FAX: Investing In Low Risk Fixed Income Securities In The Right Markets (NYSE:FAX)

~ by Snehasish Chaudhuri, MBA (Finance)

Abrdn Asia-Pacific Income Fund Inc (NYSE:FAX) is a close ended fixed income mutual fund (CEF’) launched and managed by Aberdeen Standard Investments (ASIA’) Limited. The fund invests in fixed income securities in the markets of Asia-pacific region. It primarily invests in government bonds, quasi-sovereign debts, and bonds of financial institutes. The fund generally invests in growing, large, less risky, and credible economies. FAX benchmarks its performance against the JP Morgan Asia Credit Index. Historically, FAX generated strong yield, and has a low risk portfolio. Although total return is not attractive at present, a sustainable yield close to the present level will be lucrative enough to keep investors interested in this fund over the long-term.

Abrdn Asia-Pacific Income Fund Inc Has a Static Investment Objective

Abrdn Asia-Pacific Income Fund Inc combines top-down strategic fundamental analysis with bottom-up security selection and seeks to generate strong current income. The fund has a stated policy of investing at least 80 percent of its asset under management (AUM’) plus borrowings made for investment purposes, in debt securities in any Asian market or securities denominated in, or linked to, the currency of an Asian country, and the remaining 20 percent in currencies of Australia and New Zealand, or in the market of these countries.

With regards to the investment objectives Abrdn Asia-Pacific Income Fund Inc, the company says that “…the Fund’s investment objective may not be changed without the approval of the holders of a majority of the outstanding shares of the Common Stock and the Preferred Stock, voting together as a single class, as well as by the holders of a majority of the outstanding shares of the Fund’s Preferred Stock voting as a separate class without regard to series.”

FAX Selected the Right Currencies, Right securities and Also Right Markets

In the Asia-Pacific region, most nations have growing economies. However, despite high growth rates, there are huge risks involved in investing in sovereign bonds of countries like Pakistan, Myanmar, and Sri Lanka, as these economies are allegedly under immense financial stress, and are also perceived to be fragile. There are a few other high growth economies which are not under financial stress, but have a below investment grade credit rating, i.e. rated below BBB- as per S&P. Vietnam, Bangladesh, Iran are a few such markets. On the other hand, there are developed economies like Japan, Singapore, Australia, which are less risky (rated top investment grade) but generate low returns. Macau, Hong Kong, New Zealand are also low-risk economies, rated investment grade, have relatively high growth rate, but are quite small in size.

In my opinion, the ideal markets will be those which have large size, high growth rate, ranked low in the ‘Fragile State Index 2022’ and sovereign bonds of which are rated investment grade. India, Indonesia, China, Philippines, Malaysia, Thailand, Taiwan, and South Korea are the 8 markets that will fulfill the above mentioned criterion. Three-fifths of FAX’s fund is invested in the fixed income securities of these economies. In addition, the fund invested another 11 percent in fixed income securities in Australia, the sovereign bonds of which are rated AAA. For reference, FAX is co-managed by Aberdeen Standard Investments Australia Limited and Aberdeen Asset Managers Limited, and it also has a stated policy of investing 20 percent in Australia and New Zealand.

FAX’s portfolio includes 227 securities with different maturities and coupons. The average credit rating of the entire portfolio is BBB, and the fund earns a weighted average coupon of 5.73 percent. 72.25 percent of assets are invested in bonds of various government and financial organizations. Almost 65 percent of investments are made in currencies of those 8 nations, and another 28 percent of the entire fund is invested in US dollars. In that way, the fund has selected the right currencies and also the right markets for investing its assets. I am bullish on Abrdn Asia-Pacific Income Fund Inc due to forecasted strong economic growth in these Asia-Pacific markets. As the fund invests in high quality bonds, a combination of attractive yields and strong fundamentals will most likely allow FAX to generate strong returns for its investors.

FAX Scores Well in my ‘7 Factor Model for Evaluating Emerging Market Funds’

Abrdn Asia-Pacific Income Fund was formed on March 14, 1986 and has been paying monthly dividends since 2001. The annual average yield has been in the range of 7 to 10 percent. Past five-year’s average yield is 9.5 percent, and trailing twelve months (TTM’) yield is 11.17 percent. The yield is quite lucrative. In my opinion, FAX’s portfolio is comparatively less risky, due to its investments in growing, large, less risky, and credible economies. Sovereign bonds of most countries in its portfolio are of investment grade. More than 75 percent investments of FAX are of investment grade and almost two-third of the fund’s investments are made in securities with maturities between 5 to 10 years.

I find Abrdn Asia-Pacific Income Fund to be a reasonably good fund according to my “7 Factor Model for Evaluating Emerging Market Funds.” It qualifies for the minimum requirements with respect to AUM and yield. The fund is also trading at a significant discount of 15.6 percent to its NAV. The fund has invested in the right markets and in the right currencies. Lower risk, and expected high growth rates of such markets is expected to sustain the current level of yield. In the worst case scenario, investors can be assured of availing a return close to the average coupon the fund earns.

Although the fund failed to generate a positive total return during the past 2 years, FAX recorded an annual average total return of 9.2 percent between 2016 and 2020. Even during the years of FAX generating negative total return, investors who persisted with FAX have enjoyed strong current income in excess of 6 percent. I am thus hopeful about FAX’s ability to deliver long-term growth to its investors. Current discount of 15.6 percent is much higher than its five year average discount to NAV of 13 percent. In that sense, Abrdn Asia-Pacific Income Fund is relatively inexpensive and that makes it further lucrative.