Fixed income boutique Kapstream Capital is preparing to launch an Asia ex-Japan bond fund with about $50 million in seed funding from an offshore investor.

Nick Maroutsos, a managing director at the Challenger-backed boutique, said the fund would invest in short-dated sovereign, “quasi-sovereign” and corporate debt, and would target securities it viewed as being on the verge of an upgrade.

This investment universe would be narrowed further to focus on short-duration debt.

“We will focus on short-duration securities because that is where highest liquidity and information ratio can be found,” he said.

Kapstream would buy debt issued in local currencies, as well as “hard-currency debt” denominated in the US dollar, the euro, and the Japanese yen, Maroutsos said.

“But with that comes fixed Japanese, European and US interest rate risk. We want to limit that so they’re not subject to those low yields,” he added.

The manager would aim for a weighted maturity of 5.2 years, and a weighted duration of 2.8 years, in the portfolio, he said, and a weighted yield of 4.5 per cent and weighted coupon payment of 5.31 per cent.

Overall, the Asia ex-Japan bond market had become more liquid in recent years: in the past decade it had grown to represent about 12 per cent of debt issuance globally and was expected to “quadruple” in the next five years, led by Australia, Korea, Hong Kong, Singapore and China, Maroutsos said.

He said improving fiscal discipline in these markets made another 1997-style currency crisis unlikely.

“The factors that caused the Asian crisis in the 1990s are a problem for the developed world now, rather than the developing world.”

Portfolio manager Ray Lee said the high-grade credit spreads in Asia ex-Japan markets, which were wider than five-year A-rated US banks, were unjustified given the healthier state of sovereign credit quality across the region, plus its economic growth.

But rising inflation, and the region’s dependence on funding from developed-world markets, were risks that should be watched for.

The Asia ex-Japan bond market is familiar to Kapstream: its absolute return fund invests about $200 million in quasi-Asian sovereign credit, said Stephen Goldman, also a managing director at the boutique.

Maroutsos defined quasi-sovereign debt as the bonds issued by corporations that are partly or fully nationalised.

Because of these preferences, and the developing nature of Asia ex-Japan bond and currency markets, Maroutsos said the fund would most probably reach capacity at $1.5 billion.

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