Top-performing Lombard Fund doubles down on India's junk credit bonds

South Asian nation's star economy and improving business environment, at a time of slowing growth in China, has made Indian assets investor darling

By Dorothy Ma and Sangmi Cha

Lombard Odier Investment Managers will expand exposure to Indian high-yield dollar credit in its $2 billion Asian bond strategy, after the sector helped the product become a top performer by beating 96 per cent of its peers this year.

The Swiss investment firm’s Asia Value Bond Fund has returned 9.7 per cent so far this year, Bloomberg-compiled data show. Dollar notes issued by major Indian companies such as Vedanta Ltd. accounted for a record 19 per cent of the bond strategy’s holdings this month, according to Dhiraj Bajaj, chief investment officer of Asia fixed income and equities at Lombard Odier.

“It’s a big single country exposure,” said Bajaj. “We intend to add to India high-yield, and we do best in sizing up new maiden entrants to the high-yield market.”  

India’s growing level of capital market sophistication, its proactive central bank, and strong legislation make junk debt raised by the country’s quality firms one of the most attractive assets across emerging markets, he said. The prospect of fast economic and income growth, as well as an expanding domestic savings also are tailwinds, he added.

The South Asian nation’s star economy and improving business environment, at a time of slowing growth in China, has made Indian assets such as its booming stocks investor darlings in recent years. The country’s high-yield dollar debt borrowers also enjoyed an issuance boom earlier this year, partly thanks to stronger investor confidence induced by India’s entry into a major global sovereign bond index.

While the financial woes of Adani Group and Vedanta in recent years and Prime Minister Narendra Modi’s latest electoral upset have triggered concerns about long-term risks, Bajaj said he sees opportunities in such brief setbacks.

“We like special situations where companies are recovering from a liquidity strain,” said Bajaj. He named mining firm Vedanta Resources Ltd. as an example, which according to Bloomberg-compiled data, accounts for nearly 5 per cent of his bond fund’s net asset value.

A Vedanta bond maturing in 2028, which is held by Lombard Odier’s fund, has surged 47 per cent this year, Bloomberg-compiled data show. Another note also due in four years has gained 32 per cent.

“Vedanta has also been the biggest contributor to our strategy this year,” Bajaj said. “That’s a rigorous position, because it is a company that’s growing significantly and improving its access to finances.”

The Swiss asset manager’s bullishness toward India isn’t limited to bonds. Lombard Odier also favors the country’s consumer, industrial and financial stocks, according to Faye Gao, the firm’s Asian equities portfolio manager. The firm’s stock fund “took the opportunity to really bump up our Indian exposures” after the surprising election results, Gao said.