I am reiterating my buy recommendation of Aberdeen Asia Pacific Income Fund (FAX) -- once known as First Australia Prime Income Fund -- as the way to play any risk of tapering by our Federal Reserve.
Australia, where the fund is nearly half invested (currently 43.7%), is not the USA. It has a different economy which lives on exports of raw materials and wine, a different central bank with its own constraints, and a different political system which moreover faces an election.
The result is that rather than tightening interest rates, Oz is likely to loosen them further. The first 2013 rate cut is likely to be followed by as many as three more in2 013 as the Chinese slowdown hits. All through 2013 Australian bond yields have been inching downward on expectations of rate cuts continuing.
To increase its fire power by $400 million (US), FAX did a private placement of notes to institutional investors for US$200 million -- half for 7 years and half for 10 years -- plus a secured term loan from Bank of America for another $200 million.
The money will be used to refinance its existing $600 million revolving credit facility which is used to enhance our yield by getting longer-term money which can be invested alongside ours. The notes were rated AAA by Fitch.
In Pacific Rim bond markets, I think the increased liquidity created by Japan's 'Abenomics' will tend to slop into nearby bond markets, enticed among other things by measures to lure in Japanese cash in countries like the Philippines and Malaysia.
FAX Pacific Rim bond investments are mainly in South Korea, Philippines, Malaysia, Singapore, Thailand, Hong Kong, Indonesia, China, India, Sri Lanka, and Taiwan by geographic exposure.
By currency however, the total is much less in the emerging markets part of the Pacific Rim, excluding New Zealand, South Korea, Singapore, Hong Kong, and Taiwan which have emerged. While its geographic risk for Asia emerging market bonds is 32.3%, its currency risk in these exotic moneys is only 9.9%.
When interest rates fall, the price of existing bonds rises. When interest rates rise from a tapering of quantitative easing and zero interest rate policies (as may occur in the US), the price of existing bonds falls.
FAX trades at a rare discount to its NAV and pays a dividend of 3.5 cents (US)/mo which year-to-date has been boosted by 0.66 cents from return of capital. Return of capital distributions are tax free because you are getting back your own money.
Learn ore about this financial newsletter at Vivian Lewis' Global Investing.
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