Renminbi Bond Fund

Launched in November 2007, Stratton Street's Renminbi Bond Fund provides investors with a relatively high income while enabling investors to gain exposure to the dynamic growth of the Chinese economy through bond and currency investments.


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Renminbi Bond Fund Performance. Source: Bloomberg (Data as at end-January-2018)

The Chinese economy is expected to grow strongly over the next few years, with GDP likely to double over the next decade. As a consequence, the Chinese currency (the renminbi) is expected to appreciate significantly. This is because there is a clear tendency for countries with rising income per capita to have appreciating exchange rates. Parallels are often drawn with Japan which saw substantial economic growth in the period 1950-1990. Over that period, the yen appreciated by over 250% against the US dollar.

For the last several years China has run a massively positive trade balance and very large current account surpluses, suggesting that the renminbi is very undervalued. During this process, China has amassed by far the largest FX reserves in the world, now totalling over 3 trillion US dollars. This is supported by updated estimates of purchasing power parity (PPP) which range from 3.55 against the dollar (IMF), 3.59 (Economist Big Mac Index), to 3.53 (World Bank), versus the current exchange rate of around 6.45.

Over the last eight years the Chinese renminbi has appreciated 16% versus the US dollar. However the key difference between the renminbi and other currencies is that the Chinese authorities are managing the appreciation of the renminbi versus the US dollar. This has the effect of making it less volatile versus the US dollar than other currencies. Prior to the 2008 crisis, the Chinese authorities were managing the renminbi to a 7% annualised appreciation. Then, during the 2008 financial crisis, it was effectively re-pegged to the US dollar. In 2010 the Chinese authorities reverted to a managed float.

Globally, investors are heavily underweight Chinese assets, compared to GDP. This is because the market has been and remains difficult to access directly. Investors also have largely invested on the basis of weighting markets by the amount of issuance. This makes no sense for bond markets, as it means that the investors are buying more from the indebted countries and less from those countries that have the ability to repay.

The Fund has the same management team it has had since it was launched in November 2007. The strategy is the same mix of a top down strategy of only investing in wealthy nations (limited to Asia) that can repay their debt, combined with a bottom up credit analysis looking for underlying value that is used in the New Capital Wealthy Nations Bond Fund. The fund is fully hedged into the renminbi. In addition to the USD class, currency classes are also available with exposure to sterling, Singapore dollars, the euro, the Swiss franc, the Australian dollar, Japanese yen and a Chinese renminbi class. The fund sits in a Guernsey PCC structure and is listed on the Irish Stock Exchange, with daily dealing.

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