FAX: High-Yielding Asia-Pacific Fixed Income Fund Still Available At A Deep Discount

~ by Snehasish Chaudhuri, MBA (Finance)

abrdn Asia-Pacific Income Fund Inc (NYSE:FAX) invests in fixed income securities in the markets of Asia-pacific region. The fund primarily invests in government bonds, quasi-sovereign debts, and bonds of financial institutes. During my last coverage, I found FAX invested in the right markets and in the right currency. The fund has been paying monthly dividends since 2001. The annual average yield has been in the range of 7 to 12 percent. Past five-year's average yield is 9.83 percent, and TTM yield is 12.6 percent. FAX's yield is quite lucrative and is currently trading at a deep discount of 13.25 percent to its net asset values.

FAX Invests Majority of its Assets in Growing, Large, Less Risky, and Credible Market

abrdn Asia-Pacific Income Fund invests the majority of its assets in growing, large, less risky, and credible economies. It has $750 million in net assets and an expense ratio of 2.87 percent. Despite that, I am hopeful about FAX's ability to deliver long-term growth to its investors. The fund's investments are predominantly under 10 years of maturity, with the portfolio having an overall effective duration of 6.7 years. Historically, the fund generated strong yield, and has a low risk portfolio. However, a significant part of the fund's annual distribution has been funded through return of capital. 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 longer run.

FAX's portfolio includes 226 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 6.2 percent. In my last coverage I discussed why ideal markets in the Asia-Pacific region are those which have high growth rate, large economies, ranked low in the 'Fragile State Index 2022' and investment grade rated sovereign bonds. India, Indonesia, China, South Korea, Malaysia, Philippines, Taiwan and Thailand are the eight markets that fulfills those criteria. Last time, three-fifths of its assets were invested in the fixed income securities of those markets. This time, this share went up beyond 68 percent. FAX also had statutory requirements of investing a portion of its assets in the markets of Australia and New Zealand, but limited to 20 percent of its AUM.

Strong Pay-Out, Attractive Yield Enables FAX to Generate High Returns In Long Run

Almost 54 percent of FAX's assets are invested in government bonds, primarily in the Asian markets. Strong economic growth is forecasted in these Asia-Pacific markets. Almost two-third of investments are made in currencies of those eight nations, and another 27 percent of the entire fund is invested in US dollars. abrdn Asia-Pacific Income Fund invests in high quality bonds in the right markets. On top of that, a combination of strong pay-out, attractive yield and strong fundamentals enables this fund to generate strong returns. Although it failed to generate positive returns during the past three years, FAX recorded an annual average total return of 9.2 percent between 2016 and 2020.

FED's Interest Rate Hikes Had Little Impact on FAX, But Credit Spread Widening Did

I view abrdn Asia-Pacific Income Fund more as a cyclical trading instrument rather than a traditional buy-and-hold vehicle. Although the price of this fund is at exactly the same level as it was during my last coverage during December 2023, the price did hike by almost 10 percent in between. This price volatility happened primarily due to emerging market shocks that put pressure on credit spreads. Higher local interest rates resulted in lower bond prices which in turn put pressure on their net asset values. Local currency tightening cycle moved much faster than it was anticipated, resulting in negative performance of the fund. That was the time to liquidate some of the investments in FAX.

At the same time, the FED's multiple hikes of benchmark interest rates several times during the past 18 months had little impact on FAX, as only little more than a quarter of its portfolio is invested in US dollars, and generally it runs a low duration portfolio. However, credit spread widening on the back of default fears for underlying credits had severe impacts on FAX's performance.

Ironically, although the pandemic began in Asia, the recovery there has outstripped western nations. The Western world responded with massive increases in budget deficits, which could constrain future policy options, while emerging Asian economies did not. The emerging market shock we were expecting did occur but economies like China have pulled all the stops from a monetary and financial environment perspective to ensure a smooth landing, a stable economic environment, and a controlled re-gearing of their economies.

Investment Thesis

The portfolio of abrdn Asia-Pacific Income Fund is relatively less risky, due to its investments in large, growing, less risky, and credible economies, along with investment-grade sovereign bonds. More than 75% of investments of FAX are of investment grade. The average credit rating of FAX's entire portfolio is BBB, have maturities between 5 to 10 years, and the fund earns a weighted average coupon of 6.2%. FAX's annual yield has been in the range of 7 to 12 percent. Lower risk and expected high growth of emerging markets of Asia is expected to sustain the yield. In the worst case scenario, investors can be assured of availing a return close to the average coupon FAX is earning.

FAX was little impacted by the multiple rate hikes by the US Federal Reserve, as only 27% of its portfolio is invested in US dollars, and generally runs a low duration portfolio. FAX's yield is quite lucrative, and if it is sustained, there is no justification for income-seeking investors to liquidate their holdings as the fund is currently trading at a deep discount of 13.25% to its NAV.

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