money,” Graffart said.

“Our strategy is to invest significantly in high-yield bonds, for example, we would buy five-year duration high-yield bonds and keep the credit duration while using futures to short our interest rates’ duration. That’s how we kept what we wanted in fixed-income investment as spreads tightened and rates went up.

“We are willing to take credit risk and short duration to take advantage of the natural hedge while others are not doing it.”

He said credit is a natural hedge to rates because as rates go up, credit spreads go down and yield rises. This was the case last year and it is expected to continue next year. High-yield spreads also absorbed the rising rates, so rates did not undermine high-yield products.

Corporate strategy

The one-year yield on a global high-yield bond fund managed by Nordea AM is 5.31 percent while the three-year yield is 22.59 percent. A US corporate bond fund yielded 1.11 percent over one year and 17.34 percent over three. The US high-yield bond fund at one year was at 5.02 percent while the three-year one yielded 21.96 percent, according to the company’s website on Jan. 31.

“We like high-yield bonds more as the high-yield spread is coming down with the default rates and both of them will stay at a low level, as it tends to be a negative correlation between interest rates and high-yield spreads. That is one of the reasons that high-yield did so well, as well as corporate bonds in general,” Graffart said.

Corporate bonds continue to be the way to go in the fixed-income market and high-yield products look good as well, he said, adding that the strategy will be long credit and short duration by shorting two-year and five-year treasury bonds.

“For corporate bonds, we are overweighting the financial sector in the United States and Europe, their yields are higher, and given the risk of economic environment, we believe the risk will be coming down as the economy continues to either come out of recession in Europe’s case, or continues to grow in the US case,” Graffart said.

“Therefore, those yields on banks and insurance companies will come down on a relative basis. That will be an attractive asset.”

– Contact the reporter at [email protected]


Ayishah Ma is a financial reporter on Greater China issues.

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