A simple way to invest in Asian currencies

My last update on this trip is coming from where I started.

Once again, I don't have much to say about Singapore because not much actually changes here.

There's an election in early May, but the result is a foregone conclusion. The only uncertainty is whether the opposition might be able to win a group (multi-member) constituency for the first time.

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For many, that's one of the country's strengths. Stability is why so many financial firms are based here. And that makes visits very productive on a flying visit of just a few hours, I caught up with two local managers and learned about a new fund that will interest many of you.

And then there are also a couple of promising Chinese technology stocks.

Buying Asian currencies is a good idea but it's harder than you might think

My first meeting was with Anthony Michael, who heads the Asian fixed income business at Aberdeen Asset Management. Aberdeen is mostly known as an equity specialist. But they've been building their bond offering lately and have put out a product that may fill a big gap in the market.

One very common question I get asked is: what's the simplest way to invest directly in Asian currencies?

The problem is that, while sticking some of your cash in currencies that are likely to rise against sterling over time is a very sensible way to diversify, it's not as easy as you'd expect for UK retail investors.

There are a few currency exchange-traded funds (ETFs) out there, such as renminbi/dollar and rupee/dollar trackers. But the range is limited and the currencies offered are often not the ones you want.

Many of the products are based on currency derivatives and because of the way they're structured may not perform exactly as you expect. Once you take into account charges, you could end up losing money even if the renminbi rises a bit.

It's possible to open bank accounts for some Asian currencies, either through a UK bank or one in Asia. But unless you have a fair amount of money to put to work, this isn't easy for most currencies. The Singapore dollar is the simplest useful one. I use a Singapore dollar account for spare cash myself. Hong Kong dollar accounts are also easy, but because the Hong Kong dollar is tied to the USD at a fixed rate, that's not very helpful.

So if you want a diversified basket of currencies, you need to consider a local currency bond fund. The disadvantage of doing this is that once you hold bonds, you're no longer simply looking at currencies. Your returns depend on other factors such as interest rate movements, inflation and credit risk that affect the price of the bonds.

A useful new fund from Aberdeen

So the new Aberdeen Global Asian Local Currency Short Duration Bond Fund is interesting because it's the closest thing I've yet seen to just holding a basket of Asian currencies.

It invests in relatively short-dated bonds of typically one-to-three years to maturity from a number of Asian governments. It can also use currency derivatives to hedge from one Asian currency into another. It does this where the managers are keener on a country's bond yields than its currency, and vice versa.

The value of its holdings will still be affected by interest rates and inflation, but these effects should be smaller than in other Asian bond funds currently available.

Without getting too technical, the sensitivity of a bond's price to changes in interest rates is measured by "duration". This is the weighted average time until the bond's cashflows are paid out to investors.

Short duration means a relatively low sensitivity to interest rate movements: the Aberdeen fund's duration at present is 1.6 years.

You are taking on a bit more interest rate risk here than if you simply held cash. That raises the question of whether it would be better if it was a money market fund (one that invests in very short-term debt, giving it very low duration and minimal interest rate).

However, it's possible to get significantly better interest rates by investing in bonds maturing over one to three years. The fund is currently on a running yield of 3.3%, with distributions being paid quarterly.

The annual management charge for retail investors is 1%, with no entry charge. Those fees are fine; the total expense ratio (TER) is currently a bit higher than I'd expect at 1.8%, but higher TERs are common when funds first launch.

As the only product of its type at present, it's worth a look if you're searching for this kind of broad currency investment.

Two promising Chinese stocks

I also had a chance to meet Joseph Wat, who runs the Atlantis Asian Fund. This is a regional fund formerly known as the Atlantis Asian Recovery Fund, but had a change of name and mandate in the last couple of years because there simply aren't that many distressed opportunities in Asia these days. The strategy is now theme-driven and looks for companies where there's a catalyst to drive share price gains in the next six to 12 months.

We talked about a few of his current themes. As usual when I discuss fund portfolio ideas in this letter, the assessment represents what I've heard from managers, not my own research. They're intended to be both examples of the manager's thinking and potential ideas for active investors to investigate, not outright recommendations to buy these stocks.

The largest holding in the portfolio at present is GCL Poly Energy (HK: 3800), which makes silicon wafers used in solar cells.

You may be aware that the solar industry had a terrible time a couple of years ago. A huge amount of new capacity came on stream, especially in China, just as investment was abruptly cut by the global financial crisis.

Hence the market suffered a glut, margins fell and shares in what had been a top performing sector collapsed (see chart of former darling Suntech Power below).

But since late 2009, things have been looking up. As in many tech industries, costs in solar are coming down all the time. Meanwhile demand was improving, so sales soared off a low base while margins for some firms returned to all-time highs.

Since then, selling prices have been stable for the last six quarters, while costs have continued to fall further, to around 25 US cents per watt now.

There are some threats ahead, such as the prospects of subsidy cuts for solar. But with current progress on costs, solar could be competitive with traditional sources of power in some European countries as early as 2012. So while the industry recovery has obviously happened by now, the fund is holding on for more.

How to profit from ageing populations

Another theme is one that I've written about before: healthcare and ageing populations. There's absolutely no doubt about the demand story here demographics cannot be waved away.

The real difficulties for me are valuations which are steep on many healthcare stocks and government intervention if profits seem excessive, for example by capping prices.

Atlantis's approach to this is to focus on stocks that have some pricing power for example by being able to differentiate themselves from rivals through their patents or approvals to sell products in more demanding markets such as Europe, the US and Japan.

One current holding is Biosensors International (SP:BIG), a Singapore-listed, China-based firm that makes drug-eluting stents, which are placed in diseased arteries to prevent narrowing and blockages.

Biosensors has around 30% of the Chinese market for stents, on a par with two local firms. Major international players such as Johnson & Johnson and Abbott share the remaining 10%, with difficulties growing because of their lack of a local distribution network.

But unlike its local rivals, Biosensors has its product approved in Europe and Japan and is applying for US approval. It has tie-ups with major medical firms such as Terumo in Japan and Shandong Weigao in China, while Johnson & Johnson has reputedly been interested in buying it so this looks a well-placed business. It's not obviously cheap on a trailing p/e of 34, but has been growing earnings strongly.

The Atlantis fund has only been under its current manager for a couple of years, making it hard to judge the long-term strategy. Performance in that period has been very strong at 99% for the fund versus 64% for the MSCI Far East ex Japan, although these were very unusual times coming off the lows of March 2009.

The management fee is 0.75%-1.25% depending on performance and the TER in the last year was 2.03%. There's no initial fee, although the minimum investment is $10,000 higher than average for a UK retail fund.